A Primer for Paris Commercial and Defense Market Outlook · 2019-09-13 · An increasingly globalized market, which Avascent predicts will top $330B in the 2014-20 timespan, has increased

PRIVATE & CONFIDENTIAL

A discussion on intensifying market dynamics across defense and commercial aviation

A Primer for Paris – Commercial and Defense Market Outlook

Presented to:

Participants of Avascent’s Aerospace and Defense Webinar

June 2, 2015

In cooperation with:

PRIVATE & CONFIDENTIAL | AVASCENT | 2

Panel Participants

Aleksandar D. JovovicPrincipal, Avascent• Thirteen years of experience in the A&D sector

and consulting• Expertise in defense systems, global markets,

and international political risk• Positions at Brookings and Georgetown

University, M.A. SAIS-JHU

Jon BarneyManaging Director, Avascent• Fifteen years of experience in strategy in the

global A&D sector• Focus on Avascent’s Global Expansion and

M&A efforts• Former Naval Officer, NATO Fellow; MBA

Harvard, B.S. Honors Naval Academy

Jay CarmelAssociate, Avascent• Five years of experience in the A&D sector

and consulting• Focus on strategic growth, value capture, and

M&A support within the Commercial Aviation sector

• Previously at Merrill Lynch, Department of Commerce; B.S. Georgetown


Avascent projects span markets worldwide, providing business critical advice and guidance across a host of industries and functional activities

HQ: Washington, DC

Avascent Europe, Paris

Strategy & Growth

Mergers & Acquisitions

Customer Strategy & Marketing

Global Expansion

Business Capture & Pricing $

Private Equity

Aviation

DefenseSystems

Logistics & Transport

Healthcare

Space & SatComms

Outsourced Services

Intelligence & Cyber

Information Technology

Security & Public Safety

Energy & Infrastructure

Offices in Washington, DC and Paris

120 full-time staff and network of 40 international advisors worldwide

Multiple partner organizations, including across MENA and Asia

Analytics covering US and 50 top international markets

30 years of experience supporting diverse clients

Distinguished alumni now in leadership positions across industry and government

Industries & Sectors Capabilities

Innovation & Agility

Organization

Avascent Global Coverage: Selection of Recent Projects


Today’s Objectives

A Primer for Paris – Commercial and Defense Market Outlook

– Today’s discussion will focus on the intensifying market dynamics across defense and commercial aviation

Three areas of discussion

–Early insights from Avascent’s survey on the role of innovation and R&D on global competitiveness

–Defense Markets Outlook and Trends

–Commercial Aviation Outlook and Trends

Format (1 hour)

–Presentation of Avascent’s market outlook, assessments, and analysis

–Discussion of competitive and strategic implications

–Q&A


DAK HARDWICK

Director, International Affairs

Aerospace Industries Association

Formally of Harris Corporation; supported international tactical radio exports; DoD, FAA & NOAA programs

AIA representative on Department of Commerce International Trade Advisory Committee on Aerospace Equipment

• Continued robust U.S. Government presence

- Transportation, FAA, NASA, DoD, State, Commerce representatives all attending

- Larger contingent of civil aviation focused attendees

• Continued pre-show coordination among USG participants

- Interagency meetings focused on defense and civil advocacy at the show ongoing

• Major U.S. Governor and State Economic Development official representation

• Improving USG efforts to advance U.S. aerospace and defense trade goals

Setting the Scene for Paris


Global Innovation, Competition, and R&D in the A&D Market

Defense Market Outlook and Trends

Commercial Aviation Outlook and Trends

Agenda


Surveyed senior leaders across A&D sector in mid May 2015, pre-Paris Air Show

Asked 23 questions – ranking and open ended format

Over 200 respondents

Global participation led by US

Broad participation across levels (Manager through CEO), function, and company size

Preliminary observations today with detailed report to follow in early July

Second annual Avascent survey on global innovation, R&D and competitiveness in A&D sector


Global expansion remains CEO strategic priority

Multiple competitors (e.g. China) and in multiple markets--led by cyber, unmanned, EW, and ISR

Companies continue to say better home market support needed to compete and win globally

Companies focus increasing on “how” to compete globally

Innovation/3rd Offset/Silicon Valley outreach – DoD focus on innovation

Partnering internationally and domestically to drive innovation is a recognized need across A&D sector

– 6 Steps

What’s Stayed the Same What’s Changed

Market and survey observations – last year vs. today


Maintaining leadership through R&D and innovation is critical to global success

How important is R&D-driven innovation in maintaining military parity /

superiority relative to rivals?”

