Aerospace & Defense industry reports higher revenues and profits in 2016; strong forecast for 2017

June 20, 2017

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By Scott Thompson

The top 100 aerospace & defense (A&D) companies accounted for $709 billion in revenue, resulting in $69 billion in profits for 2016 – an increase from $689 billion in revenue and $64 billion in profits compared with 2015. While this is below the record levels set in 2014, largely due to the strong US dollar, the industry still demonstrated healthy metrics for the year. What’s clear is this: commercial aerospace remains as strong as ever with more passengers taking to the skies, and defense is top of mind across the world as countries handle the uncertainty of global threats.

Commercial aerospace

The International Air Transportation Association (IATA) reported that air travel demand grew 6.3% in 2016, the sixth straight year that it rose above 5%. Passenger load hit 80% for the full year 2016, making it the second consecutive year of ever achieving this milestone.

Among the areas that saw growth in 2016 were business jet operations. While still recovering from the large drop that occurred during the 2008-2009 financial crisis, the sector grew 1.38% on a year-over-year basis.

Another booming area: drones. The FAA began registering the devices at the end of 2015, and in one year, about 1.1 million units have been registered. With improvements in technology and more affordability, they predict that number to hit 3.5 million by 2021.

For 2017, the improving economy should keep commercial aviation demand strong, and if we see a corporate tax reduction this year that may be the fuel needed to finally get business aviation growing at a faster pace again. Production of large commercial aircraft is expected to be slightly higher. And while some customers and suppliers are skeptical as to whether proposed production increases are sustainable, some industry forecasts predict long-term demand about 40% higher than current production rates.

Defense

The defense industry reported modest revenue and profit growth in 2016. The spending uncertainty that dominated the industry for a number of years is expected to have a clearer direction this year and beyond. The new administration in the US is signaling support for additional spending and global defense sales. New arms deals and regional conflicts are expected to drive growth and revenue as well. Global merger and acquisition activity in the defense sector continued to focus on organizations realigning their portfolios and the consolidation of government services companies.

This year’s outlook for the defense sector continues to brighten with the new administration’s reprioritization of defense. Most recently, President Trump included an increase in defense spending of about $25 billion in 2017 and is also looking for a 10% increase in US defense spending for 2018. However, overall defense revenue is expected to remain flat in 2017, as potential budget increases will not be effective until future years ahead. In the past, market contraction has paved the way for further consolidation and portfolio realignment. An improved outlook is good news for M&A activity, which will likely continue to be strong in 2017.

Both commercial aerospace and the defense sectors expect improvement for the remainder of 2017, with the potential for new records in both revenue and operating profit. Aerospace’s role in the global economy will drive more immediate growth. The years ahead look promising for the defense sector as well, as countries begin to reevaluate their defense spending and priorities.

To read the full report, visit Aerospace & Defense year in review and forecast.

 

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