17 juin 2019 |
International,
Aérospatial
The report highlights that the industry will have to navigate the following:
Restoring consumer trust regarding safety post-737 MAX crisis
Adverse macroeconomic factors, such as fluctuating oil prices and slowing global trade
Strengthening sustainability in the supply chain and adopting digital operating models
Investing in more environmentally-friendly propulsion and autonomous-flight technologies
June 17, 2019 08:00 AM Eastern Daylight Time
NEW YORK--(BUSINESS WIRE)--In the past year, the aerospace & defense (A&D) industry globally saw record deliveries, growth, and profitability. However, the year ahead portends to be much more challenging, and not just because of the Boeing 737 MAX crisis, although that situation could itself color what happens well beyond just Boeing. That's according to a new study by AlixPartners, the global consulting firm.
The study finds the top 100 listed A&D companies experienced record growth last year (an 8.6% increase in revenues, the highest annual growth rate of the decade) and sustained strong profitability (10.6% in earnings before interest and taxes, or EBIT). Meanwhile, OEMs and suppliers both performed well, posting revenue increases of 9.9% and 7.6%, respectively, driven by higher production rates in commercial aircraft (Boeing and Airbus delivered 1,606 commercial aircraft, an 8% increase vs. 2017), very healthy passenger and cargo traffic, and rising defense budgets globally, the latter up 2.7%.
However, 2019 has already seen several clouds gathering across key A&D market segments, says the study, including:
In commercial aircraft, while the long-term impact of the 737 MAX crisis is not yet clear, it is already negatively impacting Boeing and the whole aerospace supply chain and could also lead to new certification requirements. Regaining the trust of passengers will be critical, says the study, and this crisis may also impact Boeing's long-awaited new mid-market airplane, or “NMA.”
Several “cracks” have appeared in the commercial-aircraft supply chain in recent years— in the cabin, engine, and aerostructure sectors in particular. These cracks have drawn attention to the fragility of the industrial chain set-up at current production rates, and how the chain needs to be strengthened to sustain the higher production rates needed to clear record backlogs in narrowbody aircraft.
Volatile oil prices, volatility in international trade, and rising non-fuel costs are hurting airline profitability globally, as reflected in the recent 20% decline in the International Air Transport Association's (IATA) profit forecast for airlines for 2019.
Beyond these industry factors, a new opportunity—and threat—for industry participants is the continued rise of digital technologies, says the report. These technologies can potentially help industry players to stay ahead of the competition and better anticipate customer and public needs, but they are adding another layer of complexity to an already complex business environment, such as:
The rising awareness of the environmental impact of aviation, driving the industry towards more fuel-efficient propulsion technologies, including hybrid and electrical aircraft.
The fact that in many ways the digital revolution has already begun, such as the example of platforms like Airbus's Skywise gaining traction with airlines. The first-movers who adopt smart digital solutions will enjoy a long-term advantage, says the report.
In the defense segment of the industry, the study raises several questions, including:
The United States' defense budget is projected to increase by nearly 5% in 2020, totaling $7.18 billion, and then by another 4% per year for the next four years after that. This sustained increase in funding levels aligns with the 2018 US National Defense Strategy to fund requirements needed for step-function technology development. Can the US defense industry execute to increases in requirements for advanced technologies, such as for hypersonic and C4ISR (the Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance concept) capabilities?
Can the defense sector globally keep up with increasing end-user expectations on affordability and sustainability, especially given tighter “time-to-battlefield” requirements?
Will the efforts of the past 18 months to build a European defense policy around the Future Combat Air System (FCAS), Euro-MALE (medium-altitude long-endurance drones), and European Defense Fund bear fruit in today's complicated European political environment?
How far can Europe progress towards a needed consolidation of platforms and industry players in order to be ready to execute next-generation weapon systems?
At the same time, M&A activity in the A&D industry overall continued apace in 2018, says the study, with nearly $126 billion spent on 436 transactions. It also finds that the 10 largest transactions of the year totaled approximately $73 billion, just slightly lower than the 2017 total. While a break from mega-deals might have been expected this year, to allow the digestion of the major 2018 transactions, 2019 may be yet another record year for such deals, says the study. The recent announcement of the United Technologies-Raytheon merger, with an estimated combined market value of close to $166 billion, not only rocked the industry but may also trigger more transactions ahead, as smaller players try to consolidate, says the study.
Eric Bernardini, global leader of the Aerospace, Defense & Airlines practice at AlixPartners and a managing director at the firm, said: “The 737 MAX crisis has shone a spotlight on an industry performing well, but one contending with inherently tough issues. Despite strong performances across the board of late, with increased budgets and passenger numbers, industry participants could be in for a rough ride in the coming years. This impending turbulence is a result of diminished consumer trust, due in large part to safety issues; the sustainability of supply chains as currently configured; rising input costs; and an increasing focus on the environment from outside the industry. With the technological revolution hitting this industry, and the pace of change quickening, there will be a definite first-mover advantage, which will also likely include entirely new entrants as the industry reconfigures itself for the future.
