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Global Aerospace and Defense (A&D) Market Overview June 21, 2018

Copyright © 2018 Deloitte Development LLC. All rights reserved. 2

Global aerospace and defense (A&D) market overview

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The global A&D industry is expected to strengthen in 2018, experiencing a 4.1 percent growth

Commercial aircraft sector revenues expected to grow 4.8 percent–nearly 100 additional aircraft to be produced in 2018, compared to 2017, as aircraft manufacturers ramp up production in response to growing aircraft demand

Heightened global security threats, recovery in US defense budgets, as well as higher defense spending from other major regional powers are likely to drive global defense sector revenue growth in 2018, which is expected to be about 3.6 percent

US A&D industry revenue is projected to be up 3.7 percent, with a 9.9 percent jump in operating profits

5European A&D industry is expected to record a 4.9 percent rise in revenue and a 22.3 percent growth in operating earnings


,

• Increasing share of middle class in APAC likely to continue to drive passenger growth

• Increased ticket affordability–average return fare (adj. for inflation) in 2017 was 64 percent lower than in 1996

Growth in passenger traffic

• Over the next 20 years, passenger traffic is expected to grow at an average annual growth rate (AAGR) of 4.7 percent

Increase in commercial aircraft demand

• Global demand for new aircraft production over the next 20 years is estimated to be 36,780

• 100 additional commercial aircraft are expected to be produced in 2018, primarily led by narrow body aircraft

Strengthening

the supply

chain

Effective

program

management

Ch

alle

ng

es

Global commercial aircraft sectorRevenues likely to grow about 4.8 percent in 2018


1,788

(2022)

1,585

(2018)

1,481

(2017)Glo

bal

Air

craft

Prod

ucti

on

Record high commercial aircraft backlog of 14,215 units at the end of 2017, representing nine and a half years of current annual production

• After a moderate growth in production in 2017 to 1,481 units, it is estimated that 1,585 commercial aircraft will be produced in 2018

• Demand for widebody aircraft likely to soften due to overcapacity in the industry, airlines deferring upgrades as they wait for super-efficient next-generation widebodies, as well as the robust order backlog of widebodies

• As the demand for commercial aircraft continues to increase, new production programs are emerging from other regions, particularly China and Russia

• New entrants likely to face several challenges - procurement of orders from established global carriers, risk of cost and schedule over-runs, certifications from European and US regulators, establishing a track record of safe and reliable operations


Global defense sector revenues expected to grow 3.6 percent in 2018

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In 2018, global defense sector revenues are expected to grow 3.6 percent as global tensions continue to persist and a majority of the affected countries plan to recapitalize and improve their defense posture

Global defense spending is anticipated to grow at a CAGR of about 3.0 percent over the 2017–2022 period, crossing US$2 trillion by 2022

Heightened global security threats, recovery in US defense budgets, as well as higher defense spending from other major regional powers such as India, China, and Japan are likely to drive global defense sector revenue growth in 2018 and beyond


$1,557 $1,682

$2,023

-2.0%

0.0%

2.0%

4.0%

6.0%

$-

$300

$600

$900

$1,200

$1,500

$1,800

$2,100

FY

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8

FY

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9

FY

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FY

201

1

FY

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FY

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FY

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FY

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FY

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6

FY

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7E

FY

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FY

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FY

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0F

FY

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1F

FY

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2F

Global defense spending (US$ billion)

Global Defense Spending (US$ billion) y/y growth (%)

Global defense spending is anticipated to grow at a CAGR of about 3.0 percent over the 2017–2022 period, crossing US$2 trillion by 2022

Threats continue to evolve from traditional land based force on force, to maritime disputes, hybrid warfare, island building, high seas piracy, urban insurgency, lone-wolf civil attacks to cyber-attacks.

The US administration’s increased focus on strengthening the nation’s military has already led to higher US defense budgets for 2018 to 2019

International demand for defense and military products is increasing in the Middle East, Eastern Europe, North Korea, and the East and South China Seas.

“The US is the largest defense spending nation, representing 36 percent of the total global military spend.”

Heightened security threats are likely to result in higher defense spending from other major regional powers such as India, China, and Japan

Defense

sector growth

drivers


Changes in international trade agreements

Changes to trade agreements, especially in the US and the UK could lead to disruption in the global supply chain

Proposed renegotiation of the North American Free Trade Agreement (NAFTA) could increase costs for the U.S. suppliers with operations in Mexico

Brexit could put an end to UK’s tariff-free access to the EU market

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OEM–supplier relationships

As OEMs continue to focus on cost reduction, relationship between manufacturers and suppliers is likely to evolve

This may result in reduced margins for commercial aerospace suppliers

Defense Commercial Aerospace

US foreign policy changes

Impact on defense exports will likely depend on the new US administrations’ actions with respect to changes in foreign policy

While the US is pressurizing allies to increase defense spending, they may not essentially buy weapons and defense equipment from US defense companies, given the strengthening of the US dollar against global currencies

Pressure on contractors as Pentagon plans acquisition reforms

As Pentagon plans to reform and improve the Defense Department's acquisition system, pressure on defense contractors to accept more risk is likely to continue

