2015 Global aerospace and defence sector financial performance study

Executive Summary

Revenue growth in the global aerospace and defence sector is declining, with growth at a pace lower than gross domestic product (GDP) growth.

Global aerospace and defence (A&D) sector revenues grew by 1.9 percent, adding US$12.7 billion in revenues in 2014 to reach US$682.2 billion. This is a decline from 3.2 percent growth in 2013 and 5.8 percent in 2012. Indeed, the overall sector growth was slower than global gross domestic product growth of 2.6 percent in 2014. Although revenues in the commercial aerospace subsector continue to increase, defence subsector revenues continued to decline for the second consecutive year. Globally, the commercial aerospace subsector increased revenue by US$23.6 billion in 2014, an 8.2 percent increase over 2013. However, this growth was offset by revenue declines in the defence subsector of US$8.2 billion or a 2.2 percent decrease from 2013 to 2014. The key take away is that all sector revenue growth and more has resulted from increased revenues in the commercial aerospace subsector, similar to the last several years.

Commercial aerospace subsector sets new records for sales orders, deliveries, order backlogs, and revenues, but the growth rate is expected to edge down.

Global commercial aerospace companies achieved the highest levels of the four key growth metrics in the sector in 2014. Sales orders grew from 2,858 in 2013 to record levels of 2,888 sales orders in 2014, while aircraft deliveries increased by 6.1 percent from 1,274 to 1,352 deliveries. However, the sector growth rate is expected to slow down to 3.0 percent, with a 2015 production level expected at 1,393 aircraft and 1,422 aircraft in 2016, for a 2.1 percent growth rate. The sector’s 2014 order backlog grew by 14.4 percent and reached a record high of 12,175 aircraft, compared to 10,639 aircraft in 2013. At the current production rate, this represents a 9.0-year backlog of future production. Revenues grew by 8.2 percent, from US$291.2 billion in 2013 to US$314.9 billion in 2014. The Boeing Company and Airbus Group together added US$6.1 billion in additional revenue in 2014, as a follow up to the US$11.0 billion of combined incremental growth in 2013. Growth in demand for travel, especially in China, India, and the Middle East, as well as the need for more fuel-efficient aircraft continue to drive demand for new aircraft sales. Because of this continued demand for new commercial aircraft, it is estimated that over 34,000 jets over the next 20 years will be produced, with a value of over US$1.78 trillion at list prices.

United States (U.S.) defence subsector revenues continue to decline with the bottom expected next year.

Defence subsector revenues in the U.S. have been shrinking or remained stagnant for several years with flat growth in both 2013 and 2012, and a 2.5 percent decline in 2011. In 2014, revenues in the U.S. defence subsector declined by 2.2 percent or equivalent to US$5.4 billion. This is primarily due to the drawdown of large armed forces engaged in operations in the Middle East and continued declines in funding by the U.S. Department of Defence (DOD), the largest sector customer whose budget decreased by 4.7 percent in 2014[3]. Of the top 20 defence subsector companies in the U.S., only six companies experienced revenue growth in 2014. The Budget Control Act of 2011 mandated a reduction (sequestration) of defence spending by about US$490 billion between U.S. government fiscal years 2012 and 2021.[4] Although, the impact of sequestration cuts tapered in 2014, following the enactment of The Bipartisan Budget Act in December 2013, significant uncertainty remains concerning the overall levels of defence spending for future years.[5] Law mandates future sequestration cuts. Unless the U.S. Congress changes it, procurement decisions could result in further reductions, cancellations and/or delays of existing contracts or programs. This is likely to adversely affect the revenues and cash flows of defence companies. However, it is likely that even with sequestration in effect, the DOD base budget will start to bottom out in 2016 with consumer price inflation (CPI) adjusted increases starting to take effect.

Additional highlights include:

• Profitability and margins continue to improve
• Top 20 company revenue rankings increasingly reflect commercial aerospace subsector growth
• The U.S. continues to outperform Europe in profitability
• Sector is becoming more efficient
• A&D sector is becoming more commercial
• Propulsion, avionics, and tier two suppliers lead in profit performance, while OEMs, aerostructures, and services profit profits lag
• Key drivers of 2014 sector sales, revenue, and earnings growth