Despite high costs, Sikorsky not flying out of state

Officials with Sikorsky Aircraft and its parent company, the state's largest employer and a source of high-paying jobs for generations of families, are sending signals they see their future more and more outside Connecticut's boundaries.

United Technologies Corp. officials have issued a fresh volley of complaints that the cost of doing business in Connecticut is too high, and their companies have seized on recent opportunities to expand or acquire operations in other states.

Nonetheless, analysts and other experts say, while UTC and Sikorsky clearly want to improve their viability in the state, the prospects of the company shutting significant facilities here and leaving are unlikely.

The company's future is paramount for the 26,000 employees of the defense manufacturer and thousands of other Connecticut factory workers at a delicate time for the nation's economy.

UTC's particular concerns, according to state business groups, include the high costs of labor, electricity, housing and regulatory expenses. Taxes are also a concern, the groups say.

Those issues were dramatically underscored this week when North Carolina-based Freedom Group announced it is closing the Marlin Firearms company in North Haven because cost concerns. The brand, which was born in Connecticut, will continue, but rifles bearing the Marlin name will be made elsewhere. No location has been announced.

Gregory Hayes, UTC's Chief Financial Officer, touched off this debate when he told analysts March 12 that a key component of UTC's strategy is to source what it can in lower-cost countries and states.

"Anywhere outside Connecticut is low cost," he said.

Jeffrey Pino, Sikorsky's president, said he agreed with the statement, noting that half of all Sikorsky's man hours came from outside Connecticut last year. He also said Sikorsky has captured a big portion of the U.S. military market and to expand will need to win more foreign contracts.

"We can't just go in and win from Connecticut," he told analysts.

But Sterne Agee analyst and Senior Vice President Nick Heymann, who has followed UTC for nearly 30 years, said UTC wasn't saying "we're out of here." Nor does he think the company is angling for tax breaks. He said this isn't about tax breaks, it's about a shift in the way manufacturing and business is carried out around the globe.

THE LESSONS OF PRATT & WHITNEY

UTC subsidiary Pratt & Whitney may have already proven this when it turned down tax incentives and breaks as it attempted to close facilities in Cheshire and East Hartford. That move has been stopped for now by a court decision that found Pratt may have violated part of its labor agreement with the International Association of Machinists.

Heymann said Pratt is a good example of what is happening and what's at stake. The company's military production is remaining here to fulfill military quality and American sourcing requirements, while components of its commercial products will be built in lower-cost areas as UTC tries to compete for international contracts.

"You cannot say, I'm shipping engines that cost 20 percent more because I'm shipping them from here," Heymann said.

In a nutshell, airlines are weighing the cost benefits of having better thrust and fuel economy against the price of buying it. If the purchase price is too high, the airlines will live with lower fuel economy.

Sikorsky points out it has found a good balance between moving some work out of state while getting more value out of its skilled work force, which is building military helicopters and key components.

Despite the shift of some commercial work to other states, the company's employment level is at record highs in Connecticut, with about 9,300 workers.

"Every job is up for grabs," said Richard Aboulafia, a senior aerospace analyst with the Virginia-based Teal Group. "The trend in manufacturing is to distribute the work. Which means the various components will be manufactured in lower cost areas then brought together for final assembly."

While some of this is being done to help enter new markets, Aboulafia said he thinks that's not playing as big a role as the drive to reduce labor costs and increase profits.

TRIMMING COSTS

The real question right now is where can costs be trimmed. A point conceded by most people is that the high cost of labor for Sikorsky and other companies is due to the high quality and skill of that labor. There are seven engineering schools in Connecticut, alone. One reason Connecticut is attractive to do business is because the work force is highly educated, which, in turn, adds to labor costs.

Sikorsky officials, when asked what costs in particular are troublesome, said "It is the sum of all costs." The company explained it all gets factored into what prices it can charge. Customers ultimately will make their purchasing decision based on those costs.

Connecticut is ranked by the Tax Foundation as one of the highest taxed states in the nation.

But Sikorsky has actually seen its taxes fall in Stratford. In 2001, the company paid more than $161 million but this year, its tax bill was about $119 million.

Part of that might be due to the phasing out of the tax on manufacturing equipment, which Connecticut has been slowly getting rid of for several years.

Frank Johnson, president of the Manufacturers Alliance of Connecticut, said it's not just simply the tax on business that's the problem here.

"The people who run companies are looking at it from two perspectives," he said. "From their company's perspective and what it cost to live here."

So when your personal property tax is high it's a negative, he said. He also said if it's difficult to get a driver's license or register a family car that also creates concerns, because it makes it more difficult to recruit new employees and that ultimately leads to higher employment costs.

Johnson said one thing the state could do to help its cause is target the sectors that are here and are working today. He said the state did it for the film industry and that's helped that industry. Why not do it for people who are running companies today? It could only help them get stronger, he reasoned.

Stratford Mayor John Harkins, who spent three years in the state Legislature, said he thinks taxes could be trimmed for both businesses and residents by combining agencies at the state level and regionalizing activities at the local level. But he said it's been frustrating to watch the state talk about the problem and not address it.

The state does provide tax credits for research and development, which UTC has taken advantage of -- most notably when Pratt moved about 1,200 of its engineers from Florida to Connecticut in the late 1990s.

THE COST OF POWER

Another issue is mandates in health care, Harkins said. Connecticut is one of the states with the highest number of mandates for health coverage, and it should provide an option for a bare bones insurance plan without mandates, he said.

One area everyone agreed is a major problem for manufacturers is electricity costs. Connecticut has the second-highest rates in the nation, behind only Hawaii.

But the state has made some headway on this front, according to Joe Brennan, a senior vice president with the Connecticut Business & Industry Association.

Brennan said businesses have been able to cut their costs thanks to competition in the market. The state has also had programs to cover the costs of installing new, efficient generators in businesses. Both Pratt and Sikorsky have taken advantage of those programs. Sikorsky is still installing a new power plant in Stratford.

"Those things have helped," Brennan said.

But what isn't helping, he said, is when the Legislature considers re-regulating the industry or creating a power authority and hitting energy companies with windfall profits taxes. Those fees would be passed on to users and eventually priced into products made here, Brennan said.

State Department of Economic and Community Development Commissioner Joan McDonald said she talks regularly with UTC's executives and has been assured the company is not planning to pull up stakes. She, too, is concerned by high costs of electricity and other factors affecting companies large and small. But she noted companies like UTC are here because the state has a lot to offer and is a great state in its own right.

But, she added, "This should be a wake-up call. That we can't rest on our laurels. We cannot assume companies will be here forever."