UK: Throttling Back: Midyear Outlook For The Global Aerospace And Defence Industry

Last Updated: 13 July 2009
Article by Deloitte Manufacturing Group

Most Read Contributor in UK, August 2017

2008 Was The Peak, 2009 Is Slowing, And The Forecast Is Challenging

The global aerospace and defence (A&D) industry capped off a record-setting five-year period in 2008, with strong growth in sales revenue of 7.9% to $595 billion and earnings of $54.2 billion1. However, the global economy slipped into economic turmoil in the fourth quarter of 2008, resulting in orders for new commercial aircraft dropping dramatically and business jet manufacturers entering a deep slump. The result was declining financial performance for the entire industry on average, which continued the negative trend into the first half of 2009. Military equipment spending, led by the U.S. Department of Defence (DoD), is moderating, and several weapons platform programs are being terminated or transformed.

Financial performance fell across the board for the top 20 global A&D firms. In the 2009 first quarter financial results, sales revenue growth fell 83%, down from 10% to 1.7%. Operating profits decreased 12%, while quarterly operating margin declined by 13.9%, from 10.3% to 8.9%. Figure 1 shows the financial performance for the top 20 global industry firms and as a group.

As we near the close of the second quarter of 2009, the key question on the minds of the industry executives and shareholders: when is the A&D industry expected to rebound?

Figure 1: Top Twenty Global A&D Companies' First Quarter 2009 Verses First Quarter 2008

Commercial Aircraft

Industry pundits and forecasters expect the bottom of this recession to be forthcoming in the next six months, and a rebound in demand for commercial passenger travel to start increasing within 12 months. Commercial aircraft producers have indicated that credit financing facilities exist for most customers taking delivery for the remainder of 2009, and that credit financing may be challenging, but should be available to finance most aircraft purchases in 2010. Indeed there are early signs that the bottom is approaching, with recent news of large aircraft orders being planned, from airlines seeking to take advantage of potential price concessions, and flexibility typically found prior to the end of down cycles.

The global airline industry continues to forecasting declining revenues and increased operating losses, due to on-going adverse trends in passenger and freight traffic. According to International Air Transport Association (IATA) the organization "nearly doubled its forecast for losses this year to $9 billion for the global airline industry, amid what it said were the worst conditions it has ever faced. IATA said it now expected revenues across the industry to fall 15% to $448 billion this year and its new loss forecast was nearly twice the $4.7 billion it had projected as recently as March 20092". Furthermore, international revenue passenger kilometres (RPKs) declined 7.5%, and freight traffic growth declined 22.2% year to date through April 30, 2009 (see Figure 2). Between the IATA statement and the actual data indicating a significant falloff in passenger travel and dramatic decline in freight traffic, the commercial aircraft producers are expecting far fewer aircraft orders than experienced in the last several years. As can be seen in Figure 2, most of the regions of the world are experiencing a significant falloff in passenger and freighter traffic.

Figure 2: International Traffic Results

Despite the recession and falloff in RPKs, air traffic growth over the next 20 years is expected to be 4.9% on an annual basis, significantly higher than the global GDP rate3. The market demand for new commercial aircraft is 29,000, worth and estimated $3.2 trillion4. With 36% of the backlog of large commercial aircraft, Asia Pacific is quickly becoming the largest market for new orders5. In 20 years, 82% of the fleet flying at that time is expected to be new fuel efficient, more comfortable and green aircraft, placed in service after 20086. Thus, the long-term outlook for air travel remains optimistic, with rises in aircraft production, despite the short-term industry challenges. Indeed Figure 3 illustrates that each aircraft production down cycle is followed by ever higher up cycles in aircraft production. Note that the trend line uses 25 year historical data, illustrating a 3.5% rate of growth.

Figure 3: Aircraft Deliveries: 1984 – 2009

Business Aviation

For business jet producers, the outlook is much more severe, with orders being cancelled or deferred. Significant layoffs have occurred within the major business jet and general aviation manufacturers.

The pace of deliveries is expected to slow in this industry sub-segment, where corporations, the main customers of business jets, have found it unfavourable to own this type of transportation mode, given the negative publicity at the auto industry bailout hearings early in 2009. In addition, with corporations being impacted by the recession, they are finding other means of transporting executives for the time being.

For wealthy individuals, business jets are a luxury that becomes discretionary during tough economic times, and in this current economic crisis, many orders are being deferred and cancelled due to affordability. New markets in Russia, the Middle East, and China exploited by business jet producers over the last few years have diminished. Oligarchs, sheikhs, and the new economy wealthy are even cutting back as the pace of local economic development and the price of oil has subsided. As seen in Figure 4, business aircraft deliveries have fallen off dramatically, with a 41.1% reduction in total shipments in this first quarter.

Figure 4: First Quarter 2009 Shipments Of Business And General Aviation Aircraft Manufactured Worldwide

By comparison, business aviation deliveries dropped a dramatic 34% post 9/11, but grew in the next five years to record levels7. However, this business jet subsegment recession has been described as equal to or worse than in 2001. Indeed Hawker Beechcraft has announced plans to lay off about a third of its workforce in 20098. Cessna announced in the first quarter the intention of laying off almost 40% of its workforce9. Gulfstream, at the high end, has even announced layoffs of 12% of its workforce10 .Finally, Embraer is expected to deliver 28% fewer business jets in 200911. Therefore, the short-term outlook for business jets continues to look harsh, although long term, this segment has demonstrated resilience, usually leading to ever high levels of production.

