Trends and Themes in the Aircraft Market
By Richard Aboulafia
Vice President, Analysis
Teal Group Corp.
About This Study: What’s In, What’s Out
This overview is designed to provide a comprehensive look at the business of building aircraft. If it’s a manned, turbine-powered aircraft, it’s included in this survey. The numbers are drawn from Teal Group’s market and program forecasts, so this represents the top of the World Military and Civil Aircraft Briefing "forecast pyramid."
The words, numbers, and graphs below illustrate who is building aircraft now and who will be in 10 years. But the numbers represent only the value of deliveries; they exclude RDT&E and the generally more lucrative after-market support business. We estimate that the latter two broad business categories, plus upgrades, are worth about 200% of the value of new aircraft manufacture annually. Therefore, since the new aircraft market is worth $130–$200 billion per year, we reckon that the total aircraft industry contributes $400–$600 billion annually to the world economy. And this figure excludes numerous related industries, such as airlines, air traffic control, and military air base support services.
The numbers also exclude other aerospace business done by the companies involved. It’s quite possible to be a large, profitable aerospace company and not appear in the charts on the following pages. Northrop Grumman provides the single best example of this, and Raytheon’s December 2006 divestiture of its aircraft unit puts them on the same path. Similarly, British Aerospace’s January 1999 acquisition of Marconi Electronic Systems certainly strengthened its position, but had no bearing on BAE Systems’ place in our rankings and charts, below. In fact, as of 2002, for the first time there are no solely British civil planes. BAE’s 2006 sale of its Airbus unit indicates a clear desire to get away from all civil aircraft as quickly as possible. In short, this report covers the aviation manufacturing business, which has been eclipsed by a bigger aerospace economic universe.
Our charts also exclude subcontracts. For example, Finmeccanica’s share of world aircraft work would be significantly greater if we could add in its share of Airbus, Boeing, and Lockheed Martin programs.
Evaluating the world aviation industry involves a lot of judgment calls. Most importantly, what is a new aircraft? Many special-mission aircraft, such as Boeing’s 737 AWACS and Northrop Grumman’s E-8 JSTARS, are high-value modifications of existing off-the-shelf planes. We’ve included them in our "Other" production line, along with Northrop Grumman’s E-2. Also in this line are smaller turbine-powered aircraft that don’t belong elsewhere, such as Cessna’s Caravan.
Also, our Rotorcraft line includes several remanufacture programs, such as Boeing’s AH-64D Block II and III. While these programs involve modifications of existing aircraft, the work done to them is so extensive that they may as well be new machines, in terms of capabilities and costs.
Summary of Findings
You can save valuable time by not reading this report. Instead, scan the charts and tables in this and the following two articles, and remember the following key findings:
- This industry is one of the healthiest parts of the world economy. After a brief hiatus in 2010, aircraft deliveries have resumed their decade-long growth trend. The first simultaneous civil and military market upturn in decades gave most primes a strong boost. While the outlook for defense is plateauing, the civil market looks set for additional growth. While a handful of sub-segments and programs remain weak, suppliers with diverse program exposure continue to enjoy top-line growth.
- We forecast production of 50,520 turbine-powered aircraft worth $1.662 trillion between 2011 and 2020. The military component of this market is worth $405.3 billion, while the civil sector is worth $1.257 trillion.
- Our numbers exclude uninhabited aircraft, non-turbine aircraft, maintenance, overhaul, upgrades, and research. If all of these were included, the industry would be worth more than $4 trillion to the world’s economy over the next 10 years.
- Compare these numbers with the last 10 years (2001–2010), which saw deliveries of 35,866 aircraft worth $1.098 trillion. Despite the cyclical ups and downs, this represents 51% growth.
- 58% of the new build market—$ 959.1 billion—comprises commercial transports (including regional aircraft). Business aircraft are second, worth $245 billion. Rotorcraft (military and civil) are third, worth $194.6 billion.
- Boeing’s jetliner product line rejuvenation, despite its stumbles, will gradually lead to growing market success. Boeing jetliner success, coupled with Lockheed Martin’s F-35 and broad US defense export market dominance, means good things for the US’s share of the industry. US primes are gaining global market share, largely due to their successful embrace of globalization.
- Europe looks set to retain its market share during our forecast period, largely due to Airbus. However, the outlook for European defense remains quite weak, and European industrial restructuring might not have reached its ultimate conclusion. And if Boeing’s lead accelerates, or if the F-35 fulfills its most ambitious expectations, Europe’s share could further erode.
