Soaring commercial aviation market drives best year yet for aerospace and defence industry

In 2011, the Top 100 A&D companies reported $677 billion in revenue, a 5% increase compared to the previous year, and $60 billion in operating profit, an increase of 2% from 2010.

Neil Hampson, global aerospace and defence leader, PwC, said:  “This year, we expect continued growth in commercial aerospace resulting from strong and steady demand for global aviation and increased commercial aircraft production. Conversely, defence revenues should continue to remain low, but recent cost-cutting actions should mitigate the impact on company bottom lines.

“While revenue is expected to rise for the sector overall, there is a significant risk that return on sales could drop due to supply chain inefficiencies.”

Commercial aerospace companies predominantly reported strong revenue growth and delivered a record number of large aircraft in 2011, exceeding 1,000, driven by a record backlog and increasing production rates. The strong order activity was largely led by the launch of two new single-aisle aircrafts, the A320NEO and 737MAX.  These re-engined versions of existing models, which promise at least 15% efficiency improvement, have unleashed a flurry of orders, both in the expanding Asian market and among U.S. carriers.

Hampson added:  “2012 is already off to a great start, but the industry will continue to face challenges such as rising production rates, raw materials shortages and late deliveries. Despite these issues, times are good for the A&D sector. In fact, many are debating whether there’s a bubble in the industry. However, current backlog levels provide ample cushion between demand and production rates, likely absorbing any reasonable softening in demand near-term.”

One area of opportunity for defence contractors has been exports, where growth led to a record backlog of $327 billion at mid-year 2011. However, defence companies are and will continue, to face more pressure than ever to improve productivity, increase transparency and respond to increasingly complex government regulations, especially given uncertainty over longer-term prospects  including looming budget cuts, the growing threats of Iran’s nuclear weapons programme and the US military’s role in world affairs. As the report highlights, the industry must overcome three challenges to thrive in the future: preserving innovation, improving productivity and abiding by the regulatory environment.

“The current focus remains on affordability, so contractors need to stay dedicated to improving productivity, where they’ll start seeing the shift from new platforms to platform upgrades and sustainment. The industry also needs to recognise the value of innovation and research and must invest in knowledge retention and training,” said Hampson.

According to the report, 2011 was a record year for A&D transactions, with 341 deals and a total value of $43.7 billion. European acquirers played a much more significant role in the 2011 A&D deal market compared to 2010. In 2011, all European outbound deals that exceeded $50 million were for North American targets, boosting the number of cross-border deals for US targets.

“With original equipment manufacturer backlogs contributing to higher overall sector growth prospects, aerospace M&A is likely to continue to lead the A&D deal market in 2012," continued Hampson. "Defence M&A will likely remain oriented toward large spin-offs of lower-growth units and smaller acquisitions in growth areas such as cyber security. However, the further the defence budgets fall, the more likely there could be calls for larger-scale consolidations, which will strengthen M&A activity. Strategic investors have significant cash positions and appear well-positioned to drive a high volume of deals in 2012.”