“All this is set against a backdrop of further global economic slowdown, meaning the year ahead will be a challenging one. However, with every threat, an opportunity is also presented for the industry to evolve and improve by doing such things as proactively anticipating activist-investor interventions, seizing smart M&A opportunities, and preparing for the next wave of technological change. It is vital that management teams undertake proactive transformations of their companies by revisiting their business portfolio and continuing to innovate, rather than waiting to become victims of the larger trends sweeping the industry.”
Sector-by-sector highlights from the study include:
Airlines: cost control and capacity discipline
The report forecasts that global airline revenue this year will reach a new peak, of $865 billion, up from $812 billion in 2018—a healthy 6% to 7% growth rate and one that continues to outpace global GDP growth. However, the report finds that airline operating profits have declined in all regions from their peak in 2015-16, and that operating profits are expected to decrease to 5.0% in 2019. Last year, North America remained the world's most profitable region, at a 9% operating profit, but the study finds that margins are likely to be under pressure in 2019 due to increasing labor costs and the impact of the 737 MAX crisis on the revenues of some airlines—in particular, Southwest Airlines and American Airlines.
M&A may provide opportunities for airlines to regain profit margins lost due to cost pressures in recent years, says the report, and the recent bids for Air Transat and WestJet Airlines in Canada may signal the start of consolidation in other regions, as big European or US deals may be on the table in 2019. At the same time, failures of smaller players—such as those of Fybmi, Primera Air, Germania Fluggesellschaft, and WOW Air—will likely continue, says the study, taking capacity out of the market.
Consolidation of Middle East airlines of late has been limited by political factors, says the report, but most airlines in the region are taking determined steps on capacity to ensure fleet growth is not increasing faster than demand. Meanwhile, it says that carriers in Asia will take a stunning 14,000 new aircraft deliveries by 2037, more than the expected deliveries for North American and European carriers combined (6,100 and 6,400, respectively).
In all regions, the study says, carriers need to remain focused on cost control, as unit revenue growth has been outpaced by increases in labor and fuel costs. Established-network carriers (NWCs) are closing the gap with low-cost carriers (LCCs) due to more effective cost strategies combined with lower RASM (revenue per available seat-mile) erosion and greater capacity discipline, the study says.
Commercial aircraft: customer-centricity and continuous transformation of the value chain
The AlixPartners study forecasts that the global passenger-jet fleet will almost double in the next 20 years, driven by growing air traffic. It also finds that the hegemony of the Airbus-Boeing duopoly was never been stronger than in 2018, with the 1,606 aircraft delivered between them, the exit of Bombardier from the commercial-aircraft segment (with the sale of the C-Series to Airbus and the divestiture of the Q400), the acquisition of Embraer by Boeing, and Boeing's record profit of a 13% EBIT margin (combined with an operating cash flow of $15.3 billion). Meanwhile, the narrowbody sector is today seeing a record backlog of nine years of production on average, says the report. In contrast, the widebody backlog is at its lowest level since 2010, at an average of 5.6 years of production, it says, though production is expected to stabilize at around 400 aircraft per year, absent additional cancellations from Middle East carriers.
But, says the study, the 737 MAX crisis is impacting virtually the entire industry at its core: safety. Among other things, says the study, the crisis gives a potential opening for a third major player, such as Comac (the Commercial Aircraft Corporation of China), to enter the narrowbody market segment. And though the study also says it's too early to determine what will happen next vis-a-vis the 737 MAX crisis, it goes on to say that regaining passenger trust will be a major challenge, throughout the industry.
Aviation services: a raging battle between OEMs and suppliers to find new, profitable growth-drivers
With $273 billion in revenues forecast for 2019 by the AlixPartners study, the aviation services market is set to continue to grow at a steady pace (up 7% vs. 2018). And, it adds, as OEMs are now likely reaching a demand plateau after about 15 years of relentless development of new programs, the race is on for value-added services, mainly driven by OEMs trying to capture a larger share of the sector's profit pool and leading Tier-1 suppliers stepping up the fight to protect their aftersales revenues and profits. Growing in services will likely require acquisitions and will definitively require digital transformations that offer high-value customer services and even higher customer-centricity toward OEMs, says the study.
The development of digital platforms (such as Airbus's Skywise and Boeing's AnalytX) has helped many aircraft OEMs, Tier 1s, and dominant MRO players extract value from their data and better serve their clients, says the report. And, it says, while the MRO (maintenance, repair, and overhaul) and aviation-services segments have already seen many significant acquisitions in recent years, the trend is likely to continue in the coming years as well.
