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Global Aerospace and Defense (A&D) Market Overview June 21, 2018
Copyright © 2018 Deloitte Development LLC. All rights reserved. 2
Global aerospace and defense (A&D) market overview
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The global A&D industry is expected to strengthen in 2018, experiencing a 4.1 percent growth
Commercial aircraft sector revenues expected to grow 4.8 percent–nearly 100 additional aircraft to be produced in 2018, compared to 2017, as aircraft manufacturers ramp up production in response to growing aircraft demand
Heightened global security threats, recovery in US defense budgets, as well as higher defense spending from other major regional powers are likely to drive global defense sector revenue growth in 2018, which is expected to be about 3.6 percent
US A&D industry revenue is projected to be up 3.7 percent, with a 9.9 percent jump in operating profits
5European A&D industry is expected to record a 4.9 percent rise in revenue and a 22.3 percent growth in operating earnings
Copyright © 2018 Deloitte Development LLC. All rights reserved. 3
,
• Increasing share of middle class in APAC likely to continue to drive passenger growth
• Increased ticket affordability–average return fare (adj. for inflation) in 2017 was 64 percent lower than in 1996
Growth in passenger traffic
• Over the next 20 years, passenger traffic is expected to grow at an average annual growth rate (AAGR) of 4.7 percent
Increase in commercial aircraft demand
• Global demand for new aircraft production over the next 20 years is estimated to be 36,780
• 100 additional commercial aircraft are expected to be produced in 2018, primarily led by narrow body aircraft
Strengthening
the supply
chain
Effective
program
management
Ch
alle
ng
es
Global commercial aircraft sectorRevenues likely to grow about 4.8 percent in 2018
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1,788
(2022)
1,585
(2018)
1,481
(2017)Glo
bal
Air
craft
Prod
ucti
on
Record high commercial aircraft backlog of 14,215 units at the end of 2017, representing nine and a half years of current annual production
• After a moderate growth in production in 2017 to 1,481 units, it is estimated that 1,585 commercial aircraft will be produced in 2018
• Demand for widebody aircraft likely to soften due to overcapacity in the industry, airlines deferring upgrades as they wait for super-efficient next-generation widebodies, as well as the robust order backlog of widebodies
• As the demand for commercial aircraft continues to increase, new production programs are emerging from other regions, particularly China and Russia
• New entrants likely to face several challenges - procurement of orders from established global carriers, risk of cost and schedule over-runs, certifications from European and US regulators, establishing a track record of safe and reliable operations
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Global defense sector revenues expected to grow 3.6 percent in 2018
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In 2018, global defense sector revenues are expected to grow 3.6 percent as global tensions continue to persist and a majority of the affected countries plan to recapitalize and improve their defense posture
Global defense spending is anticipated to grow at a CAGR of about 3.0 percent over the 2017–2022 period, crossing US$2 trillion by 2022
Heightened global security threats, recovery in US defense budgets, as well as higher defense spending from other major regional powers such as India, China, and Japan are likely to drive global defense sector revenue growth in 2018 and beyond
Copyright © 2018 Deloitte Development LLC. All rights reserved. 6
$1,557 $1,682
$2,023
-2.0%
0.0%
2.0%
4.0%
6.0%
$-
$300
$600
$900
$1,200
$1,500
$1,800
$2,100
FY
200
8
FY
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9
FY
201
0
FY
201
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FY
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FY
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FY
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FY
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5
FY
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6
FY
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7E
FY
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8F
FY
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9F
FY
202
0F
FY
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1F
FY
202
2F
Global defense spending (US$ billion)
Global Defense Spending (US$ billion) y/y growth (%)
Global defense spending is anticipated to grow at a CAGR of about 3.0 percent over the 2017–2022 period, crossing US$2 trillion by 2022
Threats continue to evolve from traditional land based force on force, to maritime disputes, hybrid warfare, island building, high seas piracy, urban insurgency, lone-wolf civil attacks to cyber-attacks.
The US administration’s increased focus on strengthening the nation’s military has already led to higher US defense budgets for 2018 to 2019
International demand for defense and military products is increasing in the Middle East, Eastern Europe, North Korea, and the East and South China Seas.
“The US is the largest defense spending nation, representing 36 percent of the total global military spend.”