Defence

The U.S. defence spend is approximately 42% of the global spend on military weapons procurement and development12. Thus, it is instructive to assess where is U.S. spending going and to understand the overall global trends. For 2009, the U.S. DoD spend is budgeted at approximately a 4% nominal increases over 2008, but accounting for inflation, this represents about a 2% increase. However, the budget must accommodate a 2.9% pay raise for members of the armed services, 93,000 additional troops, increased funding for health care, and the wounded warrior program13. This leaves a lower percentage of the budget for the weapons development programs and for procurement of mature in-production weapons and platforms. Indeed, Secretary Bob Gates has recommended termination of the F-22 fifth generation stealth fighter, the VH-71 Presidential Helicopter, the Future Combat System, and the Transformational Satellite Program (TSAT), in addition to a number of changes, terminations, and redirections that he has proposed14. As can be seen in Figure 5, U.S. defence spending is moderating and levelling off from the previous levels of increases over the last several years.

Figure 5: Discretionary U.S. Department Of Defence Budget

Department Of Defence

Proposed spending is focused on irregular warfare, targeting asymmetric threats found in current and expected future conflicts. Weapons and technology priorities are in the cyber security, intelligence, surveillance, reconnaissance, command, control, and communications space. Delivery platforms expected to be in demand include unmanned air, land and sea vehicles, mine resistant vehicles, and miniaturized systems.

For defence contractors, these are the areas that will generate growth in 2009 and beyond. In particular, the number and variety of large hardware-based platforms is expected to decline and more innovation and capability will be found in software integration. Mission capability will increasingly be created by IT services firms, which are well poised to create competitive advantage through innovation in battle space management, directed energy, precision engagement, threat identification, as well as energy and infrastructure security.

Wild Cards That May Impact Defence Spending

Defence spending is subject to current global events. To that end, any number of wild-card catalysts may ignite new defence spending, with the velocity and direction of that spending dependent on the particular threat faced. These include the rapidly maturing nuclear threat in Iran and growing instability in Pakistan. North Korea's continued long range strike and nuclear arms development continues to pose a threat to regional stability. Additional wild cards include low-level tensions between the U.S. and Russia over buffer states (Georgia, Ukraine, and Kazakhstan), piracy in commercial shipping lanes off the coast of Somalia and in the Malacca Straights, and Chinese policy shifts on Taiwan. Tensions between India and Pakistan have yielded problems in recent years and could potentially flare as well.

However, there are two reasons for financial optimism among defence contractors. The average age of the U.S. air force fleet in 2008 was 24 years15. There are instances where the service is relying on aircraft that are over fifty years old. This equipment will need to be replaced. Secondly, over the long term, defence will be an innovator of technology for the industry. In the past, technology (such as global positioning system/GPS) developed for military use has made its way into broader consumer markets. Today, areas to watch include the miniaturization of technology, robotics, alternative energies, and new developments in reconnaissance and surveillance. By focusing on product innovation, process improvements, and new revenue opportunities, defence companies will be well positioned for an economic turnaround.

Solutions For The Future

In the current environment, it is difficult to forecast with accuracy due to the unprecedented nature of the economic downturn. That said, there are six reliable tactics that A&D companies will have to execute well in order to successfully position themselves to thrive as the economy recovers:

  1. Help customers reconfigure solutions that are more affordable and develop strategies for programs under consideration for termination, new competitive selection, or revamping
  2. Protect the commercial backlog by applying risk mitigation and financing alternatives
  3. Develop a global business model, particularly in the Middle East and India where commercial and defence opportunities are maturing
  4. Aggressively manage costs and set effective targets while achieving mission assurance for the customer
  5. Take advantage of new opportunities in the acquisition space
  6. Identify and capture technology directions and funding for emerging defence and security priorities

History indicates the overall innovation and financial success in the A&D industry, but the next two years will be a true test of resilience for global sector manufacturers. The industry is in the midst of a game-changing challenge and those who adapt and capitalize on the new opportunities will prevail.

Footnotes

1. Deloitte LLP study: "2008 Global Aerospace & Defence Industry Performance Wrap-up"

2. Associated Press: IATA: "Global airline industry nearly double loss estimate to$9 billion", June 8, 2009

3. FT.com: "Boeing trims delivery outlook," June 12, 2009

4. FT.com: "Boeing trims delivery outlook," June 12, 2009

5. JP Morgan — All About Aerospace & Defence 2009, January 6, 2009

6. Boeing current market outlook 2008-2027

7. General Aviation Manufacturers Association (GAMA): 2008 General aviation statistical database and industry outlook

8. Associated Press: "Hawker Beechcraft announces 2,300 layoffs," February 3, 2009, and Reuters

9. Associated Press: "Cessna Aircraft warns more layoff coming," June 4, 2009

10. Associated Press: "Gulfstream: 1,200 layoffs, 1,500 furloughs, " March 6, 2009

11. Flightglobal.com: "Forecasts 2009: Business Aviation: From boom to gloom, " January 13, 2009

12. SIPRI (Stockholm International Peace Research Institute), Deloitte Services LP estimates

13. Department of Defence 2010 budget overview

14. Defence budget recommendation statement (Arlington, VA) As prepared for delivery by Secretary of Defence Robert M. Gates, Arlington, VA, Monday, April 06, 2009

15. Standard & Poor report

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.