2017 Global aerospace and defense sector outlook
Growth prospects remain upbeatContents
Summary 1
Commercial aerospace sub-sector outlook 2
Defense sub-sector outlook 6
Regional outlook 16
Major macroeconomic and geo-political 19
trends and their potential impactGlobal aerospace and defense sector outlook
Stable global gross domestic product
(GDP) growth, relatively lower commodity
prices including crude oil, strong
passenger travel demand, especially in
the Middle East and Asia Pacifc region,
will likely drive the commercial aerospace
sub-sector growth. Commercial aircraft
backlog is at an all-time high of ~13,500
aircraft units, representing more than
nine and a half years of current annual
production rate.2 Specifcally, strong
global airline passenger trafc and
improved global airline profts, primarily
on account of lower fuel costs will likely
drive increased large commercial aircraft
production and in turn commercial
aerospace revenues in 2017 and 2018.
We expect about 96 more aircraft to be
produced in 2017 as compared to 2016.3
On the defense side, resurgence of global
security threats, expected increases in
US defense budgets, as well as higher
defense spending from other major
regional powers such as Japan and India
will likely promote global defense sub-
sector revenue growth in the near future.
In particular, we see an upside for US
defense expenditure, given the outcome
of the recently concluded US elections.
In addition to boosting the number of
troops, the US military will likely add
more aircraft and ships, which will drive
revenue growth at large defense primes
over the next few years.
Summary
The global aerospace and defense (A&D) sector is likely to experience stronger
growth in 2017, following multiple years of positive, but a subdued rate of
growth. Deloitte forecasts the sector revenues will likely grow by about 2.0
percent in 2017.1
2017 Deloitte forecast
experiencing only a 0.3 percent increase – marginal growth expected as
aircraft production recovers in 2017 after a slowdown in 2016
2017 as defense spending in the US has returned to growth, after multi-year
declines in defense budgets and future growth may be driven by the newly
elected US administration’s increased focus on strengthening the US military
grow 20.6 percent, while defense subsector’s operating earnings will likely rise
7.0 percent
revenue and 9.3 percent growth in operating earnings in 2017
spurt of 12.7 percent in operating proftsGlobal aerospace and defense sector outlookCommercial aerospace
sub-sector outlook
A slight recovery after a slowdown in
2016 will primarily be due to aircraft
production levels resuming growth
in 2017, driven by strong demand for
next-generation aircraft and growing
passenger trafc, especially in the Asia-
Pacifc and the Middle East regions.
Although 96 additional large commercial
aircraft are expected to be produced in
2017, continued pricing pressure and
product mix changes by customer airlines
will likely result in only a marginal change
in commercial aerospace sub-sector
revenues. Major aircraft manufacturers,
Airbus and Boeing, have indicated
production rate increases will occur in
2017 and 2018. Airbus’ A320neo is likely
to ramp up production in 2017, whereas,
Boeing estimates that the production
rate of its 737 will rise from 42 per month
currently to 47 per month in2017 and 52
per month in 2018.5
Travel demand (revenue passenger
kilometers or RPKs) has been increasing at
a compounded annual growth rate (CAGR)
of 4.7 percent over the last ten years,
with passenger enplanements rising
from slightly over 2.0 billion to more than
3.5 billion annually during this period.6
Increase in travel demand has been
primarily driven by global demographics
and wealth creation in Asia and the
Middle East, resulting in a signifcant
order increase for new aircrafts.
The global commercial aerospace sub-sector will likely experience a 0.3 percent
increase in revenues in 2017.4
Figure 1:Global airline trafc (1981 to 2016E)
Passenger and freight trafc are likely to
grow at an average annual growth rate
(AAGR) of 4.8 percent and 4.2 percent,
respectively, over the next 20 years,7
contributing to higher aircraft production.
Several years of above average order
intake has resulted in commercial aircraft
backlog at the end of 2015 being at an
all-time high of ~13,500 aircraft units,
representing more than nine and a half
years of current annual production.8
As illustrated in Figure 1, passenger travel
demand increased more than fve times
from 1981 to 2016, while passenger load
factor (utilization of aircraft) has risen 25.6
percent (nominally growing from 63.7
percent to 80.0 percent) during the same
Source: Deloitte analysis of the data from International Air Transport Association (IATA), “Fact Sheet,” accessed in November 2016, https://iata.
org/pressroom/facts_fgures/fact_sheets/Documents/fact-sheet-industry-facts.pdf; and Airlines for America, “Annual Results World Airlines,” accessed in
November 2016, http://airlines/data/annual-results-world-airlines/
0%
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90%1357
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Passengers (billion) RPKs (trillion) Pax load factor (%)Global aerospace and defense sector outlook
period.9 Moreover, the number of people
fying per year continued to rise, with a
greater than four times increase over
1981 to 2016, driven by afordable ticket
pricing and route availability.10As shown
in Figure 2, there has been a 47.0 percent
decrease (consumer price infation or CPI-
adjusted) in airfares since 1990, leading to
increased demand for air travel.11
Total global demand for new aircraft
production over the next 20 years is
estimated to be 35,155 aircraft (excluding
regional jets).12 Figure 3 illustrates
sales order and production history of
commercial aircraft from 1981 through
2016, showing a 220.0 percent increase in
production in that period.13
Figure 2: Real average passenger revenue per passenger kilometer (CPI adjusted, in cents)
Source: Deloitte analysis based on data from IATA, Industry Statistics, June 2016 iata/pressroom/facts_fgures/fact_sheets/Documents/fact-
sheet-industry-facts.pdf
“Increase in travel demand
has been primarily driven
by global demographics
and wealth creation in
Asia and the Middle East,
resulting in a signifcant
order increase for new
aircrafts.“
Using a seven-year moving average,
production levels over the last 20 years
have increased 120.5 percent since 1996.14
Over the next decade, commercial
aircraft annual production levels are
anticipated to increase an estimated
29.3 percent.15With such growth
expected, there are two signifcant
trends and challenges to consider—
the attractiveness of this market and
the resulting entrance of new global
competitors to the existing duopoly, and
the impact on the supply chain.
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