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Trends and Themes in the Aircraft Market

By Richard Aboulafia Vice President - Analysis, Teal Group Corp.

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.” All value figures are given in 2016 dollars.

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The words, numbers, and graphs in this article illustrate who is building aircraft now and who will be in ten years. But the numbers represent only the value of deliveries; they exclude the broader footprint of the industry, which is about two to three times as large as the value of total new build deliveries. The numbers also 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 $180–$210 billion per year, we reckon that the total aircraft industry contributes $700–900 billion annually to the world economy (that covers the broader industry footprint plus research and sustainment). 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.

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.

Finally, our Rotorcraft line includes several remanufacture programs, such as Boeing’s AH-64D/E 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

  • This industry remains the healthiest industrial segment of the world economy. After a brief hiatus in 2010, aircraft deliveries remain back on their decades-long growth trend. Both civil and military markets look set for growth through the end of the decade. While a handful of sub-segments and programs remain weak, suppliers with diverse program exposure continue to enjoy modest top line growth.
  • We forecast production of 52,673 turbine-powered aircraft worth $1.999 trillion between 2016 and 2025. The military component of this market is worth $484.5 billion, while the civil sector is worth $1.45 trillion. These numbers are all in 2016 dollars.
  • Our numbers exclude uninhabited aircraft, non-turbine aircraft, maintenance, overhaul, upgrades, and research. If all of these were included, along with aggregate revenues from the broader aircraft manufacturing industry, the market would be worth over $8 trillion to the world’s economy over the next ten years.
  • Compare these numbers with the last 10 years (2006–2015), which saw deliveries of 44,415 aircraft worth $1.419 trillion (also in 2016 dollars). Despite the cyclical ups and downs, this represents nearly 40% growth.
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    Northrop Grumman’s E-8 JSTARS. Photo courtesy United States Air Force
    Over half of the new build market—$1.095 trillion—comprises commercial transports (including regional aircraft). Business aircraft are second, worth $269.7 billion. Fighters are third, worth $242.1 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 non-traditional 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.

Dark Clouds Loom

The world aircraft industry is still growing. That’s the good news. The bad news is that the industry’s growth rate downshifted significantly last year. Meanwhile, the sluggish level of growth that remains is threatened by several looming macroeconomic trends. Most of all, the jetliner primes’ lofty production goals appear out of line with economic reality.

Several market segments have already been impacted. The result was a weak 2% growth rate for 2015 over 2014, measured in value of deliveries. This compares with the strong 7.1% compound annual growth rate (CAGR) the industry enjoyed in 2010–2014.

Lackluster economic growth, particularly in emerging markets, is one of the two big culprits. China, now the largest jetliner market in the world, is weakening noticeably, with GDP growth falling below 7% last year. Russia and Brazil are stuck in a serious downturn. India’s civil aircraft demand has also been disappointing. Last year, Boeing delivered a mere three jetliners to the country, down from a peak of 36 in 2007.

Meanwhile, Airbus and Boeing jetliner deliveries to China ramped up to 301 aircraft. That’s a record, both in raw numbers and as a percentage of the total market. But again, China GDP numbers are dropping to a level not seen in 25 years.

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Weak energy prices are the second culprit. Inexpensive fuel reduces the incentive for airlines to replace their older jets, and last year saw a worrying 38% decline in older jetliner retirements. While Airbus and Boeing show no signs of slowing down their announced production increases, there are more than ample reasons for caution. It’s quite possible that the long jetliner output ramp—an extraordinary 9.2% CAGR between 2004 and 2015—is disrupted as customers defer. If interest rates rise more than the modest increase anticipated in 2016, the problem will get worse still.

Cheap oil and other commodities also reduce demand for oil field exploration and support helicopters. This segment’s weakness drove civil helicopter deliveries down 5.3% by value last year. The rotorcraft industry may be the most vulnerable to cheap oil because of the proliferation of new models aimed at the exploration segment, with AgustaWestland’s AW189 and Airbus’s H175 entering service over the past two years and Bell’s Model 525 slated for arrival in 2017.

Also, low oil prices impact business aircraft demand in resource-rich economies. Again, last year saw damage here, with deliveries of the high-end business jets most popular in these markets falling 8% by value in 2015.

What’s most concerning is that we don’t know how low oil will go, and how long prices will stay low. Most guidance points to prices this year averaging around $45/bbl – the same price the market saw for much of last year – with a gradual recovery to the $70–$80 range, but currently oil prices are trending in the low $30s and high $20s. There’s a lot of supply that won’t go offline any time soon, and global tensions, even in the Mideast, aren’t having any kind of impact on oil prices. As Iran comes online as a global oil producer, the excess supply problem will worsen.

On the positive side, while Mideast regional tensions and military actions are not affecting oil prices, they are having a strong effect on demand for combat aircraft and other defense equipment. Combat aircraft sales to this region are up markedly, particularly as Mideast countries diversify their strategic relationships by looking for second sources of aircraft and other weaponry.

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Dassault provides an excellent illustration of almost all the key international aircraft market trends. The company sold 24 Rafales to Egypt and 24 more to Qatar last year. These were the first firm Rafale export sales, despite over 25 years of heavy marketing and false starts. This was Egypt’s first purchase of a non-US combat aircraft in decades, reflecting concern about another US arms cutoff. Meanwhile, sales of high-end Falcon business jets suffered a serious drop. Overall, just 45 were sold, meaning that for the first time in decades Dassault sold more combat aircraft than business aircraft.

