Article
citation information:
Balcerzak, T. Global aerospace
industry risks. Scientific Journal of
Silesian University of Technology. Series Transport. 2019, 102, 05-27. ISSN: 0209-3324. DOI: https://doi.org/10.20858/sjsutst.2019.102.1.
Tomasz BALCERZAK[1]
GLOBAL AEROSPACE
INDUSTRY RISKS
Summary. The
global Aerospace industry is expected to improve in 2018 as its revenue is
predicted to rise by 4.1% , doubling last year’s 2.1% growth. The
recovery of global gross domestic product (GDP), stable commodity prices, and
increased passenger travel demand are likely to ramp up growth in the
commercial aircraft sector in 2018. This article reviews the performance of the
aerospace industry in 2017 and 2018 and speculates its growth in the incoming
years. It also outlines the performance across the major aerospace markets and
discusses trends that will impact the industry. The article forecasts the
mergers and acquisitions activity in 2018 that lays the foundation for further
growth in this space. Key findings are:
• Commercial
aircraft sector revenues are expected to grow by 4.8% as production levels are
likely to be robust while the defence sector revenues are likely to record 3.6%
growth as the US defence budget recovers after experiencing multi-year
declines.
• The spiralling
demand for passenger travel is driving commercial aircraft production and is
responsible for the record high backlog of 14,215 units at the end of 2017.
• In 2018, global
Mergers and Acquisitions (M&A) activity is expected to remain strong in the
aerospace sector, being driven by pricing pressures from aircraft OEMs and
their expansion of high-margin aftermarket services. This has pushed suppliers
to consolidate for scale and cost-effectiveness.
Keywords: aerospace, aerospace risks, aviation
technology, aerospace sector, passenger travel, commercial aircraft, aerospace
forecast
1. INTRODUCTION
After a year of subdued growth in 2017, the global
Aerospace and Defense (A&D) industry is expected to improve in 2018 with
Deloitte[2]
forecasting industry revenues to grow by about 4.1% . The industry closed the
2017 year with 2.1% revenue growth, in line with Deloitte’s forecast of
2.0% (refer to Deloitte’s 2017 Global aerospace and defense industry
outlook).
Recovery in global gross domestic product (GDP)
growth, stable commodity prices including crude oil and growth in passenger
travel demand, especially in the Asia-Pacific, the Middle East, and the Latin
America regions, is likely to drive the commercial aircraft sector growth in
2018. At the end of 2017, commercial aircraft backlog remained at an all-time
high at about 14,000 units, representing nine and a half years of current
annual production rate. Almost a 100 additional aircraft are expected to be
produced in 2018, compared to 2017, aircraft manufacturers ramp up production
in response to growing aircraft demands.
Mergers and Acquisitions (M&A) activity has
accelerated over the past year, with more than a two-fold increase in deal
value. In 2018, the A&D industry is likely to continue to experience
increased M&A globally, driven by original equipment manufacturers’
(OEMs) continued pressure on suppliers to reduce costs and boost production
rates. M&A activity in the US defence sector could accelerate in 2018 as
increased defence budgets are likely to provide certainty to military planners.
Large prime contractors are anticipated to consider acquiring small to
mid-sized companies to gain access to new technologies and markets. The defence
sector in Europe is unlikely to see large M&A deals, however, companies may
pursue Joint-Ventures (JVs) to strengthen their market positions.
With higher production requirements for both aircraft
and defence equipment in the future, it is critical for A&D companies to
invest in new and advanced technologies. This will help the industry to be at
the forefront of manufacturing, hence, enhancing productivity and efficiency.
Fig. 1. Global Aerospace and Defence 2018 forecast.
Source: Deloitte’s 2017 Global aerospace and defense industry outlook
2.
