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Trends and Themes in the Aircraft Market

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

This overview aims 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 2017 dollars.

The words, numbers and graphs in this article illustrate who is building aircraft now and who will be in 10 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. 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. 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. 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 article covers the aviation manufacturing business, which has been eclipsed by a bigger aerospace economic universe.

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

Pages-from-Mentor-Aboulafia-2-300x225.jpgWhile growth is slowing markedly, this industry remains the healthiest industrial segment of the world economy. After a brief hiatus in 2010, aircraft deliveries came back on their decades-long growth trend. Both civil and military markets look set for growth through the end of the decade. While some sub-segments and programs remain weak, suppliers with diverse program exposure continue to enjoy modest top line growth.

We forecast production of 49,413 turbine-powered aircraft worth $1.969 trillion between 2017 and 2026. The military component of this market is worth $524.5 billion. The civil sector is worth $1.45 trillion. These numbers are all in 2017 dollars.

Our numbers exclude uninhabited aircraft, nonturbine 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 10 years.

Compare these numbers with the last 10 years (2007–2016), which saw deliveries of 45,033 aircraft worth $1.566 trillion (also in 2017 dollars). Despite the cyclical ups and downs, this represents 26% growth.

Over half of the new build market—$1.14 trillion—comprises commercial transports (including regional aircraft). Fighters are second, worth $267 billion. Business aircraft are third, worth $251.6 billion.

Boeing’s jetliner product line rejuvenation, despite its stumbles, will gradually lead to growing market success, particularly if it launches the 797 New Midsized Aircraft. 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 market share in military markets and holding on to their existing shares in civil markets, largely due to their successful embrace of globalization.

Europe looks set to maintain 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 a greater emphasis on indigenous defense platforms means that most emerging producer output will be defense related.

Aircraft Markets Downshift; Dark Clouds Loom

After a remarkably durable 12-year boom, world aircraft industry output growth sputtered to a halt in 2016. The market fell 2.3% (in constant dollars) relative to 2015, the first aggregate decline since 2003. While military demand remains robust, almost all civil market segments are feeling the impact of negative macroeconomic and geopolitical developments. Overcapacity, particularly in the twin aisle jetliner segment, has emerged as a serious concern.

The previous year, 2015, was also a lackluster year, with just 1.4% growth relative to 2015. The industry had been expanding at a compound annual growth rate (CAGR) of 6.5% in 2003–2014. Those good times have come to a halt.

There are few signs of improvement so far in 2017. Summer 2016 was an inflection point for the jetliner industry, which by a wide margin is the largest aircraft segment by value (about 60% of total world aircraft output), and the industry’s most important growth engine. Order deferrals have risen, and OEM plans for higher output rates are being reconsidered.

Jetliners, the Recent Growth Driver

The jetliner market is just finishing a 12-year super cycle. Airbus and Boeing guidance, until recently, indicated that they expect a 17-year super cycle. That now looks unlikely to happen. For some time now, there’s been a disconnect between jetliner market prosperity and the rest of the world economy, which is seeing higher instability and slower growth. The jetliner industry is falling in line with that macro environment.

For now, airline traffic and profits continue to outperform broader economic indicators, but there are no guarantees that this will continue, and some regions, like the Mideast, are already seeing slowing demand and diminished airline profitability.

While there will be some additional modest growth in jetliner deliveries starting in 2018, it will be in the 3% range, rather than the 9% or more that we’ve enjoyed over the past 12 years. All jetliner market growth will come from single aisle jets, where new production programs (A320neo, 737MAX, CSeries) are just beginning. The twin-aisle market is flat, at best, with only one new program—Airbus’s A350XWB—starting to ramp up. Production rates for the other twin aisle jets—777, 787, 767, 747, A330, and A380—are either flat or declining. Even Boeing’s flagship 787 is seeing slower demand, with plans to go from 12 per month to 14 effectively shelved in 2016.

Fighters, the Current Growth Driver

On the positive side, all of the military fixed wing segments, particularly combat aircraft, are still seeing demand increases. Global defense spending rose in 2015 for the first time since 2011, according to SIPRI. The Mideast, despite low oil prices, is at the center of this increase. US defense procurement is also rising, although the first Trump administration defense budget—FY 2018—has procurement numbers that are considerably below expectations. This defense upturn will largely be fueled by international demand.

In all, the military aircraft market fell by 3.6% in 2016, compared with a 1.7% civil market decline. The military side of the industry was somewhat dragged down by F-35 production delays, with deliveries staying flat at 45 aircraft. The plan had been to increase this to 53. Fighter deliveries in all stayed flat last year, but output should rise considerably in 2017. In addition to the continued F-35 order ramp, 2016 saw strong orders for more F/A-18E/Fs, F-15s, and Rafales.

Unfortunately, this military market strength is not enough to compensate for the weakness seen in the civil rotorcraft and business aircraft markets. Both markets enjoyed unprecedented growth rates in the last decade, with 17–18% CAGRs in 2003–2008. Both have spent the last eight years seeking renewed growth, with no success.