Last, the US defense budget showed surprising strength. Not only did weapons procurement recover to a respectable $111 billion in FY 2016, but spending on combat aircraft ramped up to nearly $12 billion, a very strong number. Coupled with high export demand, these numbers promise continued strength for the military side of the business.

Overall, while 2015 saw a slight 0.3% drop in military aircraft output, orders have been strong. This year, the military side of the industry will grow by a respectable 6.3% in value over 2015.

While 2015 saw a slight 0.3% drop in military aircraft output, orders have been strong. This year, the military side of the industry will grow by a respectable 6.3% in value over 2015.

By contrast, we expect the civil side of the industry to grow by just 1.2%, with further jetliner output growth (2.2%) dragged down by more softness in high-end business jets and civil rotorcraft. The total aircraft industry growth rate in 2016 will be just 2.4%, about the same as 2015’s number. Given the cheap fuel problem, there’s more downside risk than upside potential.

And most of all, the two large jetliner primes need to re-think their production ramp plans. Airbus and Boeing expect single aisle output to expand at a 13.1% CAGR through 2019, with twin aisles expanding at a 9.4% CAGR. A very difficult world macroeconomic environment, coupled with the strong prospect of a long period of cheap fuel, means we may see these plans slow considerably this year.

That’s How Canada’s Aerospace Industry Escaped Its Certain Fate

Bombardier’s CSeries, soon to be half-owned by Quebec Province after Bombardier’s $3.2 billion write-off, is in a very difficult position, with little hope of a recovery. But the CSeries’ woes are not a larger Canadian aerospace industry problem. In fact, most other Canadian aerospace companies are doing quite well. There are important lessons in that.

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Bombardier C-Series Family. Photo courtesy Bombardier

First, this situation could have been far worse. When the first CSeries was launched in 2005, the plan was to create a product with very heavy Canadian content. Since the Canadian Federal and Quebec Provincial governments were offering extensive state aid for the new jet, they expected much of the work to stay in-country. David Emerson, Canada’s then-Minister of Industry, said, “Canadian firms play key roles in many existing global aerospace projects, and the Government of Canada will work with companies across the aerospace industry to promote their capabilities to participate with Bombardier in the CSeries.”

But when the second incarnation of the CSeries was launched in 2008 (after a two-year shelving), it was a far more global product, with major structures and components coming from Northern Ireland, China, Italy, and of course the US. Canadian content on the CSeries is actually quite small, outside of Bombardier. While Pratt & Whitney plans to build the CSeries engine in Montreal, this is just a variant of the PurePower Geared Turbofan family, which is mostly built in the US.

Instead, Canada’s industry remained focused on exports, not on securing a guaranteed place on a national champion. We can measure that success using trade figures with the US, Canada’s largest aerospace trading partner by a large margin. Canada’s total aerospace exports to the US grew by a compound annual growth rate (CAGR) of just 3.7% in 2005–2014, dragged down by slumping platform sales, particularly Bombardier regional aircraft. But Canada’s exports of aircraft structures and components to the US (to be used in US aircraft) grew by a very strong 11.4% CAGR. Engines and engine parts grew at a respectable 5.3% pace.

Due to these trends, Canadian aircraft systems, components, engines, and aerostructures accounted for 48% of all aerospace exports to the US in 2005–2014, reaching 50% last year. Clearly, companies such as Heroux-Devtek, Magellan, Pratt & Whitney Canada, and many medium and small-sized companies are doing just fine. Given the damage done by the CSeries to the rest of Bombardier’s aircraft products, a growing majority of Canada’s aerospace output will be derived from first, second and third-tier suppliers. Canada is also doing great with MRO work, simulators, and advanced research.

There are two important lessons here for the world aerospace industry. The first is that global sourcing does more than just let primes select the best suppliers for the job. It also spreads risk and cost. Keeping work in-country sounds like a good idea for leveraging national investment cash, but it also means that a program failure would disproportionately impact the national industrial base. If a heavily Canadian CSeries were to have gone ahead as once planned, most of Canada’s aerospace suppliers would have been dragged down with it.

The second lesson is that a platform-driven aerospace industrial policy is vastly inferior to cultivating a diverse portfolio of technologies, companies, and projects. Putting all eggs in one basket is a risky strategy, and supplier companies generally enjoy higher margins than primes anyway. Although Brazil succeeded with Embraer using a prime-focused strategy (at the expense of a broader national industry base), there were many other countries that tried and failed with the same strategy. And given its difficult first few decades, Embraer’s success was not exactly pre-ordained.

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Another factor to consider is that national jets with a vertical supply chain can damage that nation’s industry competitiveness. Domestic suppliers who are guaranteed a large role on national programs have less incentive to pursue export contracts, and often become complacent as a result. This simultaneously hurts the competitiveness of that national jet, and the competitiveness of the nation’s aerospace industrial base.

China’s aerospace development strategy represents the exact opposite of these lessons, and the damage done by national vertical integration. China prioritizes jets first, followed by the development of a national supply chain that’s focused on supplying parts and systems for those jets. Very little of the nation’s aerospace portfolio is geared towards exports. As a result, years ago, Mexico’s aerospace exports to the US blew past China’s, and now stand at more than twice China’s exports by value.

The CSeries may be in the process of dying. Or it may survive, as a niche product. But Canada’s aerospace industry dodged a bullet when the original plan ended for a vertically Canadian jet. It is now well-positioned to compete, particularly if the federal and provincial governments assist them with even a fraction of what’s been lavished on the CSeries.

This article was first published in the 2016 edition of the Aerospace & Defense ManufacturingYearbook.

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