Heightened security threats are likely to result in higher defense spending from other major regional powers such as India, China, and Japan
Defense
sector growth
drivers
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Changes in international trade agreements
Changes to trade agreements, especially in the US and the UK could lead to disruption in the global supply chain
Proposed renegotiation of the North American Free Trade Agreement (NAFTA) could increase costs for the U.S. suppliers with operations in Mexico
Brexit could put an end to UK’s tariff-free access to the EU market
>
OEM–supplier relationships
As OEMs continue to focus on cost reduction, relationship between manufacturers and suppliers is likely to evolve
This may result in reduced margins for commercial aerospace suppliers
Defense Commercial Aerospace
US foreign policy changes
Impact on defense exports will likely depend on the new US administrations’ actions with respect to changes in foreign policy
While the US is pressurizing allies to increase defense spending, they may not essentially buy weapons and defense equipment from US defense companies, given the strengthening of the US dollar against global currencies
Pressure on contractors as Pentagon plans acquisition reforms
As Pentagon plans to reform and improve the Defense Department's acquisition system, pressure on defense contractors to accept more risk is likely to continue
There is already increased focus on fixed-price contracts to avoid cost-overruns
Global Aerospace & Defense IndustryKey risks and challenges
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>
Suppliers may struggle to ramp up production
With commercial aircraft backlog at a record-high (representing ~9.5 years of current annual production), some suppliers may struggle to ramp up their production to keep up with the increasing backlog
Defense Commercial Aerospace
Brexit likely to disrupt supply chains and trade flows
U.K.’s exit from the European Union may disrupt supply chains and create new trade barriers as the country would renegotiate trade agreements with the EU and other major trading nations
Global Aerospace & Defense IndustryKey risks and challenges
New entrants likely in the commercial aircraft market
As the demand for commercial aircraft continues to increase, new entrants are emerging from other regions, particularly China and Russia
These entrants may challenge the current duopoly in the long-term, especially in the market for narrow-body aircraft
Copyright © 2018 Deloitte Development LLC. All rights reserved. 9
Regional perspectives (1/2)
Country/Region A&D industry trends
India
India is likely to be the third largest aviation market by 2025
The country is forecast to have a demand for a record 2,100 new aircraft in the
next two decades, worth US$290 billion, with the majority being single-aisle planes
India’s 2017-18 defense budget reached US$57.4 billion to become the third
largest globally
China
China’s aviation sector is expected to be the world’s largest (by passengers) by
2024
The country is estimated to have a demand of 7,240 commercial aircraft worth
US$1.1 trillion in the next 20 years
China’s defense budget was the second largest globally in 2017, at US$192.5 billion
(up 5.2 percent YoY)
For 2018, the country is aiming at an 8.1 percent growth in defense budget,
making this the largest year-on-year increase in the last three years
Japan
Passenger traffic growth in Japan is estimated to be around 2.7 percent over the
next 20 years, one of the lowest in Asia Pacific
Recent growth in low-cost carriers (LCCs) is likely to drive commercial aircraft
demand in the region
Japan’s defense budget ranked in the top 10 globally, with the budget increasing by
1.4 percent to US$43.5 billion in 2017
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Regional perspectives (2/2)
Country/Region A&D industry trends
Middle East
The pace of growth in passenger traffic in the Middle East slowed down in 2017 due
to US travel bans as well as the prohibition of carrying large electronic devices on
board
Over the next two decades, passenger traffic in the Middle East is forecast to grow
at 5.6 percent, creating demand for 3,350 additional aircraft
The pace of growth in defense budgets of the two key countries in the region—the
UAE and Saudi Arabia—declined recently
Low-to-mid level oil prices are likely to continue to impact future defense spending
in the Middle East
United Kingdom
The United Kingdom’s 2017 defense budget grew 1.4 percent to US$51.2 billion,
moving up to the fourth position, from the fifth in 2016
Over the next three years, the country is expected to invest nearly US$38.6 billion
(£30 billion) to strengthen its military forces
As Brexit nears, there is ambiguity around its impact on the UK A&D industry—
access to and mobility of the workforce as well as the negotiation of trade
agreements with the EU and other major trading nations are likely to impact
productivity and profitability of the sector
France
The defense budgets of France remained flat in 2017 at US$45.6 billion, despite
which, the country’s ranking moved up from eighth in 2016 to seventh in 2017
France’s defense spending is likely to grow over the next five years given the
pressure from the US administration on NATO countries to increase military
expenditure to 2.0 percent of GDP (France’s current military expenditure is at 1.4
percent of GDP)
Copyright © 2018 Deloitte Development LLC. All rights reserved. 11
Other industry trends
US A&D exports reported a slight decline in 2017; Value of M&A transactions in 2017 neared the record high levels of 2015
Exports of US A&D products stood at $144.7 billion, down 1.3 percent over 2016
Although US A&D exports increased during the 2010–2016 period, the pace of year-over-year growth weakened—18.7 percent in 2012, 9.4 percent in 2013, 7.9 percent in 2014, 4.0 percent in 2015, and 1.7 percent in 2016.
Although the contribution of US A&D exports globally will continue to remain significant, the magnitude of growth will likely depend on the new US administration’s regulatory actions with respect to export of aerospace and defense products.
US A&D exports
M&A deal value in the global A&D industry reached US$51.5 billion in 2017
In 2018, global M&A activity is expected to remain strong in the aerospace sector, driven by OEMs’ continued pressure on suppliers to reduce costs and boost production rates
Deal activity in the US defense sector could accelerate in 2018, as the DoD’s spending bill will likely provide certainty to military planners. The focus is likely to be on acquisitions related to space, data analytics, cyber security, and advanced technologies.
M&A activity in 2018
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
$-
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
$140.0
$160.0
2010 2011 2012 2013 2014 2015 2016 2017
US A&D Industry Gross Exports (US$ billion)
Gross Exports % Change
$13.9
$4.1 $7.0
$27.4
$9.1 $4.3
$9.0
$54.9
$20.4
$51.5
50
100
150
200
250
$-
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0 No. o
f M&
A T
ransactio
ns
M&
A D
eal Valu
e (
$ B
illion)
Global A&D Industry M&A Activity
M&A Deal Value ($ Billion)
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