Following a rough patch for the aerospace industry, the future looks bright.
According to Forbes:
There’s no doubt that the Aerospace and Defense industry is strategic to the global economy. Since the first powered flight in 1903, the industry has grown by leaps and bounds. The industry in the U.S. nearly accounted for $909 billion in sales in 2019, while in Europe the total turnover was over 250 billion euros.
While the industry is often known for its cyclicality, 2020 saw the worst downturn in its history. After a decade of continued growth, the aircraft production rate increased year on year to fulfill the growing demand for air travel, reaching the peak in 2018 with a total of 1,606 aircraft delivered from Airbus and Boeing.
The Repercussions Of The Global Pandemic
In 2020, airlines suffered enormous financial hits due to global travel restrictions and various border closures. International flights saw the worst drop of 68% versus domestic flights which suffered a 40% drop. In our analysis, we saw major airlines suffering a 60% drop in revenue compared with 2019, while cargo revenue was up by some 3% on average.
On the manufacturing side, the industry suffered its first crisis in 2019 with the grounding of the B737Max, followed by a 30% reduction in the overall production rate of commercial aircraft from Airbus in 2020 as a result of the Covid-19 crisis.
In a broad market analysis that I conducted, manufacturers globally suffered between a 30% drop and a 50% drop in sales dependent on their customer portfolio, some manufacturers with a larger share of commercial aerospace portfolio saw between a 60%-70% drop.
Defense contracts provided some hedging for suppliers with large defense portfolios, where the majority of defense companies maintained positive growth in 2020. The majority of aerospace suppliers experienced a difficult year, while not all manufacturers were able to turn a positive profit. We calculated an earnings before interest, taxes, depreciation and amortization (EBITDA) margin in 2020 to be on average around 14% of the margins in 2019.
In general, government support schemes coupled with original equipment manufacturers (OEMs) like Airbus that maintained an artificial production rate, provided sensible protection to the supply chain against any major structural disruption. And now, the current question is about the shape of the recovery. The main concern remains as to the ability of those suppliers to ramp up at a steep rate when required to support the recovery.
The Industry Rallies For Recovery
We expect recovery to kick off in the second half of 2021. And it might take a few years, perhaps until 2024, for air travel to reach the global level of 2019. The next four to five years will see significant transformation across the supply chain, technology development and in the way we fly and transport goods by air.
According to various forecasts by Cirium and Eurocontrol monitor, domestic and leisure travel will be the quickest to recover, signaling that the demand for air travel is still healthy. However, international travel and business travel recovery will take longer to recover to 2019 levels. In our analysis and based on data that we obtained from sources such as S&P Cap IQ and Market Intelligence, we expect domestic flight and low-cost carrier revenue for 2021 to grow by 90% year-over-year.
Manufacturers and suppliers are preparing for the first ramp-up in production of single-aisle aircraft in Q3 by OEMs such as Airbus. We anticipate seeing on average an 11% increase in revenue across the supply chain compared with 2020. Most suppliers who suffered losses in 2020 are expected to return to positive profits this year. Recovery is expected to strengthen in 2022, signaling more consolidation and more research and development (R&D) spending to mature the necessary technology for the next generation aircraft program planned for 2025.
If we look at the deal activity and consolidation throughout the industry, based on data we obtained from S&P cap IQ and based on our analysis, global deal activities volume was healthy, with the U.S. seeing a growth in the deal volume. Meanwhile, in Europe, government support and measures taken by Airbusslowed deal activities. Across the globe, the average deal size in 2020 was about half the average in 2019, signaling smaller transactions and consolidation among fragmented sectors of the industry.
Looking Ahead To The Future
We expect this trend to continue in 2021 and 2022, with more restructuring and divestiture carve-outs from larger corporates taking place. Industry attractiveness and valuation multiples continue to be at healthy levels despite the severe industry impact, signaling investor’s confidence in the industry.
During my analysis work, I interviewed more than 20 executives, CEOs and private equity investors across the industry in Europe and the U.S., and I asked them about their priorities and their prospects for the industry. Based on my analysis of their responses, here are some of the top tips for doing business in the aerospace industry:
• Manage cash and liquidity: Focus on keeping operations running and maintaining relationships with customers and suppliers — on time, on cost and on quality delivery all remain critical.
• Assess and review your product portfolio: Consider potential alternative customers/sectors for your existing products.
• Review people strategy: Consider how to retain talent, as well as keeping teams engaged, developed and motivated.
• Review your strategy beyond 2023: Identify areas to inject capital, as well as seek out potential mergers and acquisitions (M&A) opportunities.
On the whole, the outlook for the industry rebound is extremely positive. The high barriers to entry coupled with long-term contracts offer a way through any potential crisis. The road to pandemic recovery is a bumpy one, with the vaccine rollout proving to be challenging and several questioning the longevity of the vaccine and veracity of the different viral strains.
We are more likely to see a more staged recovery over the next four years rather than a quick return to form. I firmly believe that more opportunities lie ahead — that we are over the worst and upturns should start soon. There is no shortage of capital and certainly no shortage of good assets.
Suppliers and companies in the industry should be thinking about growth and start planning now. It is complex and risky but highly rewarding when carefully executed.