2013 Outlook on Aerospace & Defense
Interview with Tom Captain
Despite a challenging environment, the aerospace and defense (A&D) industry is likely to continue to develop game changing technology innovations, according to Tom Captain, vice chairman and U.S. A&D leader for Deloitte LLP and Global A&D leader for Deloitte Touche Tohmatsu Limited. Read on for his perspective on the year ahead.
What is one of the most important issues facing the A&D sector in 2013?
The A&D industry is becoming more global due to heightened competition, growing travel demands and increased security requirements in emerging markets. Globalization provides opportunities for lower cost and for technologically advanced product introductions. Increasingly, these products can be designed and manufactured virtually anywhere, anytime, largely due to the Internet and advancements in digital product definition, design and manufacturing software.
Globalization is also affecting product selections, in that military and commercial customers alike are requiring that value be “offset” by placing work in their countries of origin. This tendency is likely to continue, as traditional countries are pressured to keep their jobs at home, but is balanced by the need for companies to grow revenues and continue to reduce labor costs.
The trend in the industry toward globalization is also marked by new market entrants, particularly in the commercial aircraft segment, some of which receive government financial support that may potentially invite World Trade Organization (WTO) review consideration in future years. For both the defense and commercial segments, it is expected that more governmental scrutiny and regulatory compliance will be required on acquisition practices in the areas of anti-bribery, anti-money laundering and ethical business practices in order to provide a more level playing field for competition.
What are some steps companies in this sector can take to manage through the current climate of economic uncertainty?
Defense and security — Defense revenues were flat through the first nine months of 2012 at the global level, but in the U.S., revenues continued to decline at negative .5 percent year over year. Indeed, only three out of the top 13 defense contractors doing business with the U.S. Department of Defense (DoD) experienced revenue growth. Continued global economic challenges coupled with revenue gaps and cost pressures in 2013 may result in additional decreases in revenue, lower returns on invested capital, as well as margin contraction for many defense industry companies, creating pressure to consolidate in order to squeeze out excess defense segment capacity. In response, the segment is likely to undergo more streamlining of its cost structure, divestiture of non-core assets and additions of gap filling, as well as game changing acquisitions. Companies have also renewed foreign military sales efforts into new geographic markets that face increasing threats to national security. Effective execution of such strategies will be necessary in order for defense contractors to mitigate against more aggressive competition.
Commercial and business aircraft — Growth in commercial aircraft manufacturers’ revenues is expected to reach record levels in 2013, based on increased production rates and the introduction of the next generation aircraft. It is likely that 2013 may continue the new trend of global production levels above 1,000 aircraft per year for the third year in a row. Backlogs are expected to continue growing, with airlines continuing to update their fleets with new fuel-efficient aircraft in order to stay competitive. Suppliers to aircraft original equipment manufacturers (OEMs) are likely to be challenged to keep pace with production requirements and are expected to invest in skills development, tooling and manufacturing capacity. Finally, for the first time in several years, the industry may experience an uptick in demand, albeit modest, in the business aircraft segment as well.1
What are high-performing companies doing to foster innovation and growth?
“If past is prologue, expect game changing technology innovations to continue to be created within the global A&D industry into the future.”
Although it has only been 109 years since the Wright brothers’ first flight, the industry has contributed fundamentally to the way consumers live, work, travel and communicate, and continued innovations developed in areas such as jet aircraft, communications satellites, the Internet and global positioning systems. Also, the industry is primarily responsible for the reduction of casualties in armed conflict due to the technology innovations that increasingly keep war fighters out of harm’s way with unmanned aerial vehicles, sophisticated surveillance sensors and over the horizon strike capability. This industry has created the technology innovations that have contributed to the very fabric of society — from the ability to communicate globally around the clock from our personal digital assistants, to safe and efficient air travel, to securing our borders and defending our way of life.
If past is prologue, expect game changing technology innovations to continue to be created within the global A&D industry into the future. In the defense segment, some of the science and technology being developed include directed energy and high powered microwave weapons, hyper-sonic missiles, long-range and high-altitude unmanned aerial systems, satellite-based high resolution full motion video cameras and extraordinary software that can trace financial transactions of known terrorists. For commercial applications, interesting technologies are being experimented with that can harvest solar power from space-based solar arrays, converted to microwaves or high voltage wireless signals to ground, air and sea-based distribution networks. The prospects of efficient supersonic commercial aircraft that can address the sonic boom and environmental challenges of the past are highly anticipated. These kinds of innovative technologies will change our society in immeasurable ways. Just like during the first century, the industry has changed the way humans interact on a global basis. This is indeed something to look forward to in the near-term, as well as in the future.