Healthy outlook for global defence industry, marginal outlook for commercial aerospace


After a strong year in 2018, the global defence sector continues to soar while the commercial aerospace sector has witnessed slowed growth in 2019, according to a new report by Deloitte.

In 2020, the aerospace and defence (A&D) industry is expected to get back to its growth trajectory with the commercial aerospace sector recovering from its decline in 2019, Deloitte said.

The defence sector has sustained its growth in 2019 as security threats have intensified, requiring governments worldwide to continue increasing their defence budgets, Deloitte noted, saying defence expenditure is expected to grow between 3 and 4 percent in 2020 to reach an estimated $1.9 trillion, as governments worldwide continue to modernize and recapitalize their militaries. Most of the growth will likely be driven by increased defence spending in the United States, as well as in other regions, such as China and India.

The commercial aerospace sector has experienced a decline in deliveries in 2019 due to production-related issues in certain aircraft models. Order backlog of commercial aircraft has also decreased from the 2018 peak levels of about 14 700 aircraft to slightly more than 14 000 at the end of August 2019.

This was a result of order cancellations and a drop in new orders. However, commercial aerospace sector growth is likely to recuperate from 2020 onward as the long-term demand for commercial aircraft continues to remain robust, with nearly 40 000 units expected to be produced over the next two decades.

Deloitte noted that the demand for military equipment is on the rise as governments across the globe focus on military modernisation, given increasing global security concerns. “The uncertainty and sustained complexity of the international security environment worldwide is likely to boost global defence spending over the next five years. Global defence spending is expected to grow at a compound annual growth rate (CAGR) of about 3 percent over the 2019–2023 period to reach $2.1 trillion by 2023.”

While the US administration’s increased focus on strengthening the military is expected to be a key growth driver for defence spending in 2020, other large nations, such as China, Russia, and India, are also likely to embark on higher spending on defence equipment.

US foreign military sales (FMS) also remained steady as global threats persisted, and this is likely to continue to add to the robust performance of the defence sector. In 2018, US FMS rose 33 percent to reach $55.7 billion, and in the first nine months of 2019 achieved $44.2 billion, with a likelihood of reaching the 2018 total. Strong US FMS continues to boost export opportunities for defence contractors in the United States. However, a strengthening dollar could dampen growth in FMS as some of the European defence exporting nations could become more price competitive, Deloitte said.

In Asia, higher defence spending by major regional powers such as India, China, and Japan will likely contribute to global sector growth. In Europe, members of NATO are also increasing defence budgets to reach a defence spending target of 2 percent of GDP. Apart from this, ongoing geopolitical tensions in the Middle East are creating a strong demand for military equipment.

“Increasing global defence spending would continue to create opportunities for defence contractors and their supply chains. To meet the increased demand and improve production yields, defence companies should leverage highly agile production that adapts to changes in demand, including digital technologies. For instance, adopting smart factory initiatives could drive 10–12 percent gains in factory utilisation and labour productivity without major capital investment,” Deloitte said.

Commercial aerospace

The commercial aircraft order backlog continues to be high, at about 14 000 unfilled orders through September 2019. However, the backlog declined from 2018 peak levels of about 14 700 aircraft due to order cancellations and lower-than-expected new orders. While original equipment manufacturers (OEMs) have been pushing the envelope in creating state-of-the-art aircraft—which are fuel-efficient, connected, and highly automated—many are still grappling with production-related issues. Specifically, OEMs are continually aiming to increase production rates and pushing suppliers to ramp up, and the sector is facing production-related challenges with certain aircraft models. Consequently, OEMs are experiencing order cancellations and delays in taking deliveries from their primary customers, airlines, Deloitte reported.

Aircraft deliveries are estimated to be lower in 2019 compared to 2018, largely due to the decrease in production rates for certain aircraft models. In 2020–2021, deliveries are expected to be back on track as Boeing announced its goal to have the 737 MAX back in service by January 2020. Moreover, with China’s narrow-body aircraft deliveries anticipated to begin in 2021, the current duopoly may raise production rates further between now and 2021 to capture China’s domestic aircraft backlog before C919 deliveries begin. As a result, commercial aircraft production is projected to be about 1 900 aircraft in 2020, up from an estimated 1 450 aircraft in 2019.

“The outlook for the regional jet market remains robust, as forecasts anticipate more than 5,000 regional jets will be required over the next 20 years. This is expected to primarily be driven by an aging fleet and demand from Asia-Pacific, the Middle East, and Latin America, as they continue to expand regional connectivity. Over the last two years, the regional jet market experienced some major tie-ups—Airbus’s acquisition of majority ownership in Bombardier’s C-Series aircraft programme, Boeing’s proposed deal to buy Embraer’s passenger jet unit, and Mitsubishi Heavy Industries’ proposed acquisition of Bombardier’s CRJ regional jet programme. These programme realignments could allow supply chain and manufacturing consolidations, resulting in reduced production costs,” Deloitte said.

The commercial aerospace aftermarket landscape is also evolving, due to a changing aircraft fleet mix, pressure on airlines to reduce maintenance costs, and the emergence of new advanced technologies. This is resulting in an increased aftermarket opportunity for the overall commercial aircraft value chain, including OEMs. With the increasing aircraft backlog and production rates, OEMs are focusing on expanding aftermarket revenues by seeking partnerships and exploring new business lines to diversify. For example, Boeing’s 2018 services revenue stood at about $17 billion, and it aims to triple its service revenue to $50 billion in the next five years.

On the horizon beyond 2020

Technological developments and innovation continually shape the A&D industry. Some of the significant developments Deloitte believes are likely to have implications in the medium-to-long-term include:

Electric propulsion aircraft: While aerospace manufacturers have built more fuel-efficient aircraft over the last few decades, rapid growth in air travel demand has continued to result in an increase in carbon emissions by the aviation industry. With technology evolving rapidly, there are several companies globally that are developing electric propulsion systems, which would reduce carbon emissions, make flights quieter, and decrease costs. Electric propulsion systems could also support the emerging urban air mobility (UAM) ecosystem, consisting of passenger drones, most of which are likely to be either electric or hybrid-electric. Apart from large aerospace propulsion companies, such as Rolls-Royce and Safran, there are various technology startups also involved in the development of electric propulsion engines.

Urban air mobility: The development of UAM vehicles is expected to accelerate over the next decade. However, there are significant challenges that would need to be ironed out.46 Most importantly, there would need to be the formulation of regulations for pilotless vehicles, airworthiness certifications, and the use of airspace. Implementing efficient energy management systems, onboard sensors, collision detection systems, and other advanced technologies would also need to address the technological challenges.47 In addition, the industry should build takeoff and landing zones, parking lots, charging stations, and vertiports to support the infrastructure needs of UAM. Apart from this, creating a robust air traffic management system integrated with other modes of transport would be needed to enable smooth operations of UAM vehicles. Lastly, the industry would require a flawless operational and mechanical safety record to overcome psychological challenges associated with the idea of flying in an unmanned aircraft. To address these challenges, vehicle manufacturers have begun testing vehicles, ecosystem participants are collaborating on developing a robust regulatory framework, and technology is advancing swiftly.
Automated flight deck: Although commercial aircraft manufacturers are increasingly relying on automated flight controls, including automated cockpits, the commercial aerospace sector is aiming to transition to fully automated flight decks. Such a transition will likely reduce the number of crew members in the cockpit, resulting in lower costs for airlines. Moreover, automated flight decks would also address the growing pilot shortage issue currently faced by the aviation industry, which will likely be accentuated in the future as the commercial aircraft fleet continues to grow.