As the aerospace and defence (A&D) industry recovers, companies are expected to focus on innovation to develop new technologies and solutions, create new markets, and expand growth opportunities, according to the 2022 Aerospace & Defence Industry Outlook recently published by Deloitte.
Trends in commercial air travel and customer order activity are in much better shape than earlier post-COVID expectations, which is a positive sign for the industry, Deloitte said. Global distribution of COVID vaccines is helping to clear a path toward normalization of air travel, though the current surge in infections in certain regions will likely keep demand for travel subdued into early 2022.
But current macroeconomic trends suggest that demand for small- and medium-sized aircraft will continue to recover to reach pre-COVID levels in 2022, with aircraft manufacturers focused on narrow-body aircraft being well positioned to benefit from this buoyant demand. Furthermore, with air travel volumes now well off the lows seen in 2020, aftermarket revenues could recover strongly in 2022 as air traffic rebounds.
New technologies, evolving business models, and increasing M&A activity will likely further accelerate the shift toward digital and operational efficiencies. In particular, digital thread and smart factory present a host of efficiency- and productivity-enhancing technologies that can accelerate time to market and reduce cycle times. A&D firms that focus on innovation will likely be better prepared for 2022, Deloitte reported.
One disruptive element, however, could challenge these expectations: the Omicron variant, the strong contagiousness of which is pushing governments to extend travel restrictions, slowing down the recovery of the sector.
“In 2020 and 2021, we saw many A&D companies take advantage of the downturn to invest in advanced manufacturing capabilities like smart factory. In 2022, many A&D companies will likely roll out these investments more broadly across their organization and start benefitting from such investments.”
The report highlights the digital thread and smart factory, which can help manufacturers become more flexible and knowledgeable about their entire production process. While the digital thread allows the manufacturer to acquire important data about its products’ entire lifecycle, for instance enabling the use of predictive analytics, the smart factory will help optimize costs by “increasing visibility, optimizing production, improving quality and minimizing unplanned downtime.”
Digitalization is therefore seen as supporting the amelioration of specific products’ design and lifecycle as well as the overall production process. Digital innovation will also have an important effect on aftermarket revenues, the authors say.
Aftermarket revenues were highly affected by the crisis of the A&D sector, but will likely benefit from the recovery of the passenger traffic and eventual new large orders from airlines. More importantly, the digitalization of products and manufacturing processes will drive aftermarket revenues: “the proliferation of smart parts and products opens new opportunities for digital service offerings. […] Aftermarket service providers should proactively monitor customers’ maintenance needs and advance customer engagement using digital platforms and data analytics.”
Concentrating then on the defence sector (with a strong focus on the United States), the report stresses that governments kept investing in long-term defence projects despite the pandemic, thus maintaining a good level of demand.
In 2022, “defence contractors are likely to enjoy strong demand for high-end military equipment in domestic and international markets, especially unmanned military fighter aircraft, cyber and intelligence solutions, and hypersonics”. The latter clearly refers to the big players in the defence industry, since only the US, China and Russia’s hypersonic technology market amounted to $1 billion or above in 2020 (and even $2.85 billion for the US), according to a 2021 BIS Research report.
A more global trend identified by Deloitte is the rising interest for “integrated and interconnected products with situational awareness systems ”. Global military spending, which grew by 2.6% in 2021 according to SIPRI, will grow by another 2.5% in 2022, Deloitte anticipates.
Potential supply-chain shocks could however be observed if China was to restrict the supply of rare earth minerals and other raw materials because of events such as potential US or Western military sales to Taiwan.
The report is also optimistic about growth in the space market. Private players and innovation have recently been driving the costs down, notably for launch contracts. Small satellites, they say, “are expected to become even smaller, cheaper and faster to produce than traditional satellites. […] The use of components from outside the space industry could result in a reduced development cycle”
Another important business trend identified is the continuing growth of the “operations-as-a-service” industry, “[providing] ground station and specialty services, enabling operators to access data from their satellites without investing in their own ground network.”
This same optimism appears when it comes to advanced air mobility, and electric vertical takeoff and landing (eVTOL) aircraft in particular, with a US market “estimated to reach $115 billion annually by 2035”, driving fierce competition.
In this context, Deloitte recommend that in 2022, competitors determine an appropriate business model, by arbitrating between design and development activities on the one hand, and operations and service activities on the other, which can themselves be broken down in different ways.
To finish with, the report focuses on the issue of sustainability for the A&D industry. Research in the field of decarbonization is identified as an important innovation trend for the sector, which will seek to further its efforts to reduce its carbon footprint from design to development stages, and in a more distant future in-flight emissions. This latter evolution is however not likely to become significant right away, and certainly not during the present year.
The authors ultimately anticipate innovation will be supported by an enhanced M&A momentum in the industry. This report brings an overall positive forecast for the A&D industry in 2022 — it now remains to be seen whether the recovery of the sector will follow its course despite enduring restrictions from governments in the face of the pandemic.
Written by ADIT – The Bulletin and republished with permission.