Digital Transformation Key to Survival in Aerospace & Defense

Estimated reading time: 7 minutes

While deliveries hit a record low in 2017, with only 654 jets delivered globally, this is likely to pick up to an average of 854 between 2018 and 2026 – with almost 7,700 new jets delivered during the next eight years.

Large jets are likely to drive this growth, having seen a resurgence in deliveries in 2017. However, political uncertainty (e.g. around the Iranian nuclear treaty) remains a threat to the whole sector. The medium and light categories continue to see declining deliveries, signalling a shift in aircraft preference.

Aviation services: ripe for consolidation

The aviation services market is large (worth $257bn in 2017) and growing globally in line with manufacturing output. The world’s four leading aircraft OEMs are looking to increase their services revenue by more than three times in the next 10 years, with a growing focus on digital capabilities.

2017 saw 30 deals in MRO and aviation services alone. On top of this, several mega-deals involving system/equipment suppliers added up to more than $10 billion. This will continue as major OEMs increase their focus in this area and diversify their revenues.

Defense: panic buying

Global defense spend is accelerating, driven by increasing ‘threat perceptions’ and ongoing conflicts in the Middle East, South China Sea and Ukraine.

The US market, the world’s largest, is growing at 7.5% per year and the top 10 contractors are growing both profits and R&D investments in response to Department of Defense ‘offset strategy’ policies. Spend is likely to continue as the US responds to the growing stature of China and Russia, with hypersonics the government’s number one priority. Research into hypersonics is expected to grow by 136% between 2018 and 2019.

European spending is growing at around 1.5% per year on average, although most European countries remain far below the NATO growth target of 2% of GDP. After falling sales in 2013 and 2014, European defense players have returned to growth – albeit with flat margins. The PESCO agreement, signed in December 2017, will see a dramatic reduction in major weapons systems in the EU (from 180 to about 30). The industry is likely to see increasing collaboration, although driven primarily by political – rather than business – rationale. The combined impact of Trump and Brexit will see a concurrent ‘emancipation’ from US dependence and renewed motivation to reinforce the region’s defence ambitions.

Helicopters: eroding profitability to drive consolidation?

Despite growing revenues and deliveries increasing, albeit still 27% lower in 2017 than in 2013, EBIT margins continue to lag: 15% lower than in 2014. A combination of market pressures and a requirement for significant investment suggests the helicopter market is on the cusp of consolidation.

Aerostructures: dynamic, fragmented, consolidating

Demand is expected to rise only moderately through 2026, to $76 billion, vs. $62 billion in 2017. This is a fragmented segment where consolidation and M&A are already underway. This will accelerate, driven by technology portfolio broadening, outsourcing of non-strategic assemblies from OEMs, vertical integration from suppliers, and the acquisition of low cost countries’ capabilities.

Space: disruption and pressure in a growing industry 

The $259 billion space market is growing by more than 5% per year, led by the ground equipment (+18.3%) satellite manufacturing (+7.7%) segments.

The satellite industry is undergoing a paradigm shift, from larger and more expensive geosynchronous orbit (GEO) constellations, to smaller, lower cost and shorter-life cycle non-geosynchronous orbit (NGSO) units targeting the consumer market. Pricing competition is putting margins under increasing pressure, however. An increasing number of space launchers are coming to market, playing catch up with SpaceX.

About the Study

The AlixPartners Global Aerospace & Defense Industry Outlook was conducted by AlixPartners’ industry leading Aerospace & Defense team and is based on in-depth analysis of data from both public and proprietary sources.

About AlixPartners

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