The Ukraine crisis and its consequences on aviation, aerospace and defence

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The Paris office of global consultancy AlixPartners recently presented its latest forecast on the global aviation, aerospace & defence industry, with a special emphasis on the many impacts from the war in Ukraine.

As usual, AlixPartners separate the report between a commercial aviation forecast including supply chain on the one hand, and aerospace & defence on the other hand.

According to Pascal Fabre, Managing Director of AlixPartners in France, interestingly, sanctions on Russia have only marginally impacted OEMS, with Russia representing less than 1% of total Boeing and Airbus orders (95 orders), although there is an impact on the A350 production schedule for the next two years, linked to the 14 Aeroflot orders. That said, the impact is much bigger in terms of supply: “the commercial aircraft supply chain, already strained by previous crises, has a certain dependence on Russia for raw materials, particularly for titanium and via VSMPO-AVISMA,” Fabre explains. Shortages of titanium and palladium could hamper the production of landing gear, engines and pylons for the 787 and A350, as well as affect the new generation long-haul aircraft to a greater extent (up to 15%).

As traffic was slowly recovering from COVID’s recurring waves, AlixPartners analysts now anticipate aftershocks of the war in Ukraine. The sharp rise in oil prices (x1.7) in one year – fuel represents 20 to 25% of the airlines’ cost structure – will impact their profitability by up to $40bn they say – adding that in most cases; they should be able to “pass on a good part of the increase to passengers via ticket increases and fuel taxes”. In the medium to long term, the new global inflationary environment will weigh on household budgets and risk slowing the return of air traffic to pre-COVID levels, even though this recovery relies mainly on leisure/VFR (Visiting Friends & Relatives) traffic.

Fabre is enthusiastic regarding the quality and attractiveness of the Airbus A321XLR’s value position. As it goes now, it has no real competition and the more it sells, the more it dries one big chunk of the so-called “middle of the Market”, and the less attractive any Boeing NMA business case becomes…Boeing is indeed in a corner and should react quickly in order to regain some traction on this lucrative market.

But at the same time, Fabre remains quite concerned regarding the very ambitious ramp-up plan of Airbus on its best-selling A320 family as a whole. The European OEM wants to move from around 40 aircraft a month now, to 65 by mid 2023, and no less than 75 by 2025.

According to AlixPartners defence & Space director Aymeric Gobillard, the war in Ukraine and the strong reaction from the West is certainly a turning-point. In terms of doctrine, virtually all European headquarters are assessing the lessons learned from the Ukrainian battlefield, in particular in terms of drone warfare. “Typically in the field of drones: on the battlefield, they have a very strong impact for a very low cost. With four drones costing €1000 each, we can prevent or make difficult the takeoff of an aircraft costing €10mn,” says Gobillard. Those lessons will have to be learned some way or another, and Europe will also have to decide on the type of equipment it needs.

“The budgetary constraint, reinforced by the rise in interest rates, implies trade-offs between technological equipment – hypersonic missiles, for example – and cheaper, high-volume equipment,” he adds, referring to a recent Parliamentary report on hi-intensity warfare.

Looking at the sheer numbers of frontline fighter jets or main battle tanks, the emphasis has lately been on technological sophistication versus mass and numbers of robust platforms… In terms of resources, many countries will aim to reach the 2% GDP target as soon as possible. If met, European military expenditures may lead to “a real increase of up to 41% by 2030”.

Germany will spend no less than €100bn to fix some of the equipment shortfalls of the Bundeswher. But just looking at the first procurement decisions, AlixPartners consultants are impressed by the level of penetration of US-origin equipment, such as Lockheed Martin F-35, Boeing Chinook CH-47 heavy helicopters and probably Raytheon Patriot Ground based air defence, amounting to at least $15bn… They go further and assess the French budgetary trajectory. At first sight, it looks positive, with FYDP on the upswing. But when you look at the details of the new requirement – training hours, or depleted missiles stockpiles, for example – it would be necessary to increase the national defence budget to a whopping €60bn by 2030! A considerable effort, while the 2019-2025 programming law plans to reach “only” €50bn euros at the end of the period…



Written by ADIT – The Bulletin and republished with permission.