COMMERCIAL AIRCRAFT SECTOR OUTLOOK
The global commercial aircraft sector is projected to
record a 4.8% growth in revenue in 2018. The sector is likely to experience a
stronger growth rate in 2018 after its low performance in 2017, primarily
driven by an increase in production levels as aircraft manufacturers set to
boost production in response to the growing aircraft demand. An estimate of
about a 100 additional commercial aircraft are to be produced in 2018,
primarily led by the narrow body aircraft. Major aircraft manufacturers, Airbus
and Boeing, have indicated that production rates increased in 2018 and 2019,
with the Airbus likely to ramp up production of its A320neo in 2018. Boeing is
expected to increase the production rate of its 737 from 47 per month in 2017
to 52 per month in 2018 and 57 per month in 2019.
Fig. 2. Net profit of
commercial airlines worldwide from 2005 to 2018
(in billion U.S.
dollars)
Source: The Statistics
Portal https://www.statista.com/register/corporate
Travel demand (Revenue Passenger Kilometers or RPKs)[3] increased at a CAGR[4] of 5.1 percent over the last 10 years. Annual passenger enplanements rose
from about 2.5 billion in 2008 to more than 4.0 billion in 2017(Figure 2). The
year-on-year increase in 2017 was led by the Asia-Pacific region and is likely
to continue to drive the passenger growth in the long-term due to the
increasing share of the middle class population in the region, forecasted to
grow to 65% by 2030 as compared to 46% in 2015.
Over the next 20 years, passenger traffic is expected
to grow at an Average Annual Growth Rate (AAGR) of 4.7%, contributing to
increased aircraft production (Figure 3). Strong order intake in the past
several years resulted in a record high commercial aircraft backlog of 14,215
units at the end of 2017, representing nine and a half years of current annual
production.
Fig. 3. Annual growth in
global air traffic passenger demand from 2005 to 2018
Source: The Statistics
Portal https://www.statista.com/register/corporate
Fig. 4.
Commercial aircraft unit backlog (as of December 2017)
Source:
Deloitte’s 2017 Global aerospace and defence industry outlook
The large commercial aircraft market is a duopoly
market with Boeing and Airbus collectively holding approximately 80% of the
entire market share. Both have aggressively pursued orders with emerging market
airlines and the growing low-cost carrier segments, often with favourable
financing terms. Boeing and Airbus are the only players in the wide-body
segment, while also dominating the narrow-body segment. Other players, such as
the Bombardier and the Embraer, are present in the regional aircraft segment.
The narrow-body aircraft manufacturers also face some competition from
Bombardier’s C-Series and will also have new entrants such as COMAC and
Mitsubishi to contend with. COMAC, in particular, is likely to succeed given
its ability to support a captive domestic market and the Bombardier has secured
investment in C-Series by the province of Quebec in return for equity. However,
in the medium term, opportunities for the new players are likely to be limited
given the dominance and long order books of the Airbus-Boeing duopoly, which has
effectively locked out new entrants.
Consolidation has continued within the fragmented
commercial aerospace supply chain, this is due in part to the support of the
OEMs seeking stronger suppliers with access to capital as partners who can
support and partly fund new programme developments. Larger tier one and tier
two suppliers have increased bargaining power with the OEMs given constrained
production capacity. This has led to expanded margins at these levels at the
expense of the OEMs. It has also driven increased M&A activity and
increased pricing as strategic and private equity groups compete for scarce
assets.
In Maintenance, Repair and Overhaul (MRO)[5] and broader aftermarket, structural headwinds have created challenges. New
sensor technology allows engine OEMs to control timing the of maintenance and
the OEMs have changed their business models toward “through life total
care”, reducing MROs share of spend. Airlines have been more rigorous on
MRO costs. Aftermarket-focused businesses with long-life programmes have seen
traditional high-margin pricing affected by the growth in the surplus parts
market, being aided by the increased supply of parts as older aircraft are on
verge of retirement.
As shown in Figure 5 above, passenger travel demand
increased almost sevenfold from 1981 to 2017, with the passenger load factor
(aircraft utilisation) rising 27.5% (nominally growing from 63.7 to 81.2% )
during the same period. Likewise, the number of people flying per year also
continued to grow, with a greater than five times increase from 1981 to 2017.
