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Despite solid profits in recent years and a decade of stock market outperformance, the global aerospace and defense (A&D) industry cannot afford to be complacent in the face of an increasingly dynamic business environment, according to a comprehensive new industry report from AlixPartners, the global consulting firm.
The global A&D industry will need to successfully navigate a number of headwinds including, uncertainty in international trade relations, a rising oil price, significant stresses in a supply chain struggling with continued aggressive product ramp-ups, looming over-capacity in certain sectors of the industry, and wholesale changes in defense spending around the world.
AlixPartners has identified three key themes that will shape the industry in the face of these challenges in the years ahead:
1. A new era has arrived, centered on services, new business models and partnerships
- The leading aircraft OEMs have significant services-focused ambitions with the four leading players (Airbus, Boeing, Bombardier, Embraer) looking to increase services revenues by more than three times over the next 10 years from today’s $20bn per year to $66bn.
- A key driver to achieving this revenue goal will be a growing focus on insourcing and partnership initiatives which will reshape many existing customer and supplier relationships. Target areas will include continued investment in the growing Manufacturing, Repair & Operations (MRO) sector as well as new product development, training and data management.
2. These ambitions will drive continued M&A across the industry
- 2017 was a record year for A&D industry M&A and this momentum will continue as companies throughout the industry look to cut costs and seek new avenues for growth
- The top 10 M&A deals in 2017 had a total enterprise value of some $63 billion. almost three times 2016’s $24 billion figure. Significant levels of M&A activity will continue driven by strong appetite from both corporates and private equity with continued access to capital
3. Digital transformation will be a key driver of success
- The digital revolution offers significant potential for the industry. Companies that adopt comprehensive digital transformation across their businesses – from inbound logistics to product development and marketing – could see efficiency gains of up to 20% within three years, in addition to generating new revenue opportunities for those quickest to transform
- A&D companies are currently leaving cost savings of between 1% and 3% on the table by failing to appropriately leverage existing data. These quick-wins require no significant IT investment and yet are being lost as digital is still not a tier one priority for many.
David Wireman, Global Co-Leader of the Aerospace, Defense & Airlines practice at AlixPartners, said, “A new era is coming to this industry, one centered on new business models, on an industrial step-change in services, on partnerships and on digital transformation. Players in the industry are already moving at maximum velocity, but they can’t afford to be left behind in any of these areas. First-mover advantage will be critical to success.”
Wireman added: “While the industry has certainly recovered in recent years, it faces big challenges ahead. Between big ramp-ups, new demand from end-user customers and big structural changes inside the industry, the entire sector is being stretched to capacity. OEMs and suppliers alike need to be extremely vigilant that nothing reaches breaking point—and that means anticipating problems before they arise and employing the latest in digital technologies to predict and combat them.”
AlixPartners A&D Market Segment Overview
Airlines: profitability declining in the face of increased competition and capacity growth
While global airline revenue for 2018 is predicted to reach a record $834 billion, up from $754 billion in 2017, profits have declined from the peak of 2015/16 and are expected to remain flat at $57 billion this year. North America remains the world’s most profitable region, albeit margins are likely to decline here in 2018.
Fuel prices are expected to rise by 26% in 2018, following the record lows in 2016. While fuel cost’s share of global commercial airlines’ total operating costs has decreased by 25% between 2006 and 2017, 2018 is likely to be the third consecutive year of growth in this metric, to 28%.
Middle-East carriers are expected to face over-capacity, driven by an expected fleet increase (including no new orders) of at least 80% by 2025. This will require significant action, for instance through operational improvements and partnerships with other carriers.
Commercial aircraft: Narrowbody record backlog, Widebody production stabilising
The global passenger jet fleet is expected to almost double in the next 20 years, driven by growing air traffic. While the Airbus/Boeing duopoly will remain, ‘newcomers’ are representing an increasing challenge.
The Narrowbody sector is seeing a record backlog of 9.9 years on average, with production expected to ramp up but engine availability remaining the key roadblock. In contrast, the Widebody backlog is at its lowest level since 2010, at an average of 5.9 years, as production rates are expected to stabilise following a doubling between 2010 and 2017. Nevertheless, there are serious tensions in deliveries ramp-up, with selected suppliers facing strong difficulties.