Deloitte predicts strong aerospace, weak defence market in 2014

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According to Deloitte, revenue growth in the 5% range is expected for the overall aerospace and defence industry in 2014. In its annual worldwide assessment of the industry, Deloitte says 2014 will be another record year for commercial aerospace and another year of decline for the defence industry.

In the commercial aviation sphere, “2014 will likely bring high single to double-digit levels of growth”, Deloitte writes. “Between increases in passenger demand, as well as the need for more fuel-efficient aircraft, the total demand for new aircraft production is expected to reach record highs for the foreseeable future”, Deloitte forecasts. “Indeed, aircraft production is expected to be between 29,000 and 34,000 (excluding regional jets) over the next 20 year”, the firm adds. Deloitte anticipates that “by 2023, annual production levels in the commercial aerospace sector will have increased by 25% from the decade prior”.

The Middle East and the Asia-Pacific region are seen as the main drivers of the passenger market expansion. But in defense, it’s a very different story, and the report estimates a worldwide defence industry revenue drop of 2.5% in 2013. “Global revenues for defense companies are on a downward trend, declining 1.3% in 2012 and 1.9% in 2011. It is anticipated for 2013, global revenues for defense companies will track to similar levels in the past two years, around an estimated minus 2.5 %”, the report states.

Naturally, the withdrawal of Western forces from Iraq and Afghanistan as well as sequestration have a profound impact on the US market, still accounting for 39% of global defence spending. In the rest of the Western World, “affordability concerns in many traditional militarily active governments” will also weigh on defense suppliers, Deloitte says. In a worrying graph on page 6, Deloitte shows how the operating margins the top 20 U.S. defense firms have lost nearly one point in 4 years: from 10.5% in 2009 to 9.7% in 2012…

That said, and this is the best hope for most industry players, defense spending remains on an upward trend in several areas of the globe: “especially in the Middle East, India, China, Russia, South Korea, Brazil, and Japan”, Deloitte adds. regional tensions in areas such as the Persian Gulf and the Korean peninsula will lead affected governments “to increase purchases of next-generation military equipment. In terms of growth segment, Deloitte identifies things like “next generation intelligence, surveillance, and reconnaissance; as well as cyber security”.