Global aerospace and defence industry sluggish in 2011 – Deloitte


The financial performance of the global aerospace and defence (A&D) industry generally fell in 2011, but despite the uncertainty in the defence sector, the global A&D industry as a whole grew in 2011 to US$681 billion, posting a sluggish revenue gain of 2.3%, compared to 2.5% in 2010, according to a report by Deloitte.

The report, “2011 Global Aerospace and Defence Industry Performance Wrap-Up,” revealed that reported operating earnings for the global industry decreased 3.1%, as did reported operating margins (down 5.3%), free cash flow (down 13.3%), and reported operating earnings per employee (down 5.2%). Despite this decline, the book to bill (BTB) ratio, an indicator of future revenue growth, increased 17.4%, primarily as a result of higher sales of new fuel-efficient commercial aircraft, according to the study.
“With the defence segment comprising about two-thirds of the global A&D industry, our report suggests that ongoing defence outlook uncertainty is likely to impact overall financial performance in 2012,” said Tom Captain, principal, Deloitte Consulting LLP and global and U.S. aerospace & defence leader.
“However, the findings indicate that defence spending is increasing in countries such as India, China, Japan, the United Arab Emirates, Saudi Arabia, and Brazil as a result of growing wealth and in light of mounting national security concerns.”

The report also showed that financial performance differences between the commercial and defence segments widened in 2011; commercial revenues grew 10.1% while defence revenues declined by 3.3%. Contributing to the commercial revenue growth were record production levels of large commercial aircraft and increases in demand for aircraft services. The study found that defence revenues were likely impacted by decreasing defence budgets, competing domestic priorities, weaker than expected economic performance in the western world, and the drawdown of forces in Iraq and Afghanistan.

There are also financial performance differences between A&D companies based in the United States and Europe. According to the study, the industry achieved 3.3% revenue growth in the U.S. in 2011, while it grew less than 1% (0.8%) in Europe. Significantly, operating earnings in Europe fell by 21.6% and increased 2.9% in the U.S. Reported return on invested capital was 20.7% and 8.7% in the United States and Europe, respectively. Furthermore, the U.S. employee productivity outpaces Europe with operating earnings per employee up 1.9%. Conversely, Europe saw this important metric fall 25%.
“Findings in the 2011 Global A&D Industry performance wrap-up report show that European and U.S. A&D company financial performance gaps widened, continuing a trend from 2010 and suggesting ongoing differences in work force practices between Europe and the United States,” said Pauline Biddle, A&D Sector Leader, Deloitte United Kingdom and Deloitte Switzerland. “However, the report suggests that increases in commercial aircraft production and decreases in one-time impairment charges in Europe in 2012 are expected to improve financial performance.”

Tier one (5.1%), two (11.1%), and three (29.1%) A&D suppliers, many of which serve the commercial aerospace segment, reported revenue increases; while original equipment manufacturers experienced revenue growth of just 0.1%.

Another study projects optimistic growth in the global aerospace industry. The global aerospace industry has witnessed impressive growth in the last few years, with the civil aviation segment emerging as the major contributor to its expansion. The US and European countries are the dominant markets for aerospace industry, and acting as catalyst for the overall growth. The global aerospace industry is forecasted to register CAGR of around 2.5% during 2012-2015, according to the recent “Global Aerospace Industry Outlook 2015” report from Research and Markets.

The study found that the US represents the biggest aerospace market in the world, followed by France, UK, Germany and Canada. In near future, developing nations, like China, India, Mexico, and Brazil are expected to emerge as potential marketplaces for aerospace products.

Besides being the world’s top aerospace and defence market, the US has the world’s biggest military budget. Growth of the US aerospace and defence industry depends largely on the spending outlook of defence departments, with the defence budget as the primary driver, the report notes. US defence expenditure has considerably increased during the last few years on account of wars in Afghanistan and Iraq and the overall global disturbance.

The report adds that the civil aircraft market, which plummeted in 2010, is expected to revive in the coming years, fuelled by the gradual recovery of the global economy. However, in the near future, the rise in civil aircraft sales will be driven by growing commercial air traffic and higher fuel prices that will help the leading airlines to place orders for more efficient equipments. Thus, the study anticipates that the civil aerospace industry will witness modest CAGR growth of around 2% during the forecast period (2012-2015), to cross US$230 billion mark by 2015.