While many are bullish on the commercial aerospace market, it does face some immediate headwinds that are tempering the gains made over the past few years.
The current softness in new orders may mean that operators who do come to the table enjoy more of a buyers’ market.
Flat production capacity, coupled with the ongoing production ramp-up, will continue to put pressure on cost and drive additional investments in efficiency, production automation, cost visibility, and supplier development. Lagging aircraft retirements and additional shop visits for older platforms will provide more opportunity for cost-competitive third-party MROs and perhaps delay OEMs’ ability to differentiate with proprietary service offerings targeted at newer platforms.
Forecast commercial aerospace growth is largely being driven from North America and Asia, with major OEMs claiming that cyclical ups and downs are smoothing out. Unlike in recent years, growth year-to-year has also slowed, with the second quarter of 2016 projected to have 12.7% growth QoQ, but shrink by -0.3% YoY. The last half of 2016 looks to be spent catching up with 2015 levels, leading to an overall 0.8% 2016 YoY growth rate. Looking further ahead, 2017 is shaping up to deliver 6.0% annualized growth.
While there has been some belt-tightening at a few companies, production capacity and employment are both relatively stable compared with 2015 levels. Both are expected to increase during 2017. Major areas of cost – materials and labor – have remained much the same as 2015, with a slight decrease projected for 2017.
Overall, the econometric modeling that Accenture has carried out, together with the results from our poll of aerospace executives, support the case for a slowdown in 2016 air traffic growth compared to 2015, with 2017 picking up. We are also likely to see a slowing in the number of aircraft retirements as lower fuel prices positively impact the economic basis for maintaining older aircrafts in service.
Geopolitical risks continue to weigh on industry executives’ minds. In the next 12 months, political instability and worsening economic conditions are indeed identified as key areas of concern.
Looking at a 12-24 month time-horizon, terrorism and regional armed conflicts loom larger as risk concerns. Interest and exchange rates are seen as low-risk areas, but concerns over these increase in the longer term.