Yet most of all, these two markets are now seeing slower demand, largely due to lower energy prices and other factors. Business aircraft output in 2016 fell by 14.3% by value, while civil rotorcraft fell by a disastrous 22.9% relative to 2015. The best we can expect in 2017 is flat numbers. They will see just modest growth in the next few years, unless oil prices see a sudden return to the $70+/bbl level. Military rotorcraft output, meanwhile, re-mains flat as key US programs—such as the MH-60R, CH-47F/G, and V-22—begin to wind down.

For the aircraft industry overall, the outlook is for slow growth, which is better than 2016’s difficult numbers. In 2017, and for two years after, we’re expecting the industry topline to increase modestly, entirely because of the single jetliner segment. But after 2020, we’re expecting a modest correction as the jetliner market reaches the end of a remarkable growth surge. And it will be many years before the industry enjoys another 12-year growth cycle.

Trump’s About-Face Good News for Aircraft Industry

Pages-from-Mentor-Aboulafia-23-300x225.jpgThe second quarter of the Trump administration has seen extraordinary changes to President Donald Trump’s economic policies. For the US aircraft industry, these changes promise good things. Or, more accurately, they promise vastly superior things than the toxic protectionism promised by the Trump campaign and in the first few months of his presidency. As Peter Wehner, a frequent Trump critic who ran the White House Office of Strategic Initiatives for George W. Bush told The Atlantic, Trump has gone in just weeks “from Bannon-esque, apocalyptic, racial nationalism to Goldman Sachs, conventional, elite liberalism with nothing in between.”

The most important change Trump has made concerns China.

Trump had vowed to label China as a “currency manipulator” and threatened to impose a 45% tariff on imported Chinese goods. Yet after his meeting with President Xi Jinping, all of this went away. Trump flatly stated, “They are not currency manipulators.” Most astonishingly, Trump offered possible trade benefits for China in return for help in dealing with North Korea. Trump’s China reversal is great for the aircraft business. China now takes about 20% of Boeing jetliner production. A US tariff on imports from China would have guaranteed Chinese retaliation against Boeing.

In fact, if the Trump administration stays on this course, the US-China relationship could emerge stronger. After all, when Trump took office, China’s worst-case scenario looked likely. Yet the institutions and economic realities that favor strong trade relations between the two countries prevented any kind of confrontation. That might enhance mutual confidence, and promote good trade relations. We could even see China’s government favor Boeing and other US manufacturers in its next round of highly politicized jetliner acquisitions as a sign of goodwill.

If Trump’s China warming is the biggest trade policy change for aerospace, Trump’s new approach to the Ex-Im Bank is the biggest surprise. In April, he told the Wall Street Journal that while he had regarded Ex-Im as a “ridiculous thing,” he has changed his mind and that “actually it’s a very good thing and it actually makes money.” Trump recently appointed two former congressmen to fill vacant Ex-Im Bank positions, a move needed for Ex-Im to resume guaranteeing large deals.

While one appointee, former New Jersey Rep. Scott Garrett, has a history of criticizing the bank, this was a necessary way of getting bank opponents to go along with the move. Since Trump attracted many supporters from the Tea Party, and since the rest of the Republican party was effectively hostage to the Tea Party on key issues like Ex-Im, Trump is perhaps the only politician who is able to restore Ex-Im, which plays a key role in providing back-stop financing for US aerospace exports. Boeing is its biggest single beneficiary.

Next, there’s NAFTA.

NAFTA matters to the aerospace industry since new build and aftermarket suppliers now have a substantial industrial presence in Mexico and count on low trade barriers to ship components in and out of the country (some parts cross the border for installation and finishing work and then come back for installation in aircraft and engines). Trump had termed NAFTA “one-sided” and a “catastrophe” and vowed to tear it up. But also in April Trump began moving away from this promise. He told a group of business executives, “We’ll have some very pleasant surprises for you on NAFTA.” A new draft letter to Congress also emerged, implying a measured tone on the subject, with an emphasis on renegotiation rather than abrogation. And of course six months into the new administration, there are absolutely no signs of a wall between the US and Mexico.

Finally, there are aircraft programs themselves. After his election, Trump made headlines threatening to cancel the new Air Force One and promising to look at alternatives to the F-35. But these threats have ceased. Trump now seems content to take credit for price reduction work that happened before he showed up. This, of course, implies greater stability for these programs.

The aerospace industry still faces considerable uncertainty under a Trump administration. The FY 2018 budget proposal, despite its grand promise of $54 billion in additional defense money, was not compliant with the Budget Control Act. Any hope of even modestly higher defense spending, let alone Trump’s promise of a larger military, depends on some kind of bipartisan deal in Congress.

But the biggest question is this: Are Trump’s new policies permanent? The answer depends, in part, on how Trump’s supporters react to these changes. For many of them, the new Trump is the opposite of the economic nationalist they voted for. So far, they don’t seem to mind that his idea of “draining the swamp” is more like “flooding the swamp with Wall Street executives.” If Trump stays on his new course of being another establishment politician, will his supporters make their displeasure vocal? If Trump decides to focus on keeping his core base happy, we could see another series of complete reversals.

But for now, Trump’s radical transformation is very good for the aircraft industry in the US and the rest of the world. Through the very narrow lens of this industry, Trump’s near-complete turnaround on trade and the economy is extremely encouraging.

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