The aerospace sector stands out as one of the most high-profile, fast growing markets on both the global trading stage and within the context of the U.S. economy. According to Deloitte's latest study of the worldwide defense and aerospace industries, revenues grew in the commercial vertical of these sectors as well as the segments devoted to defense during 2017. Such figures are bound to inspire considerable enthusiasm among company leaders in this space, as well as investors and other prominent stakeholders, particularly in light of how growth has slowed across many other industries in the last few years.
That being said, it's also quite clear that defense-related aerospace is having a better go of it than commercial aerospace - at least as of 2017's end. No one familiar with the market would likely be shocked if commercial aircraft sales bounced back somewhat in 2018, but rising geopolitical tensions the world over virtually guarantee that defense will continue to surge this year. Given that both halves of aerospace are important markets for AMETEK ECP, we've taken the time to examine some of the recent trends dominating the field and identify aspects that keep commercial and defense simultaneously together and apart, so customers are better prepared to choose the perfect AMETEK components for their aerospace needs.
Defense aerospace's unique advantage
Deloitte's report found that total commercial and defense aerospace revenues both saw growth from 2016 to 2017. But nothing within the field is stagnant. Defense's pace of expansion over that time frame is much stronger - 3.9 percent, or about $13 billion, to hit a final 2017 tally of $361.5 billion in revenue. This compares with commercial aerospace's 1.2 percent (approximately $4 billion) growth and $323.1 billion revenues by the end of 2017.
Defense aerospace has been bolstered by an advantage its commercial counterpart simply can't equal - the existence of significant unrest across the globe - causing numerous world powers to increase their spending by considerable factors. According to an Ernst & Young report on the global aerospace and defense sectors from early 2017, both Russia and China increased their national defense budgets by an 8 percent compound annual growth rate between 2011 and 2016. These are years in which the U.S. steadily reduced defense spending, before changing course and increasing spending on armaments and related technologies again after the 2017 inauguration of President Donald Trump. (As of Sept. 4, a bill that would hike military expenditures by $675 billion is currently under review in Congress, according to Politico.)
Backlogs plaguing commercial aerospace
By contrast, commercial aerospace revenues haven't declined or stopped growing, but they increased at a much slower rate and also remained in the midst of a problem defense doesn't have to worry about - major production delays. Deloitte has noted that aircraft manufacturers (and, by extension, third-party original equipment manufacturers responsible for building necessary parts and components) all over the world have incomplete work orders on their hands - an all-time-high backlog of 14,215 unfinished planes.
While the research firm also believes that at least 36,800 jets will be completely manufactured and delivered to their buyers between 2017 and 2036, the pace of that order fulfillment remains an open question. Not only is this a major concern, but there is also considerable uncertainty and risk whether or not that long-term delivery estimate will fully line up with the eventual need or demand for new commercial aircraft over the next two decades or so. All in all, these problems are not affecting the defense segment of the aerospace industry in America, and this constitutes perhaps the biggest difference between the two. However, in Europe, the opposite is true - commercial aerospace revenues on the Continent grew by 3.7 percent, way ahead of the the U.S., while defense lagged somewhat behind America (but still grew, by 2.6 percent).
Differences in the potential for innovation
Slower recent growth notwithstanding, commercial aerospace does have one distinct leg up on its aerospace counterpart: In a recent report on A&D trends expected to dominate 2018 and 2019, PricewaterhouseCoopers pointed out that commercial aircraft and parts manufacturers can innovate at a more rapid pace than those specifically focused on defense. (In companies servicing both markets, this point applies to the separate divisions of the firm dealing with each vertical.) Those at the vanguard of commercial aerospace, according to PwC, appear to be considerably more ambitious than those with military branches as primary customers, due in part to a certain complacency among those in the latter field that evolved from having dominated the A&D space for so long.
This could change if larger defense aerospace firms decide to absorb smaller commercial firms, or if they opt for a less hostile form of intra-company collaboration. PwC suggested the latter option as perhaps the most viable approach, and noted that some of the biggest A&D firms are already opting for this strategy, including Raytheon, Lockheed Martin, Boeing and Airbus.
A few similarities
It's worth noting that commercial and defense aerospace aren't entirely separate, and not simply because they both create aircraft. Several major trends that Deloitte highlighted are equally beneficial to both segments of the sector. For one, the propulsion segments of aerospace outpaced all other niches by a significant degree, with a 17.4 percent operating margin. Also, OEMs played a major role in overall revenue growth throughout the entire aerospace market, producing significant profit for Lockheed, Raytheon, Rockwell Collins and others.
When all is said and done, any evaluation of A&D must conclude that while it's a complex market, both portions are certainly growing with the potential to expand greatly in the near future. AMETEK ECP will continue to invest alongside aerospace companies every step of the way to help ensure their planes and internal equipment focus as effectively as possible.