This was mainly led by increased affordability of tickets as the average return
fare (adjusted for inflation) of US$355/per passenger in 2017 was 64% lower
than that of 1996 (Figure 6).
Global demand for new aircraft production over the
next 20 years is estimated to be 36,780 aircraft (excluding regional jets).
Figure 4 depicts the sales order and production history of commercial aircraft
from 1981 through 2017, showing a 248.5% increase in production during the period.
On the basis of a seven-year moving average, production levels over the past 20
years have increased by 138.3% and over the next decade, commercial aircraft
annual production is likely to increase by 25.0% .
As aircraft production continues to grow, there are
key challenges the industry needs to consider among other factors;
strengthening the supply chain, effective programme management, and use of new
and advanced technologies to become more efficient (Figures 7 and 8).
Fig. 5.
Global airline traffic (1981 to 2018F)
Source:
Deloitte’s 2017 Global aerospace and defense industry outlook
Fig. 6. The lines
converge. As oil prices rise, the fundamentals begin to converge in 2018
Sources: CAPA –
Centre for Aviation, IATA, oilprice.net, The Economist
Fig. 7. Aircraft
innovations and airline practices have improved fuel efficiency
Source: IATA: http://www.iata.org
Fig. 8.
History and forecast for large commercial aircraft orders and production
(1981 to
2020F)
Source:
Deloitte’s 2017 Global aerospace and defence industry outlook
After
experiencing the delivery of 1,481 units, which indicates moderate growth in
2017, it is estimated that 1,585 commercial aircraft will be
produced in 2018, which is a 7.0% increase over 2017, and a 24.4% increase
compared to five years ago. In five years, the sector is expected to produce
1,788 aircraft, a 20.8% increase from 2017. Figure 9 illustrates aircraft
production, indicating the solid growth experienced by the commercial aircraft
sector since 2009.
However, demand for widebody aircraft is expected to
soften due to overcapacity in the industry, airlines deferring upgrades as they
wait for the super-efficient next-generation widebodies, as well as the robust
order backlog of widebodies. Moreover, with oil prices stabilising at
low-to-mid levels, older aircraft have become more economical, potentially
making new widebodies less attractive.
Fig. 9.
Aircraft deliveries (2009 to 2036F)
Source:
Deloitte’s 2017 Global aerospace and defence industry outlook
As the demand for commercial aircraft continues to
increase, new production programmes are emerging from other regions,
particularly China and Russia. With 815 orders from 28 customers for Commercial
Aircraft Corporation of China’s (COMACs) C919 aircraft programme, China
is observing some success with respect to its domestically manufactured
commercial aircraft, whose deliveries are likely to commence in 2021. Given the
fact that majority of its customers are Chinese airlines and leasing companies,
COMAC also plans to increase its focus on potential buyers in Africa, Middle
Asia, and West Asia.
Nevertheless, to compete with the existing duopoly,
these new entrants will face several challenges, ranging from procurement of orders
from established global carriers, risk of cost and schedule over-runs,
certifications from European and US regulators, to establishing a track record
of safe and reliable operations.
3. OUTLOOK FOR AEROSPACE ACTIVITY IN 2018.
M&A deal value in the global A&D industry
reached US$51.5 billion in 2017, with the number of transactions down to 210,
compared to 234 transactions in 2016. Value of M&A transactions in 2017 was
close to the record high levels of 2015, primarily led by the mega-deal of
Rockwell Collins’s US$30.2 billion acquisition by United Technologies
Corp. In 2015, M&A deal value peaked, however, this was heavily weighted by
one transaction, the Berkshire Hathaway Inc.’s US$35.8 billion
acquisition of Precision Castparts Corp.
