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2014 Outlook on Aerospace & Defense

Interview with Tom Captain

Shifting defense spending and opportunities in new markets may require life cycle cost reduction and business model transformation, according to Tom Captain, vice chairman and U.S. Aerospace & Defense (A&D) leader for Deloitte LLP. Read on for his perspective on the year ahead.

What are the biggest challenges facing the aerospace and defense industry in the coming year?

One of the biggest challenges facing the industry continues to be the financial impact of the cessation of armed conflict in Iraq and Afghanistan and the sequester in the defense sector. This reduction is offset, however, by the continued growth that is anticipated in the commercial aerospace industry. This is being driven primarily by continued increases in passenger travel demand, especially in the Middle East and the Asia Pacific regions, and the accelerated replacement cycle of obsolete aircraft with next generation fuel efficient aircraft.

What trends might disrupt “business as usual” in 2014?

Shifting defense spending is one trend that will likely impact “business as usual” in 2014. Global defense spending is declining, resulting mainly from reduced armed conflict in Iraq and Afghanistan and affordability concerns in many traditional militarily active governments. However, defense spending is increasing in several areas of the globe, including the Middle East and the Asia Pacific region.  Some countries in those regions have produced the wealth necessary to equip their militaries with modern defense platforms and technologies. Some of these same countries have threats on their borders or in their geographies, all of which is contributing to an expectation of increased defense spending. However, these opportunities for sector growth are likely to be diminished with the overall downward trend in global revenues for defense companies.  

On the commercial side, the dramatic increase expected for annual production levels of commercial aircraft forecasted in the next decade (by 2023) is estimated to be approximately 25 percent higher, compared to expected production in 2013.1 With such growth expected, there are two significant trends and challenges to consider: the entrance of new global competitors to the existing duopoly and the impact on the supply chain.

What are some steps companies can take to foster innovation and/or growth?

“A return to growth in a declining government spending environment might include emphasis on developing new products and technologies that support military mission requirements to address the new threat environment.”

Selling more defense and military technologies to existing government customers will be difficult in a declining budget environment, thus competition for fewer programs is likely to be intensified during this period of contraction.

A return to growth in a declining government spending environment might include emphasis on developing new products and technologies that support military mission requirements to address the new threat environment (e.g., asymmetric, air-sea power, cyber, urban, etc.). These technologies include next generation intelligence, surveillance and reconnaissance (ISR), data analytics and cognition, unmanned combat vehicles – on land, at sea and in the air – and enhanced precision strike, perhaps with more reliance on non-kinetic (lasers and directed energy) weapons.   

A growth strategy might include more emphasis on international sales to countries that have new found wealth and the need for more defense capabilities. However, it can be difficult to do business in certain foreign countries with the long decision cycles, investment requirements, and inadequate indigenous capabilities to perform offset work by foreign nationals, for example.

Two areas that defense companies can focus on to create demand in a declining budget environment is life cycle cost reduction and business model transformation.

 

Endnote

1. DTTL Global Manufacturing Industry group analysis of data from Boeing, Current Market Outlook (2013-2032), September 2013, and Airbus, Global Market Forecast (2013-2032), September 2013

 

 

 

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.


As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2014 Deloitte Development LLC. All rights reserved.

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