Analysis of the U.S. Aerospace Industry

A Hot Tip about Aerospace in the United States

Posted on: 8 Jan 2010

EXECUTIVE SUMMARY

 

The year 2008 was an eventful twelve months for the U.S. and global aerospace industry. After several years of sustained growth, capped by the largest upturn in the U.S. aerospace market since World War II, the U.S. and global aerospace industry are facing challenges from a number of factors, the largest of which is the current global economic downturn. In spite of the unquestioned effect of the downturn, the U.S. aerospace industry actually experienced modest growth overall in 2008. Although the near-term outlook for 2009 remains somewhat uncertain, the global economic fundamentals remain in place to support long-term, sustained industry growth.

 

Despite a number of factors driving down the overall global economy, the U.S. aerospace industry as a whole showed reasonable strength in 2008. When viewed in the context of recent record performance, the industry‘s 2008 financial results are encouraging. According to the U.S. Bureau of the Census, 2008 total sales of U.S. aerospace products and parts were $257 billion, an increase of 3.4 percent over 2007. After-tax profits on these sales were $15.3 billion, which represented a decline of 16.3 percent over 2007.

 

Aerospace industry exports remained relatively strong at $82.4 billion, which was a 5.2 percent decrease from 2007. Although the corporate parents of a number of aerospace manufacturers experienced declines in income for 2008, in some cases the aerospace segment of these manufacturers not only booked a profit but actually realized a profit increase in 2008 over 2007.

 

Most notably, GE, which is the corporate parent of aircraft engine manufacturer GE Aviation, realized a 2008 income of $17.4 billion, which was a 21.60 percent decrease from 2007. GE‘s stock value also fell in 2008, losing more than 50 percent of its market value by year end. For the same period, however, GE Aviation actually experienced a 14.3 percent profit increase.3 Aside from the global economic downturn, other factors impacted the U.S. and global aerospace market. As in 2007, continued weakness of the U.S. dollar against the euro and other major foreign currencies made U.S. products more affordable in foreign markets. Dollar-denominated goods such as large civil aircraft (LCA) manufactured by Boeing, aircraft engines from Pratt & Whitney and GE, rotorcraft produced by Bell/Textron and Sikorsky, and unmanned aerial systems (UAS) produced by numerous smaller aerospace companies, benefitted from a favorable exchange rate in comparison to competitors from Europe, Japan and elsewhere. The exchange rate advantage likely mitigated to some degree the effects of the global economic downturn on the U.S. aerospace market.

 

The rapid rise in oil prices during the first seven months of 2008, which capped a more steady increase since 2003, adversely impacted the global commercial aviation industry. Although oil prices moderated somewhat by the end of the year, the long-term impact of higher fuel costs on the global aerospace industry, which provides aircraft, parts and service for commercial aviation, is significant. As a result of rapidly increasing oil prices in the first half of the year, fuel expenses accounted for 32 percent of operating expenses for global aviation companies in 2008, which was almost double the 2004 level of 17 percent. Although fuel as a percentage of total operating expense is forecast to drop to 29 percent in 2009, the long-term upward trend is incentivizing civil aviation operators to look more aggressively for ways to reduce their fuel expenses.4 This search is driving demand for more fuel-efficient aircraft like Boeing‘s 787 Dreamliner as well as new fuel efficient engines like Pratt & Whitney‘s PW1000G PurePower Geared Turbofan and GE Aviation‘s GEnx models. These new, more efficient aircraft and engines will help operators reduce fuel consumption and lower operating expenses.

Finally, aircraft and engine manufacturers are engaged in research on use of alternative aviation fuels produced from a variety of non-petroleum sources. In the long term, these alternative fuels may also help operators reduce fuel costs and thus maximize profitability. Another factor driving the global aerospace market is the ongoing trend towards consolidation.

 

Both domestic and international ventures that facilitate market access, as well as cost, risk and information sharing, are becoming more numerous. U.S.-only joint ventures (JV) like the Engine Alliance, a 50/50 JV between GE Aviation and Pratt &Whitney as well as international ventures like Superjet International, formed by Italian aerospace company Alenia Aeronautica and Sukhoi Civil Aircraft to market and sell Sukhoi‘s Superjet 100, are representative of this trend.

 

The largest and potentially most influential consolidation, however, is Russia‘s United Aircraft Corporation (UAC). UAC is a Russian government-owned joint stock company that consolidates the scientific and production potential of the Russian aircraft industry as well as the intellectual, industrial and financial resources for new aircraft development into a single state-owned and controlled entity.5 UAC has already negotiated design and production agreements with a number of U.S. and European aerospace companies, and UAC senior leadership has set a goal of becoming the world‘s third largest aircraft manufacturer by 2015.

 

As in years past, the issue perceived by the industry to have the largest impact on competitiveness is U.S. export control policy. Concerns about the ability to receive a U.S. export license for aerospace products, especially communications satellites, have caused foreign competitors to ?design out? U.S. components, purchase products containing no U.S. parts, and strengthen partnerships with other countries in order to avoid the need to apply for a U.S. export license. Even though the U.S. State Department has worked diligently to process licenses faster and make the application process more transparent, the negative perception continues to encourage foreign counterparts to seek products elsewhere, thereby hurting U.S. competitiveness. The greatest impact has been felt by satellite components suppliers, but the impact of U.S. export control policies is widely shared by all aerospace sectors.

 

Taking the uncertainty of current economic conditions into consideration, it is difficult to predict overall aerospace industry performance in the near term. In the longer term, however, prospects are good for continued, steady growth. Large civil aircraft, rotorcraft, general aviation aircraft, regional and business jets, engines/powerplants, communications satellites, military unmanned aerial systems (UAS), and airport infrastructure and safety equipment should continue to experience steady growth.

 

Other sectors, such as launch services, are experiencing lower but steady growth as they recover from market disruptions and/or adapt to commercial markets. The launch services sector could experience faster growth if the demand for satellite telecommunications services increases. The maintenance, repair and overhaul (MRO) market has finally recovered to pre-9/11 levels, and growth in this sector will be led by expanding aircraft fleets in India, Eastern Europe, South America and China. The market for civil/commercial UAS remains stagnant in the absence of civil regulations for certification and operation in the national air space; however, the Federal Aviation Administration (FAA) and civil aviation authorities in Europe and Asia are working towards rationalization of civil certification procedures. Key markets for U.S. aerospace exports remain India, China, Russia, Japan, and Europe.

 

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Posted: 08 January 2010

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