Pricing pressures from aircraft OEMs and their
expansion of high-margin aftermarket services have pushed suppliers to
consolidate for scale and cost-effectiveness. For example, aerospace supplier
United Technologies Corp. agreed to acquire avionics and interiors maker Rockwell
Collins, Inc. for US$30.2 billion to increase its negotiating power with
aircraft manufacturers. Efforts to rebuild missile defence systems,
geopolitical tensions and the US administration’s rising defence budget
drove deal-making in the defence sector in the US. Notable deals include
Northrop Grumman Corp.’s US$7.8 billion deal to acquire fellow defence
contractor Orbital ATK, Inc. The deal is expected to provide Northrop Grumman
with greater access to government contracts and expand its arsenal of missile
defence systems and space launch systems (Figure 10).
Fig. 10. Global
aerospace and defence industry mergers and acquisition activity
(2008 to 2017)
Source: Deloitte’s
2017 Global aerospace and defence industry outlook
In 2018, the 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. In addition, the
Northrop Grumman and Orbital ATK deal could prompt other defence contractors to
broaden their offerings and increase negotiating leverage through acquisitions.
Deal activity in the US defence sector could accelerate in 2018, as the
DoD’s[6] spending bill will likely provide certainty to military planners. Large
prime contractors are expected to buy small to mid-sized companies to gain
access to new technologies or certain markets. In Europe, the defence sector is
not likely to observe large deals, however, companies may choose to pursue JVs
to bolster their market positions. The focus is probably on acquisitions
related to space, data analytics, cybersecurity, and advanced technologies.
Valuations of A&D companies have been on the rise,
led by continued improvements in financial performance and growth expectations.
Specifically, the price earnings (P/E) ratio[7] of the A&D industry is now 30.0% higher than it was five years ago.
Figure 11 shows the increase in enterprise value on both earnings before
interest, tax, depreciation, and amortization (EBITDA)[8] and revenue basis.
Fig. 11. Global A&D
industry valuations (2013 to 2017)
Source: Deloitte’s
2017 Global aerospace and defense industry outlook
A&D companies are also entering into cross-border
JVs, which remains an important determinant in expanding international access
to new markets and technology. Cross-border JVs create a new third entity that
combines certain assets of the two partners while maintaining the ownership
profile of the original entities. As compared to M&A, JVs are easily
achievable because the risk is shared between both JV partners and the outlay
of investment is less than an outright acquisition. Changes in regulations,
access to new technologies, the need for local partners, and a fast-growing
A&D industrial base are likely to make India and the Middle East “hot
spots” for cross-border JVs in the near-term for both commercial aircraft
and defence sectors. China is also expected to be an important destination for
JVs in the commercial aircraft and equipment space.
4. GLOBAL AEROSPACE
INDUSTRY SHAREHOLDER RETURNS PERFORMANCE.
The key A&D industry indices (including the
US-based S&P[9] A&D[10] Select Index and the European STOXX[11] Europe Total Market A&D Index) continued to outperform the broader
market indices. Driven primarily by higher profitability, free cash flow, return
on invested capital, and future growth expectations, the S&P A&D select
index experienced a 402% improvement over the past 12 years, compared to a 115%
improvement for the S&P 500 Index. Additionally, share buyback programmes
by A&D companies have also contributed to the solid growth in their stock
prices in the recent past. Figure 12 portrays the performance of the industry
indices in comparison with the broader market indices.
Main global aerospace and defence risks area are
(Figure 13):
·
Compliance threats originating in politics, law, regulation or corporate
governance.
·
Operational threats impacting the processes, systems, people and overall
value chain of a business.
·
Strategic threats related to customers, competitors and investors.
·
Financial threats stemming from volatility in the markets and in the
real economy.
Fig. 12.
Global A&D industry indices’ performance (2006 to 2018YTD)
Source:
Deloitte’s 2017 Global aerospace and defense industry outlook
Fig. 13.
Global A&D industry risks. Top 10 risks in aerospace and defense (A&D) - Ernst & Young-EY[12],
Report 2017
Fig. 14. Fuel costs of
airlines worldwide from 2011 to 2018, as percentage of expenditure
Source: The Statistics
Portal https://www.statista.com/register/corporate
Top aerospace and defence risks are:
1. Volatility in geopolitical and
economic environments (Figure 14).
