Despite assurances last week by US Federal Reserve Chairman Alan Greenspan that the American economy is “probably” recovering from six months of recession, many key American industries continue to be hit hard by the response to the Sept. 11 terror attacks.
The one exception: The US defense industry.
Telecommunications firms, power generation companies, chemical plants, commercial airlines, railroads, and others are paying heavily for increased security measures.
By necessity, these businesses must pass along these increased costs to customers and business partners.
Perhaps no US industry is experiencing a greater financial loss from the increased need for security than commercial aviation. Within days of the hijack attacks on New York and the Pentagon, the Federal Aviation Administration (FAA) ordered airlines to spend more money on security — even as many carriers were contemplating bankruptcy. New FAA-mandated security measures have forced airlines to invest in hardened cockpit doors, cabin videos and transponders that allow air-traffic controllers to track airplanes with greater precision.
Though Congress has offered airlines $100 million to help pay for these security enhancements, government support will only cover a fraction of the cost. Additionally, airlines are now required to levy a $2.50 security tax on airplane tickets, provide free seats for sky marshals and must slow down flight schedules in order to allow time for delays caused by bag matching.
Power generation plants are also feeling the pinch from newly mandated security measures.
The US Nuclear Regulatory Commission (NRC), the federal agency that oversees the nuclear power industry, has responded to reported threats that terrorists might crash airplanes into nuclear power plants by issuing more than 20 advisories that mandate extra security measures.
The most recent NRC advisory, issued February 14, requires power plant operators to exert additional control over access to secure areas, create increased “stand-off distances” for vehicles approaching nuclear facilities and provide greater coordination with state and federal authorities.
As government regulators assess which new regulations to impose, many American industries are already beginning to feel the effects of higher security costs brought on by the 9/11 attack.
For example, since September 11, anti-terrorism insurance has become prohibitively expensive. Railroads, which are regulated by the US Department of Transportation, are now required by the government to carry additional insurance against terrorist acts.
The US Federal Communications Commission (FCC), the agency that regulates television, radio, telephone, and data transmission industries, is assessing security risks to the nation’s telecommunications networks.
One new measure under consideration by the FCC would enable the US government, during a crisis, to seize control of the nation’s wireless communications network.
The FCC is also concerned about Internet security, which has attracted the interest of Congress. At a hearing last month before the Senate Judiciary administrative oversight and the courts subcommittee, Richard Clarke, chief of the White House’s Office of Cyberdefenses, warned that a terrorist attack over the Internet was likely.
“Terrorists could gain access to the digital controls for the nation’s utilities, power grids, air traffic control systems, and nuclear power plants,” warns Senator Charles E. Schumer (D-New York), chairman of the subcommittee.
The White House has proposed that the federal government allocate funds for new domestic-security expenses, but few of these dollars relieve industries directly affected by the new terror threat.
The sole exception: Arms makers.
Since last January, when President George W. Bush announced a $48 billion increase in military spending, stocks of America’s five largest defense contractors — Boeing, General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon — have jumped between two and five percent.
Bush’s new military budget, if approved by Congress, boosts overall defense spending by 13 percent to $379 billion.
Of the increase, $10 billion will go into a “war reserve” contingency fund. The rest of the money would go toward procurement, military health care, spare parts, and replacement munitions.
To many defense experts, the biggest surprise in the proposed defense budget is that it promises considerable funding for existing “legacy” weapon systems that were developed and brought into production during President Bill Clinton’s term in office.
Lockheed Martin, for example, convinced the Pentagon to significantly increase funding for the F-22 “Raptor” fighter.
The White House is now asking Congress to allocate $4.1 billion to buy 21 planes, well above the $3 billion for 13 aircraft sought by the Pentagon prior to the 9/11 attacks.
The new defense budget has also improved the fortunes of defense firms that presumed their weapons contracts were about to be terminated: United Defense Industries, a company based in Arlington, Virginia, learned that the Bush Administration has ordered the resurrection of the “Crusader” mobile artillery system.
Many defense analysts believe the Crusader, which is being manufactured for the Army, is too heavy and cumbersome for a 21st Century land force.
Though stock market analysts agree America’s defense industry appears to be the sole beneficiary of the new global war on terror, they warn that the windfall could be short-lived: “The news [of a higher defense budget] conforms to our expectations and we see no reason to change earnings projections for the firms we follow,” says Byron Callan, an analyst at Merril Lynch. “(But) investors should move beyond the hoopla and the talk of ‘winners’ from the budget, and focus on what happens next with the budget in Congress.”
