Financial performance weakens at top 20 global aerospace and defence companies, says Deloitte
Despite a nominal increase in sales, the top 20 global aerospace and defence (A&D) companies experienced declining financial performance in the first quarter of 2009 compared to 2008.
According to a new report, Throttling back: Midyear outlook for the global aerospace and defense industry, by Deloitte’s Global Manufacturing Industry Group, based on 2009 first quarter financial reports and public documents, sales revenue growth fell 83%, down from 10% to 1.7%, operating profits decreased 12%, and operating margins declined by 13.9% [1]. Although the global A&D industry capped off a record-setting five-year period in 2008, with strong growth in sales revenue of 7.9% to $595 billion and earnings of $54.2 billion, the first quarter of 2009 experienced negative financial performance [2]. The commercial aircraft sector suffered a dramatic decrease in orders, business jet manufacturers are in financial stress, and military equipment spending, led by the U.S. Department of Defence (DoD), is moderating.
David Raistrick, UK Manufacturing Industry Leader, Deloitte said: “Following its record setting period of growth, it is evident that the global aerospace and defence sector is not immune to the downturn and now faces a difficult future. Given the challenging economic environment, the sector will be forced to set priorities and make difficult trade-offs about what programs they can really afford. Despite the negative outlook, A&D is in a relatively better position to weather the economic storm than other industries. By focusing on product innovation, process improvements and new revenue opportunities, A&D companies will be better placed to take advantage of an economic turnaround."
"In the UK, the A&D industry has reported recently that they are holding their own in these challenging times. However, it remains cautious on the outlook for the next three years citing the need for more collaboration between industry and Government to support investment for both research and development, and training and skills, so that the UK can remain competitive amongst the leading global players."
Tom Captain, Deloitte Global A&D Industry Leader and a member of Deloitte’s Global Manufacturing Industry Group commented: “The global A&D industry is clearly in retreat from its historic highs in 2008. The global economic downturn has hit the business jet segment the hardest. But on the other hand, with an unprecedented backlog of over five years, the significant decline in new orders year to date for commercial jets has not materially impacted current financial performance”.
Commercial aircraft - The commercial aircraft industry is showing signs of recovery with recent news of new and large aircraft orders being planned and also the availability of credit to assist customers taking delivery of their aircraft in 2009. Although a challenge, it is anticipated that more credit will be made available to finance most aircraft purchases in 2010. The global airline industry, however, is experiencing potentially the worst conditions it has ever faced, with forecast losses of $9 billion [3]. Furthermore, international revenue passenger kilometres (RPKs) declined 7.5%, and freight traffic growth declined 2.2% year to date through April 30, 2009 [4]. However, the long-term outlook for air travel remains optimistic, with a 4.9% annualised growth in RPK’s over the next 20 years, and a corresponding rise in aircraft production, despite the short-term industry challenges [5].
Business aviation - For business jet producers, the outlook is much more severe with orders being cancelled or deferred. Significant layoffs have occurred within major business jet and general aviation manufacturers. The pace of deliveries is expected to slow. In addition, with corporations being impacted by the recession, they are finding other means of transporting executives for the time being. Therefore, the short-term outlook for business jets continues to look harsh, although long term, this segment has demonstrated resilience in past recessions, leading to ever high levels of production.
Defence - “The financial performance of defence companies has (on average) moderated due to the decrease in replenishment orders for the Iraq war and shifts that are starting to take place in weapons systems priorities,” according to General (retired) Charles Wald, Director, a Senior Advisor to the Aerospace & Defence Industry, Deloitte United States. Replacement of aging military aircraft provides a reason for financial optimism among defence contractors. By focusing on product innovation, process improvements, and new revenue opportunities, defence companies will be well positioned for an economic turnaround.
Solutions for the future
“While difficult to forecast with accuracy in this uncertain economic climate, there are six reliable tactics that may help A&D companies successfully position themselves to thrive as the economy recovers”, explains Captain. The tactics include:
1. Help customers reconfigure solutions that are more affordable and develop strategies for program
under consideration for termination, new competitive selection, or revamping;
2. Protect the commercial backlog by applying risk mitigation and financing alternatives;
3. Develop a global business model, particularly in the Middle East and India where commercial and
defence opportunities are maturing;
4. Aggressively manage costs and set effective targets while achieving mission assurance for the customer;
5. Take advantage of new opportunities in the acquisition space; and
6. Identify and capture technology directions and funding for emerging defence and security priorities.
For a copy of Throttling back: Midyear outlook for the global aerospace and defence industry, please visit www.deloitte.com/manufacturing.
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Fortunately even the most conservative most prognosticators now see at least a subdued “recovery” in 2010. 
