Aerospace sector manoeuvres through turbulence

Industry experts remain upbeat about the prospects for global growth in the aerospace sector despite the challenges it faces during the current uncertain – and often tough – economic and trading times. 

According to Deloitte’s 2019 Global Aerospace and Defense Industry Outlook, in 2018 the global aerospace and defence industry bounced back and experienced a solid year after passenger travel demand strengthened and global military expenditure continued to rise. The consultancy firm expects this growth to continue in 2019, led by an increase in commercial aircraft production and strong defence spending.

Green agenda

The environmental agenda is providing challenges as well as opportunities for the sector. While consumer and climate action groups are upping the ante and becoming more vocal about the ecological costs of air travel and airport expansions, some manufacturers are seeing this as an opportunity to innovate using advanced lightweight composite materials to reduce carbon dioxide emissions on long-haul flights. 

Green projects and investment in efficiency are in full swing worldwide. Earlier in 2019, Bombardier announced it would invest C$22m ($16.3m) over three years in two major aerospace projects, including the Smart Affordable Green Efficient project. Launched in 2010, this is dedicated to developing smarter, more efficient and effective technologies, while reducing the environmental footprint of the aerospace industry. Other projects promoting cross-industry collaboration include the EU Flightpath 2050, which aims to protect the environment and energy supply through the use of alternative fuels. 

Access to talent is crucial to the aerospace sector, and this factor plays a key role in the location decisions made by companies. Good relationships with educational institutions have allowed many firms to secure impressive pipelines of talent and ongoing investments. Alex Dichter, senior partner at McKinsey, highlights how important a skilled workforce is to the sector, particularly for engineering and design centre firms. “The market for aerospace engineers is very competitive, and it’s tough to get top-quality graduates to go to a big organisation in what they might view as an unexciting location,” he says.

Geopolitical tensions

Changes to the world order have the potential to significantly impact the aerospace sector, however. Geopolitical tensions and greater demand for military equipment are driving up global defence spending, but analysts point out that the flip side to this is trade wars and changes to international trade agreements driving business insecurity, as well as concerns about possible disruption to global supply chains and increased costs.

For example, transatlantic and transpacific trade tensions characterised by duties on steel and aluminium could hit manufacturing costs and profitability. “With retaliatory tariffs being imposed, some aerospace and defence companies could consider moving their manufacturing to avoid tariffs for products manufactured and exported from their home countries, disrupting supply chains and delaying deliveries,” says Deloitte.

Brexit uncertainty is also having an effect on the sector. According to the UK Office of National Statistics’ final Index of Production figures for 2018, the country's aerospace sector recorded an overall annual fall of 3.9%. In comparison, during the seven years to 2017, growth in UK aircraft manufacturing averaged 4.8% a year as the sector benefited from strong global demand and rising production rates. 

Speaking when the figures were released earlier in 2019, Paul Everitt, chief executive of industry group ADS, said: “The real impact of Brexit uncertainty is now becoming all too clear: falling UK aerospace production, despite increasing global demand and a highly supportive national industrial strategy.”

M&As and restructuring

As the aerospace sector works to reduce costs and increase production, M&A activity is being stepped up. Announcements in this sector include Boeing’s joint venture with Embraer and its acquisition of KLX, which have the potential to help it position itself in the regional jet plane market and expand its presence in supply chain management, respectively. Other major announcements include a tie-up between Airbus and Bombardier on the C-Series of airliners; United Technologies' $30bn purchase of Rockwell Collins, and Safran’s transaction with Zodiac Aerospace.

Bombardier also announced plans earlier in 2019 to sell its operations in Northern Ireland and Morocco as part of a wider restructuring of its aerospace business that will see it integrate its manufacturing operations in Montreal, Mexico and a recently acquired site in Texas into a single aviation unit, focusing on business jets and regional aircraft.

With many airports reaching and even exceeding capacity, expansion continues apace, providing new investment opportunities. In Poland, for example, plans are afoot to create a major hub to rival Munich and Paris, which should be ready during the 2020s. 

Asia's challenge

While the US, China, France, India, Japan, the Middle East and the UK continue to be major contributors to the industry’s global performance, other locations are also making a pitch for a share of the aviation market. “In commercial aerospace, much of the growth is coming from emerging markets, and much of that is from the Asia-Pacific region,” says Mr Dichter. “That won’t necessarily affect investment decisions, but it quite easily could – particularly if locating production ‘in market’ has a favourable impact on tax/tariff treatment.”  

Deloitte reports that with the rising demand for commercial aircraft, there are several production programmes emerging outside the US and Europe, especially in Russia and China. However, it points out that although these new entrants could challenge the current duopoly in the long term, they still need to overcome several hurdles before they are widely accepted, such as procuring orders from global airlines, managing cost and schedule overruns, gaining certification from regulators worldwide, and establishing a safe and reliable track record. 

Other locations that score well with investors include Singapore, which came top in fDi’s Aerospace Cities of the Future 2018/19 rankings. US-based Pratt & Whitney and France’s Thales Group expanded their respective maintenance and repair facilities in the city-state in 2017.