From our work with some of the world’s leading aerospace companies, we understand the ongoing transformations taking place in the sector. Here are our perspectives on what 2019 might have in store.
Order intake to slow down
With the limited number of ‘open slots’ available in the next five years, and aircraft order backlogs reaching ~14,000, 2019 is likely to see the start of a slowdown in new order intake. However, aggressive campaigns by Airbus and Boeing to raise the production rate for the A320neo and 737 aircraft models may create ‘open slots’ for new customers in 2021/2022. Further, the expected entry of Boeing’s new mid-market plane may open up the market in 2025.
The pressure of production ramp-up may create supply chain disruptions
The pressure on OEMs to ramp-up production requires huge investment, close management of supply chains, and detailed monitoring of the many risk factors that are beyond control, such as a sudden swing in oil prices or an economic slowdown. The complete dependence on the ability of component/sub-component suppliers to increase production rates, while maintaining the required quality, may lead to missed production targets and shortages of components for aircraft/engines in 2019.
A hard Brexit would slow down economic growth, and in turn, A&D growth
The economic impact is clear – if GBP loses ground to the EUR and USD, materials and supply chain costs may rise, causing margins to fall. Further, if there is a hard Brexit, trade disruption will pose a significant near-term risk, the cross-border checks could complicate the already strained supply chain, and the cost of production will increase as manufacturers undertake stockpiling of goods and management. Restriction on the movement of people may also promote shifts in manufacturing footprints.
Though the large manufacturers such as Airbus and Rolls-Royce will be impacted, the smaller suppliers will suffer the most because they lack the scale, resources and liquidity to manage abrupt swings in working capital, and relocation of personnel and manufacturing sites. An interesting supply chain situation may arise, wherein a smaller supplier will have to move its production base outside the UK – to maintain proximity to the manufacturer – if any large OEM shifts its manufacturing operations.
M&A activity to remain strong
2018 was a strong year for global aerospace M&A activity and this is likely to continue into 2019, but with a slight shift in strategy. We see two key trends on the horizon: large aerospace companies focusing on acquisitions of small to mid-sized companies with specific skillsets; and we may see more mega-deals in 2019, following the UTC and Rockwell Collins deal at the end of 2018.
OEMs are likely to put pressure on suppliers to reduce costs and improve production rates, which in turn has prompted suppliers to consolidate for scale and bargaining power. The ongoing consolidation trend will make the supplier base more concentrated in the near-term.
Digitised aircraft
2019 will see a continued drive to leverage the network of sensors which constantly collect data from aircraft for real-time monitoring of all components for predictive maintenance. Availability of the right information at the right time will help determine the condition of in-service equipment, and also predict the timelines of maintenance. As a result, it will be more convenient to schedule corrective maintenance actions and prevent equipment failure, which will eventually translate into reduced costs for operating an aircraft.
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