Challenges
Challenges the Aerospace and Defense Industry Faces
The aerospace and defense industry is mainly dependent on macro-economic factors and primarily controlled by government agencies. It comprises fivekeysegments, namelyCommercial and Aviation, Military Aircraft, Space Systems, Ground Defense, and Shipbuilding.The industry observes moderate growth globally, hindered by the dependence on a large number of sole-source suppliers, long lead time, financial constraints, order backlogs leading to extensive inventories, and cyber threats.
Dependence on a Large Number of Sole-Source Suppliers
The suppliers of composite components, wing skins, seat track, assemblies, and aircraft engines are consolidated and few. As a result, companies are forced to rely on select suppliers for their needs. And frequent delays in receiving products pose a risk to production halt, eventually leading to cost overrun and delayed delivery.
Order Backlogs and Large Inventories
The aerospace and defense business nature have a longer lifespan; therefore, companies are compelled to maintain high inventories. On the other hand, fluctuating market dynamics pose significant challenges for these players, as high stocks render them incapable of responding rapidly to market changes.
Financial Constraints across the Supply Chain
The need for substantial capital investments to drive innovation hinders industry growth. Suppliers partner with OEMs in long-term contracts, wherein OEMs invest in suppliers for innovation. The scenario results in reduced profit margins for OEMs and weaker liquidity among suppliers.
Latest Thinking
Where the industry is heading
Merger and Acquisition (M&A) Deals
The aerospace and defense industry is highly influenced by the macro-economic environment, which includes volatility of oil prices, industry regulatory trends, political stability, and other global situations. At present, the COVID-19 pandemic has slowed down merger and acquisition (M&A) deals compared to the previous years.
Source: Janes Capital Partners
Q1 2020 observed relatively fewer deals, and the M&A momentum gained in 2019 has been lost. Increasing debt loads, unstable geopolitical conditions, unresolved 737 MAXaircrafts issues, and environmental concerns around air travel contribute to the ongoing industry slowdown. However, the industry is expected to observe a different set of M&A activities, which would transform mega defense mergers to supply chain- and technology-related consolidation.
M&A activities are expected to gain pace once again. In time, increasing liquidity with investors will see the return of investment inflow in the industry. The current lending rates and low demand for aftermarket services are expected to keep investors apprehensive for the moment and in the short term, which will adversely affect the second level of the supply chain, namely tier II and tier III companies that require large-scale capital funding. Adding to this, a highly constrained credit market is expected to slow down business activities.
Solutions
Solutions
Impact
Impact
Our clients from the aerospace and defense industry include OEMs, suppliers, connectivity providers, systems integrators, distributors, and other stakeholders of the ecosystem. Straits Research helps companies with the latest technological insights and social and consumer trends related to the industry dynamics. Our consulting services have been vital in educating clients about the latest trends in the A&D industry, notable advancements in Industry 4.0.
One of the leading OEMs in the aerospace and defense industry consulted Straits Research regarding uncertainties around technological adoption in various regions. We provided the client with key business strategies, which helped them decrease government spending and a comparative analysis of the industry's product portfolios. Backed by extensive industry expertise, our team has helped companies improve their product portfolios and supported them with an exhaustive study of current investments and divestment opportunities.
Covid-19: What happened and the What next
Impact of COVID-19 on Aerospace and Defense
The impacts of Covid-19 on the aviation industry are being felt in many forms — from a sudden decline of passengers travelling to world’s increased dependency on air cargo operations.
With continued risk of the contagion, airports around the world have recorded a dip in passenger volumes by over 90 percent, which has forced airlines to ground their passenger fleet. Due to a large-scale grounding of the passenger aircrafts, the global air freight industry has lost nearly 50-55% of its cargo capacity that gets checked in these passenger planes.
According to a survey, over 70% of leaders across major aerospace manufacturing companies have responded to a loss of finances including stalled operations leading to a reduced productivity. Some of the major challenges faced by the aerospace industry include:
- Disrupted supply chain
- Difficulties with funding
- Low demand resulting in downsizing of manufacturing facilities
- Reduced profitability over the financial year
The International Air Transport Association estimates that the industry would subsequently need a cash infusion of up to $200 billion as well as financial support to ride this economic crisis.
Several of the defense contracts that were slated to commercialize in 2020 have been put on hold due to the pandemic, forcing countries to focus their spending on healthcare sector. The grim scenario will lead to a major dip in terms of revenue generated from military contracts. A bulk of revenue generated in military segment would originate from renewals, and refurbishment activities. An optimistic opinion cites the recovery from COVID-19 by August 2020 onwards which would offer vendors in the market with new revenue generation opportunities.
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