2. Managing the supply chain.
3. Competition in domestic and
international markets.
4. Managing and retaining talent.
5. Ability to perform on key
contracts.
6. Compliance to a wide range of
regulations and restrictions.
7. Capacity to innovate.
8. Failure to realise the benefits
of M&As and partnerships.
9. Exposure to cybersecurity
events.
10. Foreign currency and
commodity price fluctuations.
5. MANAGING AND RETAINING TALENT
A highly engaged talented workforce can give companies
the edge in the marketplace (Figure 15, Figure 16, and Figure 17).
Because of the specialised nature of the business,
companies are highly dependent on the continued services of key engineering
personnel and executive officers. They are also dependent on the development of
additional management personnel and the hiring of newly qualified engineering,
manufacturing, marketing, sales and management personnel for operations.
Fig. 15. Boeing foresees
a big need for new pilots in the next 20 years
Source: https://www.boeing.com
Fig. 16. Boeing Cabin
Crew forecast
Source: https://www.boeing.com
EY conducted a survey to identify the major challenges
faced by A&D companies around talent management. Respondents identified
ineffective succession planning, and lack of diversity as key areas of
opportunity for improvement. A list of the top talent management challenges
faced by A&D companies is given below (Figure 18).
The products and services provided by A&D players
involve sophisticated technologies and engineering, alongside complex
manufacturing and system integration processes (Figure 19).
Fig. 17. Major airlines
with the most female pilots
Source: http://www.iswap.org
Fig. 18. Top talent
management challenges in Aerospace and Defence
Source: Ernst &
Young-EY, Report 2016
Fig. 19.
Forecast for US commercial MRO maintenance technician demand and supply by year
Source:
Frost and Sullivan Report 2018
Because of the highly specialised nature of the
business, companies must hire and retain skilled and qualified personnel
necessary to perform the business-critical processes. In addition, certain
personnel may be required to receive security clearance and substantial
training in order to work on certain programmes or perform certain tasks.
Companies need to manage leadership development and
succession planning in their business. While most of the companies have
processes in place for management transition and transfer of knowledge, the
loss of key personnel, coupled with an inability to adequately train other personnel,
hire new personnel or transfer knowledge, could significantly impact negatively
on their ability to perform under their contracts. On the other hand, as
A&D players expand their operations internationally, it becomes
increasingly important to hire and retain personnel with relevant experience in
local laws, regulations, traditions and business practices. Inability to
attract and retain qualified personnel, and maintain a diversified workforce at
different levels of the organisation might lead to materially adverse effect on
revenue and earnings. Additionally, the average workforce demographic continues
to shift toward a higher proportion of employees nearing retirement.
Considering the fact that companies lose experienced personnel, it becomes imperative
that they develop other employees, hire new qualified personnel, and
successfully manage the transfer of critical knowledge.
Competition for skilled personnel is intense, and
companies are subject to the risk of not being able to hire or retain personnel
with the requisite skills or clearances. A&D companies have to increasingly
compete with commercial technology companies outside the industry for qualified
technical, cyber and scientific positions as the number of qualified engineers
is decreasing and the number of cyber professionals is not meeting demand. As
commercial technology companies grow at a faster rate or face fewer cost and
product pricing constraints, they may be able to offer more attractive
compensation and other benefits to the candidates. At the point where demand
for skilled personnel exceeds supply, A&D companies could experience higher
labour, recruiting or training costs in order to attract and retain skilled
employees. However, would they be unable to hire or retain talent, then they
may experience difficulty in performing key contracts. Furthermore, at
difficult times, endeavours to increase operational efficiency through
workforce reductions, and consolidating and relocating certain operations may
challenge the companies’ ability to retain talent.
Fig. 20.