• 91% believe critical or very important

Should your home government encourage / reward leveraging of…

…COMMERCIAL R&D driven innovation, regardless of geographic origin?

• 92% believe government should be always or often supportive

…INTERNATIONAL DEFENSE R&D driven innovation?

• 76% believe government should be always or often supportive


Innovation in A&D sector is coming from multiple countries and continues to be led by US and Western Europe

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Assessment of Country as Source of Innovation

Frequent Source of Innovation Occasional source of innovation

Critical international success factors: understanding emerging international competitors, and partnering for success in priority markets


A&D leaders indicate there is much work for industry and government in order to drive innovation in an increasingly competitive global environment

A&D leaders’ confidence in their company’s readiness to enhance their

competitive position by leveraging…

Commercial technologies: 44% do not believe they are ready

Intl. Defense Technologies: 55% do not believe they are ready

“Defense is severely out of step with commercial R&D. A serious shakeup

must occur - led by OSD thought leaders - to affect any change.” – Senior

A&D executive

“Industry needs to step up internal R&D to keep up and should leverage

commercial market for its products.“ – Senior A&D leader





Agenda


Military MRO

Industry Trends

Customer Requirements

Global competitive dynamics remain intense, driven by new customer requirements, globalization of the marketplace, and a host of make-or-break programs of record

Some long-awaited tactical air competitions are resolved, though decisions in a number of countries are pending

As JSF program settles in, DoD focuses on the Long Range Bomber and Trainer programs

End-customers continue to struggle with trade-offs between capabilities, costs, and inventory size

An increasingly globalized market, which Avascent predicts will top $330B in the 2014-20 timespan, has increased competitive pressures on MRO providers

Growing appreciation of the strategic importance and monetary value of the logistics tail

On the cusp of a significant leap in predictive sustainment driven by sophisticated on-board analytics; implementation in real-world conditions will remains a longer-term challenge

Facing increased competitive pressures, a number of platforms face make-or-break decisions for major defense aviation providers

Lower cost offerings challenge established players in the fixed-wing space

M&A activities and technological advances enliven the rotorcraft segment

Firms across the spectrum continue to determine the role and scope of unmanned

Maintaining situational awareness of the competitive environment and working to develop an agile and flexible business structure is key to successfully navigating these emerging challenges


Top OEMs dominate 65% of defense aerospace markets at the “prime” contractor level; yet systems players, emerging OEMs, and major suppliers, contribute significant value-add

Beyond the role that the OEMs play, the pitched battle for systems—and subsequently sustainment and support—market share continues

* Note: Captures the OEM or “Prime Contractor” at the program/platform level in 51 addressable countries as defined by each end-customer; other joint efforts and partnerships are captured in the “Other” category, which includes undefined or unknown primes. MRO and other sustainment services are additive to this analysis. Source: Avascent Analytics.

Aircraft Prime/OEM Market Share*(“Top Dozen” Firms; Aggregate Value 2010-14)

Systems-Level (Non-Prime) Market Share(Aggregate Value 2010-14)

Other

$529B 2010-14

Top 12 Primes / OEMs shown

on the left

54%

Raytheon, GE, L-3, Rockwell, Thales, IAI,

Honeywell, Elbit, HAL, Exelis, Saab, KHI,

others

46%

Top 12 Primes /

OEMs

65%


Air Combat and Mobility continue to dominate the sector; look to ISR, ground attack, and other segments to gain share in the coming years

Air Warfare39%

Mobility & Lift25%

ISR11%

Ground Attack & Strategic Deterrence9%

Other Missions7%

Land Combat Operations

6%

Multimission3%

The Air Warfare segment displays some of the most extreme bifurcation between affordability on one, and capability on the other side of the spectrum

Note: Captures investment (acquisition and R&D) spending in top 51 industry-accessible international markets including the US; sizing does not include spending in Russia, China and other non-addressable markets; Source: Avascent Analytics.

2014 Airborne Defense Investment by Mission

$105B


Illu

stra

tive

Th

em

es &

Dri

vers

Manned platforms, driven by the fixed wing segment, continue to dominate the airborne defense market through 2020; attention now turns to major US programs of record

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2014 2020 (est.) 2014 2020 (est.) 2014 2020 (est.) 2014 2020 (est.)

