A quick turnaround in aerospace and defense is unlikely, since the industries still face huge challenges, according to business advisor AlixPartners. The company’s 2010 Global Aerospace & Defense Review finds that although original equipment manufacturers (OEMs) and suppliers performed surprisingly well in 2009–posting 2 percent overall growth–companies should not expect such conditions to continue.
“The strong five-year cycle of growth we have seen [ended] in 2009 and [the industry] faces a turbulent ride going forward,” said AlixPartners managing director Eric Bernardini, co-leader of the firm’s global aerospace and defense practice. “The industry made it through 2009 remarkably well, compared to most other industries because the major players reacted quickly to cut production capacity. Also, of course, U.S. defense spending continued to be strong in 2009 and (so far) in 2010, largely due to supplemental spending authorizations for the wars in Iraq and Afghanistan.
“However, because of the financial crisis and our lingering fragile economy, pressures on defense budgets will be intense going forward, which should prompt primes and non-primes alike to move now to optimize their cost structures. The commercial sector faces an economy that’s uncertain, and any recovery will be slow over the next two years,” concluded Bernardini.
“Business jets face an even tougher environment, with high inventory levels and [a] large product offering, while still trying to remove the “politically incorrect’ stigma of private jets,” according to AlixPartners director Thierry Duvette. “On the military side, the Pentagon (as well as European governments) [are] actively looking to trim costs at every turn with significant budget cuts being made. The ongoing debt crisis in Europe is yet another overhang likely to keep a lid on aviation demand, while also making credit more costly for airlines and business-jet buyers.”
AlixPartners is a global firm, which provides advice to businesses. It has offices in the U.S., Europe and Asia.
Economic Forecast for Aerospace: Headwinds Ahead
AlixPartners’ 2010 Global Aerospace & Defense Review cites several factors that could cause the economic recovery to be slow over the next two years:
* Global aircraft deliveries were down 9 percent in January-March 2010, while aircraft orders (which dropped 70 percent in 2009) have only partially recovered.
* Airline passenger traffic was down 7.5 percent and cargo down 22 percent in the 12 months prior to April 2010.
* Signs point to big cuts in defense spending ahead, as the U.S. and other countries’ defense departments face fallout from the world financial crisis.
*Continued weak demand for business jets will continue, due to still fragile corporate profits and a “politically incorrect” image.
* Consumer disposable income will be cut further by government deficit-reduction efforts, as reinforced in recent G20 meetings.
