Aerospace & Defense: Outlook 2018

AerospaceSociety predicts the global aerospace and defense industry to experience a stronger growth in 2018, perpetuated by favourable macro-economic conditions, relatively lower commodities prices, and complex global geopolitical challenges.

On road to recovery

Looking back to 2017, the Global Defense and Aerospace Manufacturing industry underwent modest growth estimated at 2% [1], driven primarily by EU and US defense sectors, the world’s second and third largest economics respectively by GDP. With global economies still recovering from spending-cuts perpetuated by 2008’s crisis and 2014’s oil glut, AerospaceSociety predicts the industry will continue recovery into 2018.

In the United States, rising government debt, currently estimated at over 105% of GDP [3], forced review of its spending on military aircraft, missiles and satellites. Moreover, with the war in Iraq completed and combat operations in Afghanistan winding down, the United States and allied nations have cut spending on defense, with US federal funding for defense falling for most of the five-year period [2]. The new administration in the US, however, is signaling support for additional spending and global defense sales, perpetuated by 2017’s $350 Billion deal with Saudi Arabia, US largest arms sale in its history. New arms deals and regional conflicts are expected to further drive growth and revenue as well.

Non-Western countries increased spending on defense products [2]. Economic growth in markets growth allowed more nations to spend on military procurement, while geopolitical tensions in the Middle East and Asia provided further incentive to buy new aircraft and missiles, most notably in Saudi Arabia, UAE and Iran. Large arms suppliers such as China and Russia are rapidly expanding their defense funding, aimed at increasing geopolitical challenges in South-China Sea and Middle East respectively.

Over the five years to 2022, industry total revenue is forecast to climb at an annualized rate of 3.9% to $309 billion [2], driven primarily by procurement and introduction of new platforms such as the F-35 stealth fighters, unnamed aerial vehicles (UAVs), missiles and avionics upgrades. Moreover, climbing non-NATO defense spending will continue to provide more funding for the procurement of industry products, offsetting creeping spending by the West.

Key External Drivers

External forces currently affecting the performance of the Global Military Aircraft & Aerospace Manufacturing industry can be summarized as follows:

1 - Macro-Economic Conditions

When countries’ economies grow (as reflected by GDP), more funds are available to spend on industry goods. Conversely, if their economies decline, there are fewer funds to use on industry products. Global GDP growth is estimated to hit 3.1% in 2018 [4], with China and India leading the emerging economies at 6.7% and 7.1% respectively, while EU and US, world second and third largest economies, are expected to grow at a more modest 1.9% and 1.5% respectively, correlated to projected Defense spending [2].

2 - Input Costs

S&P500’s GSCI All Commodities index is currently trading at the lowest level in 50 years, signaling lower input costs to Aerospace manufacturing. However, steel is the dominant input in the manufacture of military aircraft and aerospace equipment. With expected prices of steel to rise in 2018 [5], the cost of production is expected to increase as well, forcing manufacturers to increase product prices to salvage profitability and focus on cost reduction programs.

3 - Geopolitical Forces

An advanced understanding of the geopolitical terrain is essential, including country’s history — its colonial past, wars, rivals, and alliances — and how this “burden of history” guides a country’s current political and military decisions toward new threats or conflicts. Current geopolitical turbulences in the Middle-East, North-Korea and South-China Sea are accelerating spending on Defense technologies to deter potential threats, represented by the fight against terror, containing North-Korea, and handling the increasing global assertiveness of Russia and China.

Looking Forward

Overall, AerospaceSociety predicts a positive outlook for the global aerospace and defense industry, with stronger growth in 2018, supported by favourable macro-economic conditions, stable commodities prices, and global geopolitical challenges. In the following reports, AerospaceSociety will review specific markets, and evaluate separate companies’ performances.

[1] Deloitte 2017 Global aerospace and defense industry outlook.

[2] IBISWorld Industry Report, 2017 Global Military Aircraft & Aerospace Manufacturing

[3] US Bureau of Public Debt

[4] The World Bank GDP Data 2018

[5] 2018 STEEL PRICE FORECAST, Trading Economics

Member Login
Welcome, (First Name)!

Forgot? Show
Log In
Enter Member Area
My Profile Not a member? Sign up. Log Out