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2019 Global Aerospace and Defense Industry Outlook Summary

Core Content

The 2019 global aerospace and defense (A&D) industry outlook highlights continued growth driven by factors such as rising commercial aircraft demand and increased defense spending. The report outlines key trends and regional outlooks, emphasizing the challenges and opportunities faced by manufacturers and suppliers.

Main Points

Commercial Aerospace Sector

• Order Backlog: The commercial aircraft order backlog is at a record high, exceeding 14,000 units, with an estimated 38,000 aircraft to be produced globally over the next 20 years.
• Production Ramp-Up: Manufacturers are expected to increase production rates, leading to higher aircraft deliveries in 2019.
• Narrow-Body Aircraft: The introduction of new narrow-body models (e.g., 737-8, A321neo) has expanded their capabilities, potentially reducing demand for wide-body aircraft.
• Supply Chain Risks: Suppliers may struggle to increase production to meet the demand, posing a risk to manufacturers. Strengthening supply chain management and leveraging technology are recommended.
• New Entrants: Emerging production programs from countries like Russia and China could challenge the traditional A&D industry duopoly in the long term.

Defense Sector

• Rising Military Spending: Global military expenditure is increasing due to heightened geopolitical tensions, including those in the Middle East and North Korea.
• US Defense Budget: The US defense budget has been rising since the Trump administration, with a focus on strengthening the military.
• NATO Countries: NATO members, particularly France, are increasing defense spending to meet the 2% of GDP target.
• Cyber and Space Threats: Cybersecurity and space are becoming increasingly important in defense strategies due to the growing reliance on satellites for military operations.
• Militarization of Space: The US, China, and Russia are establishing dominance in space, with other countries like North Korea and India gradually following.

International Trade and Supply Chain

• Trade Tensions: Trade tensions between major regions could disrupt the global supply chain and increase costs, particularly for aluminum and steel, which are key materials for A&D production.
• Tariff Impact: Import tariffs may lead to cost increases and reduced profitability for A&D companies. Some firms may consider relocating production to avoid tariffs.
• Partnerships: Companies should focus on building long-term stable partnerships and managing global supply chain relationships effectively.

M&A Activity

• Supplier Consolidation: M&A activity is expected to remain strong as OEMs push suppliers to reduce costs and increase production rates.
• Vertical Integration: Larger players are likely to pursue vertical integration through acquisitions, especially to gain access to new technologies and markets.
• High Valuations: Even with high valuations, M&A activity is expected to continue due to the pressure on suppliers to improve efficiency and scale.

Regional Outlook

• China: Expected to require 7,690 new commercial aircraft worth $1.2 trillion over the next 20 years. Defense spending is growing, reaching $175 billion in 2018, with a projected annual growth of 9-10%.
• France: Plans to increase defense spending by 40% over the next six years, aiming to meet the NATO 2% of GDP target. Annual defense spending is expected to rise to $3.5 billion by 2025.
• India: Projected to become the third-largest aviation market by 2025, with a demand for over 2,000 new aircraft over the next two decades. Defense budget for 2018-19 was $43.8 billion, a 7.7% increase from the previous year.
• Japan: Passenger traffic growth is expected to be slow at 3.2% over the next 20 years. However, the rise of low-cost carriers (LCCs) may drive commercial aircraft demand. Defense spending increased to $47.6 billion in 2018-19, marking an all-time high.
• Middle East: Passenger traffic is forecast to grow at 5.2% over the 2018-37 period, creating demand for 2,990 new aircraft. Wide-body aircraft will constitute over 40% of the region's total demand due to long-haul flights. Seven out of the top ten countries with the highest military expenditure as a percentage of GDP are in the Middle East.
• United Kingdom: Defense budget is near 2% of GDP, but there is uncertainty around the impact of Brexit on the A&D industry, potentially leading to supply chain disruptions and new trade barriers.

Key Information

• The A&D industry is expected to continue its growth trajectory in 2019, driven by commercial aircraft production and defense spending.
• The commercial aircraft order backlog remains strong, with a peak of over 14,000 units.
• Defense spending is rising globally due to geopolitical tensions, with the US, France, India, China, and Japan as key contributors.
• Trade tensions and tariffs may increase manufacturing costs and affect profitability, especially for defense companies reliant on foreign sales.
• M&A activity is likely to continue as OEMs seek to improve efficiency and scale, with a focus on vertical integration and technology acquisition.
• Emerging markets like China and Russia may challenge the traditional A&D industry structure in the long term.
• The UK's A&D industry faces uncertainty due to Brexit, though a stronger dollar may boost exports if favorable trade agreements are secured.

Conclusion

The aerospace and defense industry is set for continued growth in 2019, supported by robust commercial aircraft orders and rising defense budgets. However, challenges such as supply chain disruptions, trade tensions, and the need for technological and strategic adaptation remain critical for industry players to navigate successfully.