New Deloitte report expects steady growth in 2010 for global aerospace & defense

Published: 5 March 2010

There are positive signs for the global aerospace and defense (A&D) industry in 2010 according to a new report by the Deloitte Touche Tohmatsu (DTT) Global Manufacturing Industry, Compass 2010 — Global Aerospace & Defense Sector Outlook. Orders for new commercial aircraft are projected to rebound in 2010 to over 800 units, reversing the steep decline experienced in 2009. Likewise, orders for business jets are showing signs of improvement, and new requirements for innovative technologies in cybersecurity, intelligence, surveillance, reconnaissance, remotely piloted vehicles, and data fusion are expected to drive demand for defense companies.

"This year in the global sector, there is a sense of both caution and muted optimism,” says Tom Captain, A&D sector leader, DTT Global Manufacturing Industry. “Although 2009 appears to be the bottom of the current economic cycle, the new decade is expected to provide new market opportunities.” Deloitte member firm senior A&D leaders foresee growth opportunities especially in Asia for industry products and services, with Asian firms also expected to increase their participation in the global supply chain.

"In China, it is widely expected that the A&D industry has the potential of becoming a major new engine for economic growth and technological innovation. China is likely to become a major consumer and supplier of commercial airplane," said Mr. John Hung, Manufacturing Leader of Deloitte China. "The growth in the country's middle class by an estimated 600 million people over the next 20 years is likely to drive over 3,500 commercial aircrafts. On the supply front, an all-new regional jet is now in the test and certification process in China, with another next-generation single aisle plane to be on first flight in 2014."

In other parts of the world, India is drawing the attention of the defense industry, with their defense procurement budget expected to rise to US$45 billion by 2012. United States and European aerospace companies are now recognizing India as a critical market as well as a potential manufacturing partner. Although Japan anticipates a modest rise in commercial aircraft parts production and no significant increases in defense budgets, the steady growth of the industry in the long-term in mainland Asia also is expected to benefit Japan.

However, the European sector is at an inflection point. There are ongoing challenges to deliver cross-border joint development and procurement programs to meet expectations in terms of timing, cost, risk, and program management and capability, with cost overruns in key programs making headlines. At the same time, competition has increased from nontraditional smaller companies which have demonstrated innovative approaches to technology programs and they are quickly capturing market share for government defense and space programs.

According to the outlook, one of the keys trends to watch for in 2010 is the likely acceleration of merger and acquisition activity in the industry. Consolidation in tier-one and tier-two suppliers is expected to rise, to gain economies of scale and increase industry asset utilization. It is anticipated that large original equipment manufacturers (OEMs) will continue to acquire smaller companies to fill capability gaps. European sector firms especially are likely to acquire U.S. companies to “dollarize” their cost structure and to establish or strengthen their position with the largest A&D market in the world, the U.S. Department of Defense.

"In addition to robust economy, a sizeable market and government support, mergers and reorganizations are also fueling the development of the Chinese aerospace industry. For example, Aviation Industries of China (AVIC), which sold its automotive assets to Changan Automobile Group last year, aims at becoming a listed company in five years," added Mr. Hung.

The global A&D industry to date has been largely sheltered from the credit crunch due to the long-term nature of its contracts. In the UK for example, companies are carrying very strong order backlogs which will help them in 2010. However, the future of the European sector will depend upon the extent of collaboration to gain economies of scale, be more cost-competitive, and achieve better market access. In the Indian market, most segments are expected to show significant growth this year. Japan will continue to accelerate its presence in the industry through the development of new regional and commercial aircraft and China will lead in the next 20 years with increased passenger travel and new aircraft orders and production.

"The innovations of this industry have provided widespread and affordable air travel, produced technologies that contribute to global security, and given us some of the most iconic moments in human history, such as the Apollo moon mission and the Berlin airlift”, adds Captain. “The long term prospects for the industry are positive and developments within the sector will continue to touch many aspects of our lives.”

For a copy of Compass 2010 — Global Aerospace & Defense sector outlook, please visit here.

Deloitte Touche Tohmatsu (DTT) Global Manufacturing Industry
Global Manufacturing Industry is comprised of more than 750 partners and 12,000 industry professionals in Deloitte member firms in over 45 countries. The team’s deep industry knowledge, service line expertise, and thought leadership allows them to solve complex business issues with member firm clients in every corner of the globe. Deloitte member firms attract, develop, and retain the very best professionals and instill a set of shared values centered on integrity, value to clients, and commitment to each other and strength from diversity. Deloitte member firms provide professional services to Deloitte member firms to 80% of the manufacturing industry companies on the Fortune Global 500®. For more information about DTT Global Manufacturing Industry, please visit www.deloitte.com/manufacturing.