6 Key Takeaways from the Deloitte 2021 A&D

By March 1, 2021blog

1. Commercial Aerospace

A slow recovery in passenger travel can affect the supply of aircraft and revenue from the industry

Commercial air travel is recovering steadily, even at a stable interest. In 2021, passenger traffic is expected to remain approximately 40 percent below pre-pandemic peaks. An effective COVID-19 vaccine could lead to short-term growth in passenger traffic. However, the continuing harm to lucrative business travel, which could take two to three years to recover.

Certain behavioral changes among passengers have resulted from the pandemic, with an increased emphasis on short-haul and domestic travel. The International Air Transport Association (IATA) does not expect a return to pre-pandemics by 2025, the average air travel duration is predicted to decrease by around 8.5 percent globally.

The selling of aftermarket parts and services may also remain weak due to expected lower aircraft utilization rates, especially as airlines postpone discretionary maintenance or upgrades to conserve cash. As aftermarket parts also have higher margins, this is likely to have a disproportionate effect on profitability.


2. Defense

As countries prepare to retain their military capability, the sector remains stable

Defense budgets and revenues for defense contractors are expected to remain relatively stable in 2021, as military programs, especially given geopolitical uncertainties, continue to be critical to national defense. In 2021, global defense expenditure is projected to rise by around 2.8%, passing the $2 trillion mark. Throughout the world, countries continue to spend on improving their military strategies.

Defense spending will remain unaffected in the United States in 2021. To revive the economy and reduce the effect of the pandemic on economic development, some nations are diverting spending to other social services. In May 2020, China reported a military budget of $ 178.2 billion, up 6.6 percent from the previous year, and Japan is growing its military air-sea capabilities.

Overall, instability in global and diversified supply chains of defense could lead in 2021 to minor short-term cost overruns and schedule delays. The increased work on defense programs helped the company move more than 400 employees from its business to defense. This move may move the company from its commercial business to defense. The outcome is increased competitive pressure for mainstream defense firms and the entrance into the defense business of new solutions and technologies.

3. Space

Satellite broadband, space discovery, and militarization to accelerate the development

The space launches for the first half of 2020 are about on par with previous years, considering the ongoing pandemic. If funding continues to rise and costs decrease, there are likely to be increased opportunities for the space industry, primarily in the field of satellite broadband internet access. In 2021, space launch services are expected to report strong growth, with business growth estimated to rise by more than 15 percent.

Satellite launch costs have already decreased from $200 million in the last decade to almost $60 million at present and have the potential to drop further to as low as $5 million. The creation of the “Space Force,” a sixth branch of the US military, in 2019, could drive investment in the public sector in 2021.

Also, the US Space Command, which manages space operations utilizing Space Force-managed personnel and equipment, is likely to assist A&D companies in speeding up investments in advanced technologies and capabilities. China and Russia are both working on improving their space-based military capabilities.

4. Supply Chain

The development of supply chains into more resilient and dynamic networks in the industry

Even with the pandemic, lower aircraft demand and restrictions on the movement of people and goods led to a collapse of many critical supply chains for A&D. This affects smaller suppliers, especially those with heavy exposure to commercial aerospace and the aftermarket industry. It is expected that suppliers that rely primarily on the commercial aftermarket will experience lower volumes. Depending on whether they concentrate on commercial aerospace, defense, or aftermarket, the crisis is likely to continue to impact suppliers in various ways. Concerning sourcing critical parts, any spillover from the commercial side could leave defense OEMs vulnerable.

The focus of the industry is likely to turn to the transformation of supply chains into more resilient and dynamic networks in 2021. Tactics such as onshoring, vertical integration, and improved cyber defenses may be used to achieve this. To improve their supply chains, many A&D businesses are now using an ecosystem approach.


5. Mergers and Acquisitions (M&A)

As A&D companies pursue long-term growth, deal activity is expected to rebound in 2021

2020 remained stagnant with year-to-date deal value only at around $17 billion after a good year for M&A in 2019. Global deal activity is likely to recover in 2021, driven by improved liquidity, especially among financially strong firms. In comparison, relative to their global rivals, US A&D companies trade at lower valuations, with an EV/EBITDA of 11.6x, 12.1% below the five-year average.

Well-capitalized suppliers are likely to seek acquisition opportunities, as lower commercial aerospace production rates could cause weaker players to sell and restructuring properties. Companies are likely to seek M&A to create scale in specific A&D markets, while others could launch vertical and horizontal integration strategies to capture more value, drive cost-competitiveness, or acquire targeted niche capabilities and emerging technologies.

However, a tightening of US foreign investment rules put in place to limit opportunistic acquisitions by foreign entities could affect some cross-border deals.

6. Technological Developments and Innovation

Emerging innovations for market transition and long-term growth

Although the industry has been affected by the pandemic, continued technological advances in 2021 will likely drive growth over the long term and form the A&D industry. Some innovations that could change the A&D sector include the following:

  • Advanced Air Mobility (AAM)
    • Industry partners and government agencies such as the National Aeronautics and Space Administration (NASA) and the Federal Aviation Administration (FAA) are already improving the technology for AAM, and industry players are focused on safely translating AAM globally into routine commutes. This new method of travel could bring a complete paradigm shift and change mobility entirely. More companies could reach the AAM market in 2021 and an increased number of OEMs could progress to the piloting and testing stages, paving the way for commercialization.
  • Hypersonics
    • Since the beginning of the 2000s, the defense industry in the United States has been aggressively exploring the production of hypersonic weapons, and its latest activities have concentrated largely on hypersonic glide vehicles and cruise missiles. Though China and Russia are both displaying an increasing interest in hypersonic technology, the United States has been working to quickly control the production of hypersonic systems and their near-term launch. Russia and China have also carried out multiple hypersonic glide vehicle experiments and will already have operating capabilities in 2020, but the United States is likely to perform three flight tests of the hypersonic glide body in 2021.
  • Electric Propulsion
    • As technology advances exponentially, electric propulsion systems are being built by many firms worldwide, which may minimize greenhouse emissions, make flights quieter and reduce costs. There are also numerous research start-ups interested in the production of electric propulsion engines, in addition to major aerospace propulsion firms. In 2021, as corporations grow rapidly in technology development, we may see groundbreaking flights using hybrid or electric propulsion engines.
  • Hydrogen-Powered Aircraft:
    • If OEMs around the world continue to manufacture more fuel-efficient and environmentally sustainable aircraft, there is a growing awareness of hydrogen fuel as a power source. Although several start-ups are already piloting these aircraft, Airbus SE announced at the end of 2020 that it will build a zero-emission aircraft that would rely on hydrogen as the primary energy source and could enter service as early as 2035. Deloitte expects other aircraft OEMs to follow suit in 2021, and others may likely announce hydrogen-fuelled aircraft designs and production plans. Start-ups already designing these aircraft will also showcase concepts, perform test flights, and may start trial operations, especially for freight services.
To learn more, follow this link: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-eri-aerospace-defense-industry-outlook.pdf