Deals in Berlin: Visitors crowd to watch airplanes during the ILA Berlin Air Show in 2012. More spending is expected due to increased budgets amid the Ukraine crisis. (Wolfgang Kumm/AFP via Getty Images)
WASHINGTON — For most defense companies, Europe’s declining defense buys have yielded diminished interest in the continent. Firms have been cutting their business development office sizes, and reducing their presence at the European air shows for years.
But following Russia’s annexation of Crimea and increasing concerns about potential further aggression, several European countries have announced their intent to increase defense spending, and the ILA Berlin Air Show starting Monday will be the first major international gathering for them to look at filling their needs.
Berlin, the oldest air show in the world serving as the continental European sibling to the biennial Farnborough International Airshow, will provide a forum for industry to meet with government and begin to hash out how those extra dollars might be spent. Companies around the world are recognizing that an opportunity for growth that they hadn’t expected might be afoot in Europe.
Ellen Lord, CEO of Textron Systems, said she anticipates a bit more activity at the shows coming up this summer, including at Farnborough in July.
“I anticipate Farnborough being a little bit busier than it was, however, although we now look at Dubai Airshow and Singapore and so forth as kind of the prime air shows, we still have to remember that a lot of those customers from the Middle East, from Asia, find it convenient to take a shorter plane ride to Europe and meet us there,” she said.
Textron, as it turns out, created a new office in Stuttgart, Germany, a little over a year ago, which should help the company if European buys gain momentum.
“Now that things are getting a little bit more exciting in the neighborhood, we actually already had people there,” she said. “No, we haven’t changed how we’re doing things; this actually worked very nicely with our strategy, and I think our office there is getting a little bit more traffic.”
Lithuania, Romania and Sweden have announced plans to increase defense spending, and others are expected to follow.
But that expansion is unlikely to reach all of Europe, said James Hasik, a fellow at the Atlantic Council.
“I don’t think the French or the Germans are going to do anything, quite frankly,” he said. “But the people in the east aren’t starting from a lot of money initially.”
That means even if there are big relative increases in spending, the overall opportunity for industry will be somewhat limited.
“The odds of selling an F-35 to the Czechs or the Romanians is close to squat,” Hasik said. “There have to be [affordable] solutions.”
US and NATO officials have been direct and vocal in their calls for increased European spending, but with defense spending falling from 2.5 percent of gross domestic product a decade ago to 1.6 percent today, it would take an enormous increase to make up for previous cuts. How the market has changed will be hard to gauge at the show itself, as increased regulations in many countries require that defense acquisitions are announced immediately. That prevents defense companies from employing a tactic their brethren in the commercial market use where they store up announcements to make a splash at a big event.
The scope of increased spending, even among those that have announced intent to splurge, is also unknown. Their parliaments are still weighing in on the matter. But because of Russia’s aggressive actions, it is likely inevitable that spending will tick up, at least for countries with close proximity to the Russian Bear.
“If the Lithuanians or Baltic states don’t [increase spending], the ‘oh come help us’ will ring really hollow,” Hasik said. “The Poles and the Swedes, I can’t imagine that they won’t increase spending.” ■