Aerospace outlook positive, defence negative in 2013 – report


The global defence industry is expected to shrink while the commercial aerospace industry is expected to see record growth in 2013, according to a new report from Deloitte.

The report, entitled ‘2013 global aerospace and defence industry outlook’, expects the defence sector to see a third consecutive year of decline as a result of spending cutbacks, especially in the United States and Europe.

However, the commercial aerospace sector is, according to Deloitte, expected to “reach record levels of revenues in 2013, just coming off its best year ever for production in 2012”.

The report said that defence revenues “were flat through the first nine months of 2012 at the global level, but in the US, revenues continued to decline at negative .5 percent year over year. Indeed only 3 out of the top 13 defence contractors doing business with the U.S. Department of Defence (DOD) experienced revenue growth.”
“Continued global economic challenges coupled with revenue gaps and cost pressures in 2013 may result in additional decreases in revenue, lower returns on invested capital, as well as margin contraction for many defence industry companies, creating pressure to consolidate in order to squeeze out excess defence segment capacity,” the report said.

Companies will in response implement strategies such as promoting foreign military sales, streamlining operations and undergoing mergers and acquisitions.

With respect to commercial and business aviation, the report said that the growth in commercial aircraft manufacturer’s revenues is expected to reach record levels in 2013, based on increased production rates and the introduction of the next generation aircraft.
“It is likely that 2013 may continue the new trend of global production levels above 1,000 aircraft per year for the third year in a row. Backlogs are expected to continue growing, with airlines continuing to update their fleets with new fuel-efficient aircraft in order to stay competitive. Suppliers to aircraft original equipment manufacturers (OEMs) are likely to be challenged to keep pace with production requirements and are expected to invest in skills development, tooling, and manufacturing capacity. Finally, for the first time in several years, the industry may experience an uptick in demand, albeit modest, in the business aircraft segment as well.”

The drivers of growth in the commercial aerospace sector are the growth in passenger travel demand, especially in Asia and the Middle East, and the need for more fuel-efficient aircraft. Deloitte estimates that between 27,350 and 34,000 aircraft will be produced over the next 20 years.

Concerning business jets and general aviation, total shipments grew by 4.2% in the first three quarter of 2012, Deloitte reports. However, the still significant number of high quality previously owned aircraft available in the market and high fuel prices are restricting this sector.

Overall, Deloitte pointed out that the aerospace and defence industry is becoming more global because of heightened competition, growing travel demands, and increased security requirements in emerging markets.
“Globalization provides opportunities for lower cost and for technologically advanced product introductions…Globalization is also affecting product selections, in that military and commercial customers alike are requiring that value be ‘offset’ by placing work in their countries of origin. This tendency is likely to continue, as traditional countries are pressured to keep their jobs at home, but is balanced by the need for companies to grow revenues and continue to reduce labour costs.

In the report’s look at global defence spending, it predicts that global spending with defence contractors is expected to decline in 2013 due to the onset of US defence budget cuts, continuing the pace set in 2011 with a 3.3 percent decline, followed by a nominal decline in 2012. Over the next decade the US Department of Defence will see its budget reduced by $487 billion, which translates into a reduction of 12% of contractors’ 2012 estimated revenues. The report adds that this budget reduction would mean that “one out of four people in the defence contractor base within the US would be potentially impacted between both tranches of the Budget Control Act and the possibility of being downsized out of the workforce, should the additional $492bn cut take effect”.
“The declines are mostly made up of defence budget reductions in the US, United Kingdom (UK), and the rest of Europe, offset with smaller aggregate increases, principally in China, Russia, India, Saudi Arabia, the United Arab Emirates (UAE), and Brazil. The decline may be more pronounced if the US Budget Control Act automatic cuts, referred to as ‘sequestration,’ also comes into effect.

In 2011, global defence spending, inclusive of armed forces personnel, is estimated to have been $1.7 trillion, with the US maintaining the highest spending level, nearly five times the defence spending of China, followed by Russia, UK, and France. “China, Russia, India, Brazil, South Korea, and others are increasing their defence spending rapidly due to either their wealth creating affordability and/or national security interests.” As the world’s largest arms importer, India in 2013 is expected to realise several major programmes, including submarines, missiles as well as fighter jets.