The outlook for the 2018 aerospace and defence industry is positive due to rising commercial aircraft deliveries and higher defence spending, according to Moody’s Ratings.
Boosted by Boeing and Airbus increasing commercial deliveries and strong global demand for single-aisle jets, which shows no sign of slowing, Moody’s Investor Service’s analysts estimate the “strong aircraft order backlog” will fuel 10% growth in the aerospace industry’s delivery ramp-up. While “a period of elevated execution risk over the next 12 to 24 months” is expected as Boeing and Airbus increase their respective B737 and A320 narrow-body production rates, “supply chain manufacturers have been making significant capacity investments to meet the production rate increases” and are therefore “well positioned to meet production rate increases.” Yet risk of supply chain disruptions remains.
Analysts write even more aggressive production rate increases by Boeing and Airbus could lead to issues in 2019. Smaller suppliers and engine makers such as Pratt & Whitney and Rolls Royce could face “execution risks” as soon as 2018. Bombardier in particular was singled out by analysts for the delivery delays with its C Series “due to persistent issues with Pratt & Whitney’s geared turbofan engines,” while Rolls Royce’s Trent 100 engine’s turbine blade issue caused “utilization constraints for certain 787 Dreamliners.”
The defence industry outlook is also positive, with military expenditures forecasted to grow about 5% and “maybe higher” depending on US Congress and White House decisions. For Moody’s, defence contractors are also likely to “continue to face pressure to accept more of the risk on contracts” due to reforms in the DoD’s acquisition system. “Fixed-price incentive contracts for development work are becoming more common,” while the cost-plus contracts, where the government picks up the cost of the contractor’s expenses, are declining as these contracts led to more situations of cost overruns, particularly for the Navy. Indeed, the latest statements from DOD officials clearly indicate their aim to meet fiscal challenges with a focus on pricing in military contracts, much higher personal accountability, as well as a dramatic shortening of procurement delays…
Written by ADIT – The Bulletin and republished with permission.