Volatility in the geopolitical and economic environment. Forecasted growth in
GDP air traffic and aircraft fleet (2016-2035). Top 10 risks in aerospace and
defense (A&D)- Ernst & Young-EY, Report 2017
Most A&D companies have global footprints, so
their operational, as well as financial performance, depend significantly on
the geopolitical and economic conditions in their key markets. On the side of
the commercial aerospace, sustained economic growth and political stability are
major underlying factors that drive long-term growth in the air traffic. On the
defence side, political and economic conditions of the developed, as well as
emerging countries, play an instrumental role in dictating the
governments’ allocation of funds for the military.
In recent years, the European financial markets have
undergone significant disruptions due to concerns regarding the ability of
certain countries in the eurozone to reduce their budget deficits and refinance
or repay their sovereign debt obligations. On the other side of the globe,
China has reduced its GDP growth target, indicating apprehensions of a slowdown
of the world’s largest growing economy.
History has over time shown a great correlation
between economic growth and growth in demand for commercial aircraft. The chart
below highlights the expected growth in GDP, air traffic and aircraft fleet
size across different geographic regions.
The chart (Figure 20), clearly shows that Asia and the
Middle East are expected to witness the highest economic growth in the next two
decades. In line with the GDP growth in these regions, air traffic and aircraft
fleet size are also expected to grow significantly during the same period. On
the other hand, aircraft fleet growth as well growth in air travel would
develop at a slow rate in North America and Europe, as the economic growth in
both of these regions is expected to be low at close to 2% per annum.
In the last five years, there has been much volatility
in the GDP growth of the top five defence markets. Over the next five years,
while the GDP of seven of the top 10 defence markets (the US, France, Japan,
the UK, Korea, Russia and Germany) are expected to remain near-stagnant,
China’s GDP growth rate is expected to decline and India and Saudi Arabia’s
GDPs are expected to increase.
6. COMPLIANCE TO A WIDE RANGE OF REGULATIONS AND
RESTRICTIONS
Companies have to comply with the laws and regulations
related to the award, administration and performance of contracts, especially
for government contracts. They face various laws and regulations relating to
the export of products and services as well as the use of technology. Failure
to comply with any of the regulations could result to severe consequences, such
as the imposition of fines and penalties, termination of contracts, suspension
or debarment from bidding on or being awarded government contracts, and civil
or criminal investigations or proceedings.
With the inclusion of government customers and defence
agencies in the customer base of A&D companies, it becomes obvious that
they have to operate in a highly regulated environment. This subjects A&D
companies to added scrutiny on bribery and corruption . Furthermore, A&D
companies often work in partnerships in a number of small and non-consolidated
entities. These entities have a lower level of control and oversight from their
parent groups and presents a higher risk of fraud and corruption. Operating in
countries with high level of corruption often multiplies the level of exposure
to bribery and corruption litigations. Involvement in bribery or corrupt
practices may lead to severe consequences, such as order cancellations or even
blacklisting. For instance, a leading European defence company was blacklisted
by the Government of India on the instance of alleged corruption charges
related to a helicopter acquisition programme.
7. CAPACITY TO INNOVATE
Offerings in the A&D industry involve high-end
technologies and engineering, as well as complex manufacturing and system
integration processes. The demand from the end users is evolving and changing
regularly. To strive in the current era of rapidly evolving technologies across
industries, A&D companies need to constantly focus on innovations in their
product and services offerings. It is also very important for A&D players
to create the right infrastructure for fostering innovation through funding
in-house R&D, collaborating with industry partners and teaming up with the
academia.
Some of the technologies that A&D players use in
their manufacturing and other business processes are decades old. They need to
upgrade these technologies on a regular basis as well as adopt new and advanced
technologies to stay competitive. The advancements in the internet of things
and digital technologies make it even more important for aircraft manufacturers
and their suppliers to look for opportunities to offer new products and
services in both the original equipment (OE) and aftermarket spheres of their
businesses. While OEMs are using digital technologies to improve the performance
and efficiency of their aircraft and parts, aftermarket service providers are
extensively using sensors to capture in-flight data to facilitate predictive
maintenance and associated services.
