Aerospace and defence market set to resume growth in 2016

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The global aerospace and defence (A&D) industry is expected to return to growth in 2016 with total sector revenues estimated to grow at 3 percent, according to a new study, versus an expected decline of minus .5 percent in 2015.

This is according to the Deloitte group’s 2016 Global aerospace and defence sector outlook, which says the development is a positive signal following years of declining revenue growth of 5.8 percent in 2012, 3.2 percent in 2013 and 1.9 percent growth in 2014. The decline was largely driven by decreased revenues in the defence subsector, which suffered from cuts in global military expenditure, mainly from the United States. Programme cancellations and delays in major weapons programs affected the revenues of the major defence contractors and the stronger US dollar adversely affected the revenues of the A&D companies headquartered outside of the US.

Deloitte said that travel demand, new technologies, and security threats are fuelling increases in aircraft production, defence budgets, and the global supply chain.
“Over the last three years, the global A&D industry revenue was largely impacted by decreased revenues in the United States…The return to growth in 2016 is expected to be fuelled by increases in the US defence budget, a resurgence of global security threats, and growth in defence budgets of key nations around the world. In addition, relatively stable growth in global gross domestic product (GDP), lower crude oil and other commodity prices, and continued increases in passenger travel demand are contributing to expected growth in production rates for next-generation commercial aircraft,” Deloitte said.
2015 was a pivotal year that saw heightened tensions between China, its neighbours and the US over “island building” in the South and East China Seas, and the related claims of sovereign ocean territory rights by China. In addition, Russia and the Ukraine are at odds related to Russia’s takeover of Crimea and their military actions in Eastern Ukraine. North Korea continues to threaten its neighbours with its nuclear ambitions and aggressive rocket launches. The Islamic State (ISIS) has become a key threat in Syria, Iraq, and Afghanistan and is involved in exporting terrorism to Europe, Africa, and elsewhere. The recent tragic bombings in Paris, Beirut, Mali, the Sinai Peninsula, and other places have emboldened nations to join in the fight against terrorism.

Several governments (the US, United Kingdom, France, Japan, andseveral Middle Eastern countries) affected by these threats are increasing their defence budgets to combat terrorism and address sovereign security matters, including cyber-threats, Deloitte’s report said. For defence contractors, this represents an opportunity to sell more equipment and military weapons systems.

Products, which are expected to experience renewed interest from buyers, include armoured ground vehicles, ground attack munitions, light air support aircraft, intelligence, surveillance and reconnaissance electronic sensors, cyber protection systems, maritime patrol ships and aircraft, as well as provision for equipment maintenance and sustainment, as the military operations tempo is likely to increase and more missions are executed.

In addition, many large, mainly US DoD defence programmes representing billions of US dollars, are likely to start soon, enter the engineering manufacturing design phase, and reach low-rate or full-scale production over the next few years. These programs include Ohio Class Submarine replacement, F-35 fighter jet, KC-46A aerial refuelling tanker, Long Range Strike Bomber, USAF T-X trainer, and Rafale fighter programmes.

In addition to growing revenues, many defence firms will likely seek to grow via foreign military sales, acquisitions, and through new product introductions. Large-scale domestic programmes are likely to find increased success in selling into foreign markets, according to Deloitte. Indeed, many defence companies have increased the percentage of sales to foreign governments. In the US alone, foreign military sales increased from $21.36 billion in FY2010 to a record $46.6 billion in FY2015, a 118.2 percent growth. It is likely that this trend will continue for not only US-based defence firms, but also European and Asian firms.

A second avenue for revenue growth will be acquisitions. As the defence subsector has contracted over the last few years and as U.S. DoD and global Ministry of Defense (MoD) budgets decreased, there have been many acquisitions due to subsector contraction and diminishing work to support defence employment. Several companies—particularly those in the government services businesses—were divested by prime defence contractors, with some degree of combinations occurring in order to gain economies of scale. In addition, there have been mergers and acquisitions in the space subsector, as the industry becomes more fluid with the introduction of new, privately financed companies that create a dynamic competitive landscape.

Regarding the commercial aerospace sector, Deloitte expects it to continue its decade-long trend of above-average growth rates, driven by growth in passenger travel demand and an accelerated equipment replacement cycle. Strong increases year over year of global revenue passenger kilometres are leading to an unprecedented level of aircraft production rates, which in 2015 were about twice the levels experienced 10 years ago. However, this may be slightly offset by the 50 percent reduction in oil prices since 2014 and weak economic growth from China. The strong US dollar could also negatively affect the global aerospace and defence market.

Deloitte noted that the top 20 global A&D companies reported combined revenues of $353.3 billion during the first nine months ending September 2015, which represents a year-over-year decline of 1.5 percent. Aggregate revenues for the top 20 global defence companies reported a 3.2 percent decline to $177.8 billion in the nine months ending September 2015, versus $183.7 billion during the same period in 2014.