2017 Global aerospace and defense sector outlook

2017 Global aerospace and defense sector outlook Growth prospects remain upbeat 2ContentsSummary 1Commercial aerospace sub-sector outlook 2Defense sub-sector outlook 6Regional outlook 16Major macroeconomic and geo-political 19 trends and their potential impact 1Global aerospace and defense sector outlookStable global gross domestic product (GDP) growth, relatively lower commodity prices including crude oil, strong passenger travel demand, especially in the Middle East and Asia Pacific region, will likely drive the commercial aerospace sub-sector growth. Commercial aircraft backlog is at an all-time high of ~13,500 aircraft units, representing more than nine and a half years of current annual production rate.2 Specifically, strong global airline passenger traffic and improved global airline profits, primarily on account of lower fuel costs will likely drive increased large commercial aircraft production and in turn commercial aerospace revenues in 2017 and 2018. We expect about 96 more aircraft to be produced in 2017 as compared to 2016.3 On the defense side, resurgence of global security threats, expected increases in US defense budgets, as well as higher defense spending from other major regional powers such as Japan and India will likely promote global defense sub-sector revenue growth in the near future. In particular, we see an upside for US defense expenditure, given the outcome of the recently concluded US elections. In addition to boosting the number of troops, the US military will likely add more aircraft and ships, which will drive revenue growth at large defense primes over the next few years.SummaryThe global aerospace and defense (A&D) sector is likely to experience stronger growth in 2017, following multiple years of positive, but a subdued rate of growth. Deloitte forecasts the sector revenues will likely grow by about 2.0 percent in 2017.12017 Deloitte forecast• Global A&D sector revenue growth is likely to be around 2.0 percent• Commercial aerospace subsector revenues are likely to remain flat, experiencing only a 0.3 percent increase – marginal growth expected as aircraft production recovers in 2017 after a slowdown in 2016• Defense subsector revenues are likely to grow at a much faster 3.2 percent in 2017 as defense spending in the US has returned to growth, after multi-year declines in defense budgets and future growth may be driven by the newly elected US administration’s increased focus on strengthening the US military• Operating earnings for the commercial aerospace subsector are expected to grow 20.6 percent, while defense subsector’s operating earnings will likely rise 7.0 percent• European A&D sector is expected to record a 2.5 percent YoY increase in revenue and 9.3 percent growth in operating earnings in 2017• For the US A&D sector, revenue is expected to be up 1.7 percent, with a strong spurt of 12.7 percent in operating profits 2Global aerospace and defense sector outlook2Commercial aerospace sub-sector outlookA slight recovery after a slowdown in 2016 will primarily be due to aircraft production levels resuming growth in 2017, driven by strong demand for next-generation aircraft and growing passenger traffic, especially in the Asia-Pacific and the Middle East regions. Although 96 additional large commercial aircraft are expected to be produced in 2017, continued pricing pressure and product mix changes by customer airlines will likely result in only a marginal change in commercial aerospace sub-sector revenues. Major aircraft manufacturers, Airbus and Boeing, have indicated production rate increases will occur in 2017 and 2018. Airbus’ A320neo is likely to ramp up production in 2017, whereas, Boeing estimates that the production rate of its 737 will rise from 42 per month currently to 47 per month in 2017 and 52 per month in 2018.5 Travel demand (revenue passenger kilometers or RPKs) has been increasing at a compounded annual growth rate (CAGR) of 4.7 percent over the last ten years, with passenger enplanements rising from slightly over 2.0 billion to more than 3.5 billion annually during this period.6 Increase in travel demand has been primarily driven by global demographics and wealth creation in Asia and the Middle East, resulting in a significant order increase for new aircrafts. The global commercial aerospace sub-sector will likely experience a 0.3 percent increase in revenues in 2017.4 Figure 1: Global airline traffic (1981 to 2016E)Passenger and freight traffic are likely to grow at an average annual growth rate (AAGR) of 4.8 percent and 4.2 percent, respectively, over the next 20 years,7 contributing to higher aircraft production. Several years of above average order intake has resulted in commercial aircraft backlog at the end of 2015 being at an all-time high of ~13,500 aircraft units, representing more than nine and a half years of current annual production.8