There is already increased focus on fixed-price contracts to avoid cost-overruns

Global Aerospace & Defense IndustryKey risks and challenges


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Suppliers may struggle to ramp up production

With commercial aircraft backlog at a record-high (representing ~9.5 years of current annual production), some suppliers may struggle to ramp up their production to keep up with the increasing backlog

Defense Commercial Aerospace

Brexit likely to disrupt supply chains and trade flows

U.K.’s exit from the European Union may disrupt supply chains and create new trade barriers as the country would renegotiate trade agreements with the EU and other major trading nations

Global Aerospace & Defense IndustryKey risks and challenges

New entrants likely in the commercial aircraft market

As the demand for commercial aircraft continues to increase, new entrants are emerging from other regions, particularly China and Russia

These entrants may challenge the current duopoly in the long-term, especially in the market for narrow-body aircraft


Regional perspectives (1/2)

Country/Region A&D industry trends

India

India is likely to be the third largest aviation market by 2025

The country is forecast to have a demand for a record 2,100 new aircraft in the

next two decades, worth US$290 billion, with the majority being single-aisle planes

India’s 2017-18 defense budget reached US$57.4 billion to become the third

largest globally

China

China’s aviation sector is expected to be the world’s largest (by passengers) by

2024

The country is estimated to have a demand of 7,240 commercial aircraft worth

US$1.1 trillion in the next 20 years

China’s defense budget was the second largest globally in 2017, at US$192.5 billion

(up 5.2 percent YoY)

For 2018, the country is aiming at an 8.1 percent growth in defense budget,

making this the largest year-on-year increase in the last three years

Japan

Passenger traffic growth in Japan is estimated to be around 2.7 percent over the

next 20 years, one of the lowest in Asia Pacific

Recent growth in low-cost carriers (LCCs) is likely to drive commercial aircraft

demand in the region

Japan’s defense budget ranked in the top 10 globally, with the budget increasing by

1.4 percent to US$43.5 billion in 2017


Regional perspectives (2/2)

Country/Region A&D industry trends

Middle East

The pace of growth in passenger traffic in the Middle East slowed down in 2017 due

to US travel bans as well as the prohibition of carrying large electronic devices on

board

Over the next two decades, passenger traffic in the Middle East is forecast to grow

at 5.6 percent, creating demand for 3,350 additional aircraft

The pace of growth in defense budgets of the two key countries in the region—the

UAE and Saudi Arabia—declined recently

Low-to-mid level oil prices are likely to continue to impact future defense spending

in the Middle East

United Kingdom

The United Kingdom’s 2017 defense budget grew 1.4 percent to US$51.2 billion,

moving up to the fourth position, from the fifth in 2016

Over the next three years, the country is expected to invest nearly US$38.6 billion

(£30 billion) to strengthen its military forces

As Brexit nears, there is ambiguity around its impact on the UK A&D industry—

access to and mobility of the workforce as well as the negotiation of trade

agreements with the EU and other major trading nations are likely to impact

productivity and profitability of the sector

France

The defense budgets of France remained flat in 2017 at US$45.6 billion, despite

which, the country’s ranking moved up from eighth in 2016 to seventh in 2017

France’s defense spending is likely to grow over the next five years given the

pressure from the US administration on NATO countries to increase military

expenditure to 2.0 percent of GDP (France’s current military expenditure is at 1.4

percent of GDP)


Other industry trends

US A&D exports reported a slight decline in 2017; Value of M&A transactions in 2017 neared the record high levels of 2015

Exports of US A&D products stood at $144.7 billion, down 1.3 percent over 2016

Although US A&D exports increased during the 2010–2016 period, the pace of year-over-year growth weakened—18.7 percent in 2012, 9.4 percent in 2013, 7.9 percent in 2014, 4.0 percent in 2015, and 1.7 percent in 2016.

Although the contribution of US A&D exports globally will continue to remain significant, the magnitude of growth will likely depend on the new US administration’s regulatory actions with respect to export of aerospace and defense products.

US A&D exports

M&A deal value in the global A&D industry reached US$51.5 billion in 2017

In 2018, global M&A activity is expected to remain strong in the aerospace sector, driven by OEMs’ continued pressure on suppliers to reduce costs and boost production rates

Deal activity in the US defense sector could accelerate in 2018, as the DoD’s spending bill will likely provide certainty to military planners. The focus is likely to be on acquisitions related to space, data analytics, cyber security, and advanced technologies.

M&A activity in 2018

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

$-

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

$160.0

2010 2011 2012 2013 2014 2015 2016 2017

US A&D Industry Gross Exports (US$ billion)

Gross Exports % Change

$13.9

$4.1 $7.0

$27.4

$9.1 $4.3

$9.0

$54.9

$20.4

$51.5

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150

200

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$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0 No. o

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M&

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eal Valu

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$ B

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Global A&D Industry M&A Activity

M&A Deal Value ($ Billion)

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Copyright © 2018 Deloitte Development LLC. All rights reserved.

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