- Numerous macroeconomic trends are hindering nontraditional producers (those outside the US and Europe). These "emerging" producers will actually have roughly the same share of the market by the end of our forecast period, although thanks to increased outsourcing by the US and European primes some emerging players will still prosper.
Aircraft, a Global Safe Haven
Aircraft survived the world economic crisis better than any other industry. In 2009, the industry actually grew by 7%. In 2010, deliveries fell by 5%, but all told this is arguably the only industry in the world to finish 2010 delivering more product than when the crisis began in 2008. In 2011, output growth resumed.
With the world economy recovering but still experiencing relatively slow growth, the aircraft industry offers a unique combination of safety and long-term growth. However, this industry still suffers from patches of weakness, and there are risks moving forward in several key market segments.
The Jetliner Miracle
Two years through the Great Recession, jetliners remain the single brightest spot of the commercial economy. Production continues to rise at both manufacturers. Orders in 2010 look set to match deliveries, and the backlog remains above 6500 aircraft for Airbus and Boeing alone. Boeing jets represent nearly 2% of all US exports.
The primary reasons for this phenomenal performance in the face of broader economic pain are strong emerging market demand, and persistently high fuel prices, which make newer equipment more desirable. Government support has played a key role too. This has taken the form of export credit finance, as well as increased demand from government-owned airlines. Also, government-owned institutions such as sovereign wealth funds play an increasing role in jet finance.
Another important factor behind strong jetliner sales and production is a growing appreciation for them as financial assets. The most common aircraft—Airbus’s A320 and A330, and Boeing’s 737-800 and 777-300ER, for example—are quite appealing to investors.
Of course, two of the defining characteristics of today’s slack economy are a lack of good investment opportunities coupled with a strong dislike of risk. The result has been very strong, almost excessive demand for safe assets, such as US government debt. Jetliners fall under this category too. Lessors have successfully attracted funds from investors looking for safe places to put their cash, such as popular current-generation jets.
In short, we could be seeing very level jetliner output because people with money have no better places to invest it. If investment opportunities elsewhere return with renewed global growth, and if the cost of capital increases with better times, the current fashion for jetliner investment might diminish.
Still, on the strength of the backlog and market fundamentals, we see very little risk of jetliner market softness in the next few years.
Business Jet Bifurcation Continues
The second half of 2010 provided confirmation of a key structural change in the business jet market. The massive bifurcation between the two halves of the business jet industry continues to transform the market’s structure, and has inflicted considerable pain on several key players.
Historically, the business jet market could be split in half by value. The top half consists of jets costing $25 million and more. The bottom half consists of jets costing less than $25 million. In 2009, the bottom half fell by 42.8%, while the top half fell by just 4.1%. In 2010, the top half fell an additional 7%, but the bottom half fell an additional 17.8%, bringing it down to about 60% off its 2008 deliveries peak. This represents the worst decline of any aerospace market in the present downturn. It was worse than the decline suffered by the majority of world economic markets.
Two years into this downturn, it’s clear that the market continues to favor top end aircraft. Pricing in this segment has generally held up better than in the lower and middle segments. The two key players in the bottom half—Cessna and Hawker Beechcraft—have suffered grievous losses. They have seen their businesses drop precipitously. Meanwhile, a powerful new competitor, Embraer, has entered their segment, aiming at taking market share at the very moment that the legacy players can least afford to fight back.
Both Cessna and Hawker continue to cut products and employees. Meanwhile, the companies at the top of the market continue to enjoy a reasonable level of prosperity, and are aggressively pushing ahead with new product development. According to Gulfstream, the company booked more orders in the third quarter of 2010 than in any quarter since the downturn started in mid 2008. In November 2010 it said it would spend $500 million on plant expansion and add 1000 jobs in its Savannah, GA facility, to meet a growing market for large-cabin aircraft. Similarly, its rival Bombardier announced in October 2010 that it was launching its Global 7000 and 8000 growth versions of its high-end Global Express product line.
Clearly, the bifurcation of the business jet market looks set to induce a notable structural change. What was once the top half of the market by value will from now on be the top 60–65%.
In all, the outlook for both the civil and military aircraft industry is quite strong, despite some areas of weakness and risk. Our forecast for the next five years is for a total market expansion at a 4.2% compound annual growth rate (CAGR). This is somewhat weaker than the 5.7% CAGR expansion enjoyed by the industry in 2003–2010. But again, the industry avoided any kind of serious cyclical downturn during the worst economic recession since World War II.
This article was first published in the 2012 edition of the Aerospace and Defense Manufacturing Yearbook.