On the eve of the Paris Airshow, AlixPartners released its annual study on the Aerospace and Defence Outlook y and found out that the industry is “buoyant” and “fuelled by commercial aircraft and rise in defence spending.”
The industry recorded 3.8% growth year on year in 2016 and profit margins of 8.8% and the “macro-economic factors for the industry from GDP growth to oil price, raw material and interest rates remain favourable.”
In the commercial aircraft sector, backlogs have reached highs of 13,000 aircraft and thanks to the Asia-Pacific region the global fleet should record an average annual growth rate of 3.1% by 2020. OEMs are now focusing on ramping up production to meet their deadlines. For traditional players of the commercial market, two challenges will have to be met. On the one hand, major OEMs who dominate the market of single-aisle aircraft, i.e. Boeing with the 737 MAX and Airbus with the A320neo, will compete with new contenders.
The Irkut MC-21 and Comac C919 recently carried out their maiden flights, hoping to grab an important market share. Bombardier and the CSeries could threaten the current Boeing-Airbus duopoly if the Canadian company “can overcome its financial troubles and get a stronger order book to secure a real foothold in the market. A joint Chinese-Bombardier effort on the CSeries would be a serious threat to both Boeing and Airbus.”
On the other hand, traditional airlines must face tough competition from low-cost companies. The latter “operate a fleet which is half the age (5.7 years vs 11.9 years), and therefore drives fuel burn and maintenance cost advantages.” Other structural differences between classic European network carriers and low cost carriers keep “driving unit cost gaps” and traditional European airlines will have to work on their business model to face competition, thus leading to important restructuring in the coming years.
In the defence sector, global spending has been increasing in the last two years with the European Union and the US reaching a 2% growth in defence spending in 2016. This trend should continue and AlixPartners sees it as “a unique opportunity for the players involved.” Europe is especially highlighted by AlixPartners analysts, who note a growing interest in European defence in the wake of continuous conflicts and terrorists threats.
However, the study warns that European Defence players will need “to be better integrated if it is to avoid a trend that ends up with ‘buy American’ as the only option.” This implies important work ahead for European industries to consolidate and collaborate in order to rationalize “portfolios that would address the number of redundant products in the market (e.g. fighter jets, ships, helicopters, military ground vehicles).”
Among the major trends for both commercial and military players is the aerospace and defence industry will have to enter the digital age and this is not easy for an industry as peculiar as this one. Indeed, with “programmes that last for decades, modest production volumes, extremely technical and complex products and a highly regulated environment,” the digital leap is hard to take.