Despite solid profits in recent years and a decade of stock market
outperformance, the global Aerospace and Defense (A&D) industry cannot
afford to be complacent in the face of an increasingly dynamic business
environment, according to a comprehensive new industry report from
AlixPartners, the global consulting firm.
The global A&D industry will need to successfully navigate a number
of headwinds including, uncertainty in international trade relations, a
rising oil price, significant stresses in a supply chain struggling with
continued aggressive product ramp-ups, looming over-capacity in certain
sectors of the industry, and wholesale changes in defense spending
around the world.
AlixPartners has identified three key themes that will shape the
industry in the face of these challenges in the years ahead:
1. A new era has arrived, centered on services, new business
models and partnerships
2. These ambitions will drive continued M&A across the industry
3. Digital transformation will be a key driver of success
Wireman, Global Co-Leader of the Aerospace,
Defense & Airlines practice at AlixPartners, said, “A new era is
coming to this industry, one centered on new business models, on an
industrial step-change in services, on partnerships and on digital
transformation. Players in the industry are already moving at maximum
velocity, but they can’t afford to be left behind in any of these areas.
First-mover advantage will be critical to success.”
Wireman added: “While the industry has certainly recovered in recent
years, it faces big challenges ahead. Between big ramp-ups, new demand
from end-user customers and big structural changes inside the industry,
the entire sector is being stretched to capacity. OEMs and suppliers
alike need to be extremely vigilant that nothing reaches breaking
point—and that means anticipating problems before they arise and
employing the latest in digital technologies to predict and combat them.”
AlixPartners A&D Market Segment Overview
Airlines: profitability declining in the face of
increased competition and capacity growth
While global airline revenue for 2018 is predicted to reach a record
$834 billion, up from $754 billion in 2017, profits have declined from
the peak of 2015/16 and are expected to remain flat at $57 billion this
year. North America remains the world’s most profitable region, albeit
margins are likely to decline here in 2018.
Fuel prices are expected to rise by 26% in 2018, following the record
lows in 2016. While fuel cost’s share of global commercial airlines’
total operating costs has decreased by 25% between 2006 and 2017, 2018
is likely to be the third consecutive year of growth in this metric, to
Middle-East carriers are expected to face over-capacity, driven by an
expected fleet increase (including no new orders) of at least 80% by
2025. This will require significant action, for instance through
operational improvements and partnerships with other carriers.
Commercial aircraft: Narrowbody record backlog,
Widebody production stabilising
The global passenger jet fleet is expected to almost double in the next
20 years, driven by growing air traffic. While the Airbus/Boeing duopoly
will remain, ‘newcomers’ are representing an increasing challenge.
The Narrowbody sector is seeing a record backlog of 9.9 years on
average, with production expected to ramp up but engine availability
remaining the key roadblock. In contrast, the Widebody backlog is at its
lowest level since 2010, at an average of 5.9 years, as production rates
are expected to stabilise following a doubling between 2010 and 2017.
Nevertheless, there are serious tensions in deliveries ramp-up, with
selected suppliers facing strong difficulties.
Business jets: size matters
While deliveries hit a record low in 2017, with only 654 jets delivered
globally, this is likely to pick up to an average of 854 between 2018
and 2026 – with almost 7,700 new jets delivered during the next eight
Large jets are likely to drive this growth, having seen a resurgence in
deliveries in 2017. However, political uncertainty (e.g. around the
Iranian nuclear treaty) remains a threat to the whole sector. The medium
and light categories continue to see declining deliveries, signalling a
shift in aircraft preference.
Aviation services: ripe for consolidation
The aviation services market is large (worth $257bn in 2017) and growing
globally in line with manufacturing output. The world’s four leading
aircraft OEMs are looking to increase their services revenue by more
than three times in the next 10 years, with a growing focus on digital
2017 saw 30 deals in MRO and aviation services alone. On top of this,
several mega-deals involving system/equipment suppliers added up to more
than $10 billion. This will continue as major OEMs increase their focus
in this area and diversify their revenues.
Defense: panic buying
Global defense spend is accelerating, driven by increasing ‘threat
perceptions’ and ongoing conflicts in the Middle East, South China Sea
The US market, the world’s largest, is growing at 7.5% per year and the
top 10 contractors are growing both profits and R&D investments in
response to Department of Defense ‘offset strategy’ policies. Spend is
likely to continue as the US responds to the growing stature of China
and Russia, with hypersonics the government’s number one priority.
Research into hypersonics is expected to grow by 136% between 2018 and
European spending is growing at around 1.5% per year on average,
although most European countries remain far below the NATO growth target
of 2% of GDP. After falling sales in 2013 and 2014, European defense
players have returned to growth – albeit with flat margins. The PESCO
agreement, signed in December 2017, will see a dramatic reduction in
major weapons systems in the EU (from 180 to about 30). The industry is
likely to see increasing collaboration, although driven primarily by
political – rather than business – rationale. The combined impact of
Trump and Brexit will see a concurrent ‘emancipation’ from US dependence
and renewed motivation to reinforce the region’s defence ambitions.
Helicopters: eroding profitability to drive
Despite growing revenues and deliveries increasing, albeit still 27%
lower in 2017 than in 2013, EBIT margins continue to lag: 15% lower than
in 2014. A combination of market pressures and a requirement for
significant investment suggests the helicopter market is on the cusp of
Aerostructures: dynamic, fragmented, consolidating
Demand is expected to rise only moderately through 2026, to $76 billion,
vs. $62 billion in 2017. This is a fragmented segment where
consolidation and M&A are already underway. This will accelerate, driven
by technology portfolio broadening, outsourcing of non-strategic
assemblies from OEMs, vertical integration from suppliers, and the
acquisition of low cost countries’ capabilities.
Space: disruption and pressure in a growing
The $259 billion space market is growing by more than 5% per year, led
by the ground equipment (+18.3%) satellite manufacturing (+7.7%)
The satellite industry is undergoing a paradigm shift, from larger and
more expensive geosynchronous orbit (GEO) constellations, to smaller,
lower cost and shorter-life cycle non-geosynchronous orbit (NGSO) units
targeting the consumer market. Pricing competition is putting margins
under increasing pressure, however. An increasing number of space
launchers are coming to market, playing catch up with SpaceX.
About the Study
The AlixPartners Global Aerospace & Defense Industry Outlook was
conducted by AlixPartners’ industry leading Aerospace & Defense team and
is based on in-depth analysis of data from both public and proprietary
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