UNIVERSITY OF MASSACHUSETTS Amherst Boston Dartmouth Lowell Worcester JET ENGINE MANUFACTURING IN NEW ENGLAND Beth Almeida University of Massachusetts Amherst Beth Almeida is a research economist for the Strategic Resources Department, International Association of Machinists and Aerospace Workers. When this paper was written, she was a doctoral student in the University of Massachusetts Department of Economics and a Fellow at the Center for European Integration Studies in Bonn, Germany. © 2001 by the University of Massachusetts Donahue Institute The contents of this publication may be reproduced only with permission of the author. Project manager: Steven Landau Managing editor: Carolyn Dash Mailler Copy editor: Kathleen Lafferty Data analysts: Rebecca Loveland and Ruth Malkin Jet Engine Manufacturing in New England Beth Almeida Contents EXECUTIVE SUMMARY . .1 INTRODUCTION . .3 HISTORICAL ROOTS OF JET ENGINE MANUFACTURING IN NEW ENGLAND . .6 The Early Days: The Precision Production Skill Base . .7 The Leap to Jet Propulsion: Turbine Technology and the Scientific Skill Base . .8 New England’s Science and Technology Infrastructure and Regional Agglomeration . .9 DOWNSIZING OF THE INDUSTRY . .11 DIVERGENCE OF FORTUNES . .13 LOOKING TO THE FUTURE . .17 GE’s Response to Downsizing . .17 Trends in Use of Cash Flow . .18 Retaining the Skill Base . .19 ENDNOTES . .20 BIBLIOGRAPHY . .22 Executive Summary ew England is the birthplace of the American jet engine industry. Employing 33,675 Npeople, 128 firms in the industry build the complex parts, components, sub- assemblies, and control systems that make up a gas turbine engine. Massachusetts industry employment accounts for about 9 percent of total U.S. jet engine and engine parts manu- facturing employment, and the state is second only to Connecticut in its concentration of aircraft engine manufacturing employment. Some twenty firms in Massachusetts employed 11,056 people in this industry in the first quarter of 1999. Building jet engines has tradi- tionally been a successful, but often overlooked, example of Massachusetts firms’ strengths in high-tech manufacturing. The aircraft gas turbine is a technology truly indigenous to New England. The world- wide leaders in the industry, General Electric Aircraft Engines and Pratt & Whitney, whose combined market share totals 80 percent, both trace their roots to the region. The successes of these firms were historically based as much on the wealth of precision production skill in the area as on the engineering and scientific talent that was so abun- dant in the region, thanks to the technical strengths of New England’s universities. Throughout the post–World War II era, innovations in propulsion were the “pacing technology” that led the improvements in aircraft performance, which in turn grew the market for air travel. With each new generation of aircraft engines, air travel became faster, cheaper, safer, and less damaging to the environment. In many ways, the story of the jet engine industry epitomized the golden age of U.S. capitalism in which techno- logical progress helped to grow new markets, providing more and better employment opportunities over time. New England was, for much of the postwar era, at the center of this industrial success story. Recent trends, however, have been less than positive for workers in New England’s air- craft engine industry. Though layoffs and industry consolidation have slowed somewhat since the dark days of the early 1990s, when a downturn in both the military and com- Jet Engine Manufacturing in New England 1 mercial segments of the aircraft market led to devastating job losses, they still continue. And though the mass job losses and wage stagnation experienced by workers in the industry during the early 1990s could be attributed to a drop-off in demand, the recovery of the demand for aircraft has by and large failed to re- store employment levels or lead to real wage growth, either regionally or nation- ally. Between the fourth quarter of 1993 and the fourth quarter of 1997, at a time when manufacturing employment as a whole remained essentially flat, Mass- achusetts employment in the industry declined 7.5 percent. Nationally, jet engine employment fell 19 percent between these years, even though new orders in 1997 were 24 percent higher than they were in 1993. These trends are troubling because they suggest a “divergence of fortunes” be- tween firms’ well being and that of workers in the industry. It appears that cor- porate strategies rather than market forces alone are shaping these employment trends. An increasing reliance of engine manufacturers on overseas suppliers, a desire on their part to exit manufacturing activities in favor of more profitable servicing activities, and increased pressures on the part of managers to deliver “value” to shareholders all seem to be playing a role. These conclusions present a particular challenge to state-level policy makers who might seek to stem the tide of job losses in the industry. 