8. EXPOSURE TO CYBERSECURITY EVENTS.
A&D players transfer large volume of data
including flight data monitoring, flight operations quality assurance and load
management between end users, manufacturer and service provider. Companies
involved in the A&D value chain routinely exchange confidential data on
specifications, technology and performance of equipment or services with the
objective of enhancing collaboration on design, development and support. All of
such data is valuable for cyber terrorists with unethical clients in the
industry, who use this stolen data to copy products and undercut prices to
outperform the competition.
In commercial aerospace, key aircraft functions, such
as flight navigation and control, propulsion, landing and braking, and
information systems, are managed by embedded electronic systems and
safety-critical software. The critical data generated during the time of the
flight is analysed for better flight safety and optimisation. On the defence
side of the business, upgrading of existing weapons, as well as increased focus
on intelligence, surveillance, and reconnaissance (ISR) systems, have increased
the information flow within the supply chain. Furthermore, the confidential and
sensitive nature of the information around programme specifications and
technologies involved necessitates the use of reliable and enhanced
cybersecurity solutions.
Modern-day increased dependency on internet network by
military organisations has brought about the frequency and rise of
sophisticated and organised cyber attacks. Furthermore, the traditional methods
of defences against cyber threats have become ineffective against new types of
cyber attacks and advanced malware. Companies need to invest in the next
generation cybersecurity solutions to be able to prevent themselves against
advanced cyber attacks.
9. FOREIGN CURRENCY AND COMMODITY PRICE FLUCTUATIONS.
Operating in a number of countries across continents,
A&D companies are susceptible to fluctuations in foreign currency exchange
rates. The following chart highlights the fluctuations in the yearly growth
rate of the average value of major currencies against the US dollar in the last
five years.
Given that most of the A&D companies have global
footprints, they earn a significant portion of their revenues in currencies
other than the currency of their home market. With foreign currency
fluctuations, the value of the revenues earned in foreign currencies
fluctuates. The impact of the currency rate fluctuations on the overall
financials of a company is even more magnified when a significant portion of
its revenue comes in foreign currencies.
In addition to its effect on the revenues earned,
currency fluctuations also affect the receivables, payables and return on
assets denominated in foreign currencies. Moreover, production in various
countries adds to the risks associated with fluctuations in the foreign
exchange rate as compared with the home currency.
10. CONCLUSIONS
Companies must prepare themselves to counter the
threat of a tight credit environment and order cancellations. An economic
slowdown in any of the key markets for A&D players could potentially result
into tightening in the credit markets, low liquidity, and extreme volatility in
credit, currency, commodity and equity markets (Figure 21).
Fig. 21. Major Trends in
Commercial Aviation Segments
Source: Frost and Sullivan Report 2018
Customers might review their order intake strategies
and eventually postpone or cancel existing orders for aircraft. In face of the
declining financial health of their customers, A&D companies would need to
provide increased sales financing to the customers to support their purchases,
therefore, increasing its exposure to the risk of customer defaults.
After reaching a peak in 2015, order intake for
commercial aircraft is expected to gradually drop over the next few years.
Airbus's net orders for new aircraft declined by 32% in 2016 (731 in 2016
compared to 1,080 in 2015), while Boeing's net orders declined by 13% (668 in
2016 as compared to 768 in 2015). Order intake in the first two months of the
full year-FY17 has further slowed down. While this is not a problem given the
order books, it suggests growth will flatten once production has ramped.
Furthermore, reductions in public spending for
defence, homeland security and space activities could also result in loss of
sales. In addition, changes in the economic environment and a reduction in
defence budgets may adversely affect the financial stability of the key
suppliers and their ability to meet their performance requirements, impacting
the ability of the OEMs to meet their customer obligations.
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Received 09.11.2018; accepted in revised form 11.01.2019
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