As it recovers from the global recession, the world aerospace and defence industry is expected to earn revenues of US$399 by 2015, according to a new report by Global Industry Analysts (GIA). Key factors driving growth in the industry are the expansion of commercial airlines, post-recession improvements in air travel and continued investment in the military.
In its report entitled “Aerospace and Defence Industry: A Global Strategic Business Report,” GIA analyses trends and growth drivers, industry issues and challenges, as well as recent industry activity.
The report finds that growth in the aerospace and defence industry went through a rough patch during 2008 and 2009 as the worldwide recession spread across all industrial sectors.
Commercial aerospace, including general aviation has been through an especially difficult time, the report says, with this sector witnessing significant weakening in business prospects, such as decline in air travel, reduced number of flight trips, cancellation of new aircraft orders, postponement of new aircraft deliveries, especially in the developed markets.
The outcome of these disruptions has been declining profitability of airlines, liquidity crunch, rise in airline bankruptcy, pilot job cuts, airline consolidation, reductions in airline fleet/passenger capacity and reductions in airline fleet, among others. Additionally, tight corporate budgets and liquidity concerns resulted in companies halving expenditures on business travels. Against the backdrop of a fiscal climate strained by deficit, new orders for corporate aircraft manufacturing declined perceptibly.
One of the casualties of the recession has been the business/corporate jets industry. The belt tightening measures adopted by cash starved companies has brought luxury air travel to an abrupt end, GIA says. The trend is mirrored in the steep slump in corporate jet travel. With several companies selling off company planes, corporate aircraft manufacturing has suffered.
In addition, although luxury is widely touted as a habit difficult to break, the prolonged severity of the current economic slowdown has elicited declines in spending and the low tide has stranded growth with wealthy consumers gradually cutting back on lavish, luxury lifestyles. The erosion in personal wealth and scale back on spending by High Net Worth Individuals (HNWIs) has hurt the market for private aircraft, the report continues.
In contrast, flying in the face of recession was defence and military spending, which held up better than expected and for longer. Despite widening fiscal deficit for governments across the globe, and the heavy borrowing, most governments have continued to spend on military and defence operations. Given the risks involved in pruning down budgets for the defence sector, especially during a recession, governments across the world have continued with their long-term programmes to upgrade and develop air defence assets and equipment.
Indeed, worldwide military expenditure reached $1 531bn in 2009, a 5.9% rise in real terms from 2008, according to Stockholm International Peace Research Institute (Sipri). Whilst deficits ballooned in many countries, the world spent almost 50% more on arms and military operations in 2009 than it did in 2000, Sipri’s yearbook reveals.
The growth in world military spending comes despite stagnating military budgets in some countries and budgets cuts in few other weaker countries where military spending drained the economy against a backdrop of fewer jobs, slower growth, and the resulting greater push for civilian spending. This is primarily because major spending nations have stepped up their military budgets, unfazed by the recession. Powerful economies like the United States, China, Russia, Brazil and India perceive military spending as a long-term strategic investment vital for national safety and security, and as a result, military budgets in these countries have been relatively shielded. Although the moderation in growth in the global defence industry is undeniable, the sector has continued to benefit from the war on terror.
High backlog orders, especially for industry giants, such as Boeing and Airbus, have largely camouflaged the recession’s impact on the aerospace industry. Higher backlog orders is a characteristic feature of the aerospace industry given the large time lag between orders placed and the actual delivery of the aircraft, which typically runs into years. As of January, Airbus has a backlog of 3 552 orders whilst Boeing has 3 443 awaiting orders.
While top companies have been viewing encouraging order books and new aircraft as strong points to weather the recession, the rising level of postponement of deliveries and cancellation of orders creates uncertainty over the ability of backlogs to cushion the players’ performance, bringing quality of the backlogs into the spotlight as against the volume of the backlogs. Although backlog deliveries have until now held up well largely because production financing of these aircraft were settled before the deterioration in the debt markets, uncertainty over continued ability to finance existing deliveries casts a dampener on player optimism, the report says.
Recovery from the recession is now seen as inevitable, although the rate and extent of recovery will vary, depending on the regional market and airline business models, with low-cost carriers (LCC) and emerging markets leading the pack, especially in Asia and the Middle East. Notwithstanding the challenges witnessed by the commercial aviation sector over the last two years, the future remains bright as international air transport is considered a world system and an indispensable component of world business globalisation. Continued industrial development and expansion in commercial operations of business organizations across the globe will support the development of global aircraft industry in the post recession period. This is because any development in business activity translates into increased business trips, rise in air passenger traffic, and subsequent demand for more air flights in operation, thereby creating the demand for sophisticated passenger aircraft. Quick rebound of investments, especially government investments in regional aviation infrastructure projects such as new terminal facilities, and air travel infrastructure augurs well for aircraft manufacturing and production.
As stated by the new market research report on Aerospace and Defence Industry, the United States remains the largest regional aviation market in the world. Asia-Pacific is the fastest growing regional market, displaying a compound annual growth rate (CAGR) of more than 3.0% over the analysis period. Growth in this region is primarily driven by burgeoning demand for commercial aircraft in the region, encouraged by the robust growth in air traffic, particularly in developing countries such as China and India.
The Aircraft Products and Services market represents the largest segment within the aerospace and defence industry. The Modelling, Simulation & Training sector represents the fastest growing segment, displaying a CAGR of about 3.7% over the analysis period. Growth in this segment is primarily driven by shortages of trained pilots in developing countries, such as, China, India, and other Asian countries. With a large number of new aircraft deliveries being made to developing countries, need for experienced and skilled pilots in these markets will remain acute.
Major players in the aerospace and defence marketplace include Arianespace SA, ATR, B/E Aerospace Inc, BAE Systems Plc, Ball Aerospace & Technologies Corporation, Bell Helicopter Textron Inc, Bombardier Inc, Cessna Aircraft Company, CFM International Inc, DAHER-SOCATA, European Aeronautic Defence and Space Company (EADS), Airbus SAS, Eurocopter Group, Embraer-Empresa Brasileira de Aeronáutica SA, Finmeccanica SpA, AgustaWestland SpA, GE Aviation, Goodrich Corporation, Gulfstream Aerospace Corporation, Hawker Beechcraft Corporation, Honeywell International Inc, Ilyushin Aviation Complex JSC, IRKUT Corporation, Israel Aerospace Industries Ltd, Kaman Corporation, Lockheed Martin Corporation, Northrop Grumman Corporation, Pratt & Whitney, Raytheon Company, Rolls-Royce Plc, RUAG AG, Sikorsky Aircraft Corporation, Snecma SA, Thales Group, The Boeing Company, and Turbomeca SA.