Study: Expect Aerospace Industry Growth Countered With Continued Cuts in Defense

An earlier study showed us that the US auto industry is poised for growth over the next few years.

Now, a new analysis concludes that the aerospace and defense industry can expect growth, too although it's likely that any gains on the commercial side will be counterbalanced with the burden of tightened national defense budgets.

Last week, the global business-advisory firm AlixPartners released a study which forecasts a 25 percent jump in commercial-aircraft deliveries by 2014, driven in large part by increasing air-traffic demand globally.

At the same time, however, the defense sector will be focused on affordability.

What will these contradictory challenges mean to supply chains? David Fitzpatrick, managing director at AlixPartners and co-leader of the firm's Global Aerospace and Defense Practice, anticipates a bumpy ride.

"While bruised, the aerospace and defense industry emerged from the economic downturn in better shape than most industries, due largely to increased demand in the defense sector, plus some pretty vigilant cost-cutting overall," he said. "However, the industry now faces the big squeeze' the contradictory challenge of quickly ramping up production for expected growth in the commercial sector coupled with the need to address expected cuts and therefore a sharpened focus on affordability in the defense sector. And those squeezed the most will be the supply chain."

More specifically, the AlixPartners study predicts that global aircraft production is expected to increase 30 percent to 50 percent over the next three years. However, original-equipment manufacturers (OEMs) will face several challenges as they ramp up to meet this demand. For instance, OEMS will need to:

innovate and develop products to meet demand for more fuel-efficient aircraft

face capacity and talent-acquisition constraints, which in turn, could lead to severe quality issues

deal with capacity constraints of their own (Tier-2 and Tier-3) suppliers that have under-invested in capability development

anticipate specialty raw-materials shortages (e.g., carbon fiber and titanium fasteners)

cope with ongoing supply-chain delays and shortages resulting from the disaster in Japan

Meanwhile, on the defense side of the ledger, global demand looks to be weakening. According to the study, US defense spending is expected to decrease by at least 12.2 percent by 2013 and by 6.5 percent by 2016, while defense spending in Europe, already down 2.8 percent in 2010, is expected to continue to drop sharply in the coming years, led by the UK's recent announcement of an 8 percent cut by 2015 and promised drops of up to 25 percent in smaller European nations.

In response to these kinds of cutbacks, AlixPartners recommends that larger defense companies pursue a more diverse business mix that will lead to partnerships, M&A and consolidation among smaller players as larger companies pursue new markets.

More details about the study are available here.

TAGS: Finance
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