Business jets: vassals of the economic cycle
The AlixPartners study reports that there were 703 business jets delivered globally in 2018, an increase of 4% from 2017. A jump in the sales of less-profitable light and very-light jets (326 deliveries, vs. 285 in 2017) more than offset the decline in heavy jets (209 deliveries, which was the lowest level since 2004), it finds.
With deliveries forecast to be more than 8,000 units over the next nine years (or around 890 jets per year through 2027), the future could look bright for the business-jet sector, says the report, but only if the global economy does well. And, the study adds, as there was a 23% decrease in annual deliveries from 2004 to 2008 (an average of 935 deliveries per year) and from 2009 to 2018 (717 deliveries on average per year), a market downturn on top of that may result in a gloomier future for the OEMs, who have had high hopes for their recent launches (such as of the Global 7500 and Global 5500/6000 launches for Bombardier, and of the G500 and G600NG for Gulfstream).
Defense: deepening confrontations, unclear political actions
Global defense spending continued to increase in 2018 (up 2.6%), for the fourth consecutive year, due to a general atmosphere of deepening confrontation between Russia and the West plus increasing tensions around China's borders and in the Middle East, says the study. With a 13% increase, Central and Eastern Europe (excluding Russia) was the region with the highest increase in 2018, finds the study, while the $1,743 billion spent globally was above the levels of during the last years of the Cold War.
Meanwhile, the world's largest defense budget, that of the US, with $634 billion in 2018 (36% of global military spending), grew 4.6%, says the report—with the US Congress voting a 7% increase for 2019. Similarly, it notes, China increased its budget by 8.1% in 2018, and Japan announced a 7.2% budget increase for 2019—while European spending grew 2.6% last year. Meanwhile, the study notes, the defense budget for European NATO members last year reached 1.5% of GDP on average, although this remains far from the stated NATO target of 2.0%.
The heavy fragmentation of the European weapons-systems landscape remains a major impediment to intra-European arms exports, says the report. As an example, it notes that European armies currently have 37 different battle tanks and infantry fighting-vehicles in service vs. only three for the US. However, says the report, the European defense industry is likely to see increasing collaboration—although driven primarily by economic reasons, rather than strong political leadership, as no country alone can afford the cost of many major programs, such as of the next-generation aircraft fighter. The report also notes that recent decisions have been focused on air and ground defense, and are being led by France and Germany, with their FCAS and the MGCS (Main Ground Combat System). The combined impact of the Trump Administration's foreign policy and of Brexit, the planned withdrawal of the United Kingdom from the European Union, might result in a concurrent European emancipation from US dependence and renewed motivation to reinforce Europe's defense ambitions, says the report. However, delivering a successful European defense program on time and “at cost” remains a huge challenge, it says.
Helicopters: declining oil prices, disrupters
With total deliveries in 2018 of 1,520 helicopters (down 10.6% vs. 2017) and revenues of $19.6 billion (down 4.8%), this segment's performance continues to remain far below 2014 levels, when oil prices were above $100 per barrel, says the report. The business models of many helicopter operators are at risk, says the study, and after several years of cost reduction and fleet optimization some operators (e.g., PHI and Bristow) have recently had to file for bankruptcy. At the same time that it's contending with these tough issues, the helicopter sector is also facing disruption from “new-mobility” start-ups, such as Ehang and Volocopter, the study notes.
Space: satellites battling broadband; new constellations and overcapacity
Fifty years after Apollo 11 Moon landing, the space industry is going through a renaissance thanks to well-endowed benefactors investing billions of dollars—and this new paradigm is both a threat and an opportunity for the space value chain, says the study. Commercial- satellite fleet operators are looking for new avenues for growth, but the price disparity between terrestrial broadband-access technologies and satellite-access ones is likely to hurt the fleet operators badly if they don't take actions to address it, says the report. Financial restructuring and a consolidation of players may be in the cards, says the study. At the same time, the promise of a new business model for commercial space has yet to bear much fruit, says the report, as the influx of investments for new satellite constellations may exacerbate current overcapacity and result in bankruptcies. Meanwhile, on the launch side, despite market disruptions led by SpaceX, heavy space-launchers are likely to remain a strategic asset for global powers, says the AlixPartners study.
About the Study
The AlixPartners Global Aerospace & Defense Industry Outlook was based on months-long analysis of data from both public and proprietary sources.
About AlixPartners
AlixPartners is a results-driven global consulting firm that specialises in helping businesses successfully address their most complex and critical challenges. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others. Founded in 1981, AlixPartners is headquartered in New York, and has offices in more than 20 cities around the world. For more information, visit www.alixpartners.com.
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