2 UMass Donahue Institute Introduction he aerospace industry, the “crown jewel” of was at the center of this industrial success story. TU.S. manufacturing, was for decades after The combination of production skill, technical ex- World War II the source of the many good things pertise, and scientific talent embodied in the re- advanced industrial economies are expected to pro- gion’s workforce contributed greatly to the pros- vide: good jobs with growing wages, technological perity of the leading firms in the industry and, in advances that allowed for both increased productivi- turn, the region’s workers shared in the fruits of ty and qualitatively better products, and the export these firms’ competitive success. of U.S. value-added to other countries. All these The industry has seen hard times of late, however. developments helped to ensure the health of firms The end of the Cold War has, it seems, perma- in the industry while simultaneously contributing to nently reduced demand from the aircraft indus- improved U.S. standards of living. try’s single most important customer, the U.S. This state of affairs was especially present in the Department of Defense. The decline in U.S. gov- engine-manufacturing sector of the aerospace in- ernment orders has meant fewer sales but at the dustry. Since the introduction of the jet engine in same time has entailed a redefinition of “value” in the 1940s, U.S. firms have come to dominate the the industry. As fuel prices dropped1 and the global market for aircraft gas turbine power product has matured over time, airlines have plants. The design innovations engine makers turned away from state-of-the-art engine designs, built into each new generation of products al- preferring simpler products with fewer parts that lowed for air travel that was ever safer, faster, are easier to maintain. Producers of aircraft and cheaper, and less environmentally damaging than engines are under more pressure than ever to earlier products; technological advances in offer equipment that is cost-competitive at the propulsion improved aircraft performance and time of purchase and in operational service.2 thus helped to grow the market for air travel. Despite these challenges to firms in the industry, it Alongside the growth of the market, employment should be remembered that air transportation, far opportunities expanded, and as productivity grew, from a saturated market, still enjoys healthy growth better wages followed. rates. Since 1975, annual growth in world passen- For much of the postwar period, New England ger traffic has averaged a robust 6 percent per year, Jet Engine Manufacturing in New England 3 whereas world freight traffic has increased about cent greater than the level for U.S. manufacturing 7.5 percent per year in the same period.3 More- as a whole.5 This productivity premium translated over, the end of the Cold War has brought oppor- into substantially higher average hourly earnings tunities as well as challenges, opening new com- for production workers in the aircraft engine in- mercial aircraft markets in the former Soviet Union dustry than for other workers: $18.93 per hour in and Eastern Europe. In addition, NATO expan- 1998 versus $13.49 per hour for overall U.S. sion will likely bring forth additional sales of mili- manufacturing.6 tary models, and economic growth in China has re- Such observations might lead one to believe that sulted in hundreds of millions of dollars worth of workers in U.S. aircraft engine manufacturing es- orders from that country in recent years. caped the effects of globalization and deindustri- Indeed, there is ample reason to believe that the alization that traumatized workers in other manu- major U.S. engine makers have been quite suc- facturing industries and their communities during cessful in responding to recent market challenges the 1980s and 1990s. By virtue of competing in a and taking advantage of new opportunities. Build- product market in which price, however impor- ing on the competitive lead they established dur- tant, is less so than high quality standards, firms ing the 1950s and 1960s, General Electric Aircraft in this industry are less easily tempted by the lure Engines (GE) and Pratt & Whitney, the two of “cheap” labor markets and less stringent regu- largest firms in the industry, have come to domi- latory environments than their counterparts in nate the market. These firms trace their roots to— other industries, such as consumer goods. This and maintain significant manufacturing operations fact would appear to bode well for U.S. aircraft in—New England. GE began building jet engines engine manufacturing workers and the cities and in the late 1940s in Lynn, Massachusetts, for the towns that host these manufacturing operations, U.S. Air Force. Pratt & Whitney, headquartered in but below this calm surface lies a paradox. Hartford, Connecticut, is an air- craft engine builder with a histo- U.S.