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2017 Global Aerospace and Defense Sector Outlook Summary

Core Content

The global aerospace and defense (A&D) sector is projected to experience stronger growth in 2017 compared to previous years, with revenue growth of approximately 2.0%. The commercial aerospace sub-sector is expected to grow by 0.3%, while the defense sub-sector is anticipated to grow at a faster rate of 3.2%. This growth is attributed to a combination of economic factors, geopolitical tensions, and increased defense spending in key regions.

Main Points

Commercial Aerospace Sub-Sector Outlook

• Revenue Growth: Expected to grow by 0.3% in 2017, driven by increased aircraft production after a slowdown in 2016.
• Production Increase: 96 more large commercial aircraft are expected to be produced in 2017 than in 2016, with further increases anticipated in 2018.
• Demand Drivers: Strong passenger travel demand, particularly in the Asia-Pacific and Middle East, and lower fuel costs are key factors behind the demand.
• Backlog: The commercial aircraft backlog reached an all-time high of ~13,500 units, representing over nine and a half years of current production.
• Market Challenges: Pricing pressure and changes in product mix may limit revenue growth despite increased production. Twin-aisle aircraft demand is weak due to low fuel costs and surplus of second-hand aircraft.
• New Competitors: Emerging players like China and Russia are entering the market, which may lead to increased competition and potential market crowding.
• Supply Chain: The supply chain faces challenges in meeting increased demand for capacity, quality, and cost efficiency, prompting industry consolidation and strategic partnerships.

Defense Sub-Sector Outlook

• Revenue Growth: Expected to grow by 3.2% in 2017, fueled by US defense budget increases and rising military spending in other regions.
• US Defense Spending: The new US administration under Donald Trump is expected to increase defense budgets, expand military fleets, and eliminate sequester.
• Global Trends: Rising global tensions are driving increased demand for defense products in regions such as the Middle East, Eastern Europe, North Korea, and the East and South China Seas.
• Major Spenders: The US remains the largest defense spender, accounting for 34% of global military spending in 2015. Other notable spenders include Oman, South Sudan, and Saudi Arabia.
• Opportunities for Contractors: Defense contractors are expected to benefit from increased military spending in countries like China, India, and the Middle East. Key products in demand include armored vehicles, munitions, surveillance systems, and cyber protections.

Regional Outlook

• Asia-Pacific and Middle East: These regions are key growth areas for both commercial aerospace and defense spending, driven by demographic growth, economic development, and increased security concerns.
• Europe: Expected to see revenue growth of 2.5% and operating earnings growth of 9.3% in 2017.
• US: Revenue growth is expected to be 1.7%, with operating profits rising by 12.7%. US FMS is projected to reach US$41.8 billion in FY2017.
• Emerging Markets: China, India, and Japan are increasingly focusing on defense modernization, which is expected to boost foreign military sales and international partnerships.

Macroeconomic and Geopolitical Trends

• Stable GDP Growth: Provides a positive backdrop for A&D sector growth.
• Lower Commodity Prices: Especially crude oil, reduces costs for airlines and supports commercial aerospace growth.
• Geopolitical Tensions: Rising global security threats and conflicts in various regions are driving increased defense spending.
• One-Time Charges: A significant increase in 2015 due to program delays, cost overruns, and funding issues, though growth is expected to slow in 2017.
• Efficiency: The US A&D sector remains more efficient than the rest of the world, with higher operating margins and better productivity.

Key Information

• Commercial Aerospace:

  • Expected to produce 1,456 aircraft in 2017, a 7.1% increase over 2016.
  • Airbus and Boeing are increasing production rates, with Boeing’s 737 production rising to 47 units/month in 2017 and 52 units/month in 2018.
  • Passenger traffic has grown at a CAGR of 4.7% over the last decade, with RPKs increasing from 2.0 billion to 3.5 billion annually.
  • Airfare declines have contributed to increased demand for air travel.
  • Total demand for new aircraft over the next 20 years is 35,155 units (excluding regional jets).

• Defense Sector:

  • US defense spending has bottomed out and is returning to growth, with FY2016 seeing an increase of US$20.0 billion and FY2017 of US$9.0 billion.
  • Global defense spending is expected to continue rising, especially in Middle East, Asia, and Oceania.
  • New markets are being targeted by A&D firms, including India and China, due to increased defense budgets and security concerns.

• Technological Advancements:

  • The A&D sector is leading in digital innovation, adopting additive manufacturing, machine learning, smart automation, and blockchain.
  • These technologies are enhancing productivity and efficiency across the sector.

• Growth Strategies:

  • Acquisitions and joint ventures are becoming more common as a way to access new markets and reduce competition.
  • International partnerships and local supply chain compliance are critical for success in global markets.
  • Pricing strategies and cost leadership remain important for maintaining competitiveness.

• Challenges:

  • Supply chain pressures are expected to continue due to increased demand.
  • One-time charges may still occur due to program delays, currency fluctuations, and asset write-downs.
  • Uncertainty in US A&D exports is expected due to currency issues and Export-Import Bank limitations.

Conclusion

The global A&D sector is expected to see moderate to strong growth in 2017, driven by increased commercial aircraft production and rising defense spending. The US remains a key player, but global competitors are emerging, creating new opportunities and challenges. Efficiency, innovation, and strategic partnerships will be crucial for sustaining growth and adapting to market changes.