The global aerospace and defence sectors are rebounding, according to a new report from Deloitte, which said that the commercial aerospace backlog has reached a record high and defence spending is driving growth in the defence industry.
The study analysed the top 100 global aerospace and defence companies, or industrial conglomerates with aerospace and defence business. Deloitte’s study highlights the fact that the global aerospace and defence sector revenues experienced growth in 2015, with total revenues reaching $674.4bn, a 3.8% increase from 2014 (on a constant currency basis).
However, the sector experienced a decline when measured on a non-constant U.S. dollar basis: a 1.9% decline year-on-year in 2015, likely due to the strength of the U.S. dollar and the weakening of other currencies, including the Euro and the Pound Sterling, making European products more competitive. Furthermore, defence subsector is rebounding with 1.7% of revenue growth ($5.8bn), likely due to increased military spending by governments that are recapitalizing their defence infrastructure, the study outlines.
The decline of U.S. defence subcontractor slowed down, and is expected to rebound in 2016 and 2017 thanks to increased U.S. DoD funding. DoD budgets for 2016 increased by 3.6%, but increases are expected to take effect from 2016 onwards. In Europe, Deloitte reports a 6.8% growth of defence subsector revenue, fuelled by foreign exports and the stabilization of European defence budgets after years of decline. The defence subsector is thus “rebounding”.
The Middle East and Asia are among the leading global arms importers, with several major contracts at stake and strong competition between defence suppliers.
“Commercial aerospace deliveries and backlog reached record-highs with strong revenue growth in 2015, with future years of sector industrial stability expected”, Deloitte reports. Global commercial aerospace companies achieved record high aircraft deliveries and backlogs in 2015: deliveries are up by 3.3%, and aircraft backlog units reached 13,467 (9.6 years of future production), a record.
However, total new sales orders for commercial aircraft in 2015 declined 39.0% year-on-year to reach 1,841 units, but sector revenue grew by 6.3% at $325.5bn. Growth in the aerospace sector reflects growth of Asian and Middle Eastern markets, along with fleet replacements and keen interest for more fuel-efficient commercial aircraft, driving demand for new airliners. As several reports had already mentioned, global demand for commercial aircraft is forecasted at 34,000 new deliveries between 2015 through 2034, for a total value of $5.47 trillion at list prices.
The European aerospace and defence sector witnessed an 8.2% growth in 2015, over the 1.4% growth reported for its U.S. counterpart, driven by defence spending and commercial aircraft demand, further strengthened by the strength of the U.S. dollar. “The top three European companies – Airbus Group, BAE Systems, and Safran recorded strong revenue growth of 6.2%, 8.8%, and 20.3% respectively, in 2015. On the other hand, the top three aerospace and defence companies in the U.S., namely, The Boeing Company, and Lockheed Martin and General Dynamics recorded 5.9%, 1.2%, and 2.0% revenue growth, respectively, in 2015,” the study points out.
Global aerospace and defence sector operating margins and core operating earnings have remained flat in comparison with 2015 figures. One time write-offs and impairments likely due to programme losses reached US$10.3bn in 2015 according to the study, although with maturation of major aerospace and defence programmes and stabilization of deliveries, it is expected that one time write-offs of development cost overruns will lessen in the near future.
In the field of sector productivity, Deloitte’s study points out to stabilization after years of improvement and efficiency gains, although productivity remained “solid” in 2015. A gap remains between U.S.-based and European-based aerospace and defence suppliers however, with operating earnings per employee at $41,218 in 2015 in the U.S. sector, against $28,521 for European counterparts. Deloitte considers that efficiency initiatives, including concentration of supplier base, merger and acquisition operations and automation are amongst the factors explaining this gap. “Higher profitability over the long term should attract more resources in the capital markets needed for investments in innovative research and development to introduce next generation product,” the study adds.
Propulsion, avionics, and complex systems suppliers continue to experience higher operating margins and profitability, compared to aerostructures and services companies, which are more likely to be impacted by pricing pressures according to Deloitte.
Finally, Deloitte’s study points out that the A&D sector is increasingly relying on debt to finance stock buybacks, acquisitions, and product development, a trend more observable in the U.S. Indeed, historically low interest rates favour such operations. The study points out that in terms of financial performance, revenue growth from commercial aircraft OEMs, propulsion suppliers and European defence suppliers were key drivers.
Written by ADIT – The Bulletin and republished with permission.