Despite the downward pressure on defence spending and relatively slow sales in the commercial aircraft and business jet segments, the global aerospace and defence (A&D) industry has continued to show resilience in 2010, according to a new study released by the Deloitte Global Manufacturing Industry Group.
Holding steady: 2010 Midyear outlook for the global aerospace and defence sector, examines the quarterly financial statements released thus far in calendar year 2010 by 25 top global A&D companies.
Sales revenue growth was -1.01 per cent. Operating profit growth was -1.92 per cent and operating margin growth was -0.92 per cent, all pointing to flat financial performance for the first quarter of 2010.
“Despite these growth challenges, the industry remains resilient and performing better than many other sectors hit hard by the recession. The imperative now will be to cut costs and grow top line revenue in new areas to demonstrate to global markets the ability to grow profits again,” said Tom Captain, Global Aerospace & Defense Sector Leader, Deloitte Touche Tohmatsu Global Manufacturing Industry Group.
According to the outlook, defence spending, which is led by the United States (U.S.) Department of Defence, is decreasing, with a 5 per cent drop in research and development spend expected into fiscal year 2011, and a base budget increase of only 1.8 per cent that barely keeps pace with inflation. The United Kingdom (UK) is expected to have a steeper decline in defence spending. However, the study also states that defence expenditure in India is expected to increase to US$32 billion and spending in the Gulf Coast countries is expected to rise dramatically.
“Decreasing defence spend by developed countries will require smarter use of the remaining funds in order to develop and deploy the technologies needed to counter more sophisticated adversaries,” added General Charles Wald (United States Air Force retired), Director and Senior Advisor to the A&D sector, Deloitte LLP in the United States.
On the other side, spending in India and the Middle East is expected to rise dramatically. The Indian defence procurement for the year 2010-11 is budgeted at US$32 billion (including US$13 billion for acquisitions for new weapon systems, equipments and services). India is likely to spend nearly US$80 billion over next five years (2010-15) on new capital acquisitions.
Kumar Kandaswami, leader manufacturing industry for Deloitte in India said, “The sheer volume of planned expenditure is expected to create new opportunities for global A&D companies, as total spending will grow in absolute terms. Further, having a burgeoning spending on A&D and significant offset requirements, India is also looking for necessary technologies from these companies.”
“India is building a mature manufacturing sector which enables it to offer more cost-competitive terms for foreign platforms builds. While global companies are looking for cost-saving programs while increasing revenue, India as a critical market and potential engineering and manufacturing partner that A&D companies can leverage for future opportunities,” he further added.
Other key findings from the study include:
– Commercial aircraft sales are rebounding, albeit from a low base, with a 127 per cent annual increase through to May 2010.
– Commercial aircraft backlog as of May 2010 stands at 6,600 units, representing six years of guaranteed work, and provides some comfort to suppliers going forward.
– For defence companies, key areas generating new revenue sources include mission capability software integration, battle space simulation, directed energy, precision engagement, threat identification, and energy and infrastructure security.
– The number of merger and acquisition deals is up 10 per cent over last year with more than a 300 per cent increase in the value of deals completed or in process.
“We expect to see more deals by private equity and strategic buyers alike as competition for desirable assets heats up over the next several months,” explains Pauline Biddle, Aerospace & Defence Sector Leader, Deloitte UK & Switzerland Manufacturing Group.