Bill

ion

s

Middle East and North Africa

Europe & Israel

Asia

Americas

Major US programs, notably JSF, dominate; attention on T-X, LRB…

Intensified competition in mobility and ISR

European TacAirofferings gain foothold

ROTORCRAFT UAVsAIRCRAFT

SYSTEMS & TECHNOLOGY

Transport and utility decline drives market contraction

Attack and armed reconnaissance provide some growth

Potential for upside

MALE and HALE systems continue to dominate

Increased introduction of smaller tactical systems

Unmanned combat systems spending continues robust growth

Niche segment populated by both research & development and procurement efforts for platform, engine or electronics upgrades, and other airborne components

Note: Captures investment (acquisition and R&D) spending in top 51 industry-accessible international markets including the US; MENA includes South Africa; sizing does not include spending in Russia, China and other non-addressable markets; Source: Avascent Analytics.

FIXED-WING

Airborne Investment by Platform Type (2014 and 2020 Snapshots)


Defense Market: Parting thoughts Five developments that may impact the defense aviation business in the coming period

Unmanned Systems Go Lethal

• With unmanned systems on the verge of going commercial, the defense industry and end-users are increasingly looking to unmanned combat systems

• While the market is US-led, driven by programs such as the GA’s Reaper and AeroVironment’s Switchblade, expect increased offerings globally

A New Dawn for European Combat

Aircraft

• With Gripen’s win in Brazil and a late surge in Rafale sales to India and Egypt, these and other players are presenting a formidable competitive challenge to established providers in the US and Russia, as well as their pan-European Eurofighter counterpart

More Turbulence in the Mobility Market

• A steady slew of developments is not ebbing in the fixed-wing mobility market: a tragic accident, new competitions, and new competitors to include the newly unveiled An-178

• Watch for continued forays into the MPA, SAR, and ground support markets

Helicopters: Looking Beyond Rotors

• We are witnessing significant innovation in rotorcraft design with the induction the of V-22, and development programs such as Airbus’ X-3, Bell-LM’s Valor, and Sikorsky’s Raider among others

• The ownership status of Sikorsky adds another interesting twist to this segment

Join the Team: Manned-to-

Unmanned Teaming

• The next major leap in the utilization of UAVs is teaming with airborne manned assets, culminating in “level five” interoperability, where an airborne crew assumes complete command of a UAV to include take-off and landing





Agenda


150

200

250

300

350

400

450

500

550

600

2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E

Widebodies

700

750

800

850

900

950

1,000

1,050

1,100

1,150

1,200

2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E

Narrowbodies

Commercial Aviation: Production Outlook as of July 2014Comparison of manufacturer and analyst rate forecasts

Historical deliveries

Mfr-stated rates

Avascent projection

Third party forecast range

5.1%

1.2%

2.6%

-5.0%

11.8%

2.3%

6.3%

-1.4%

2014-17 CAGR

Un

its

Un

its

The market outlook as of July 2014…

Major concerns over OEMs filling final delivery slots for “current version” narrowbody aircraft (A320ceo, 737NG)

Similar concerns with widebody sunset programs (777, A330)


700

800

900

1,000

1,100

1,200

1,300

2009A 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E

Narrowbodies

Commercial Aviation: Production Outlook as of June 2015Forecast opinions have converged as OEMs have filled “end of line” delivery slots before new variants arrive

Forecast Discussion

Overall Outlook

• Both segments should see sustained growth through 2018 as production of new aircraft ramps up (A320neo & 737MAX; 787 & A350)

• Greater variance exists in narrowbody segment forecasts as doubts surround OEMs ability to achieve astronomic build rates

Historical deliveries

Mfr-stated rates

Avascent projection

Third party forecast range

5.8%

2.9%

5.3%

1.2%

10.2%

1.9%

5.6%

0.9%

2014-18 CAGR

Un

its

Un

its

• We expect sustained growth in overall output through 2018, yet manufacturer-stated rates remain overly optimistic in light of current order book realities

• Airbus and Boeing have done well to fill delivery slots for current narrowbodyvariants before A320neo and 737MAX arrive; however, concerns linger for the 777X and A330neo transitions

• If fuel prices hold at current low levels, demand could soften for new-fuel efficient aircraft, yet a low fuel environment should drive greater overall air traffic and counteract this decline in replacement orders

150

200

250

300

350

400

450

500

550

600

2009A 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E

Widebodies


Commercial Aviation: M&A Activity ReviewAn Overview Across Key Segments and Notable Transactions

76commercial aerospace

transactions in 2014

Machined/Cast Parts & Structures MRO & Logistics

Cabin Systems / Interiors

Components & Subsystems

Commodities & Distribution

Unmanned Aerial Systems (UAS)

Engine Components

2215

11

96

5

4

4

Despite sustained M&A activity, still unconsolidated

Pricing risks, program transitions (737, A320, 777) impacting cash flow projections

Increasingly competitive market as new players, especially OEMs, seek aftermarket share

Innovative technologies, new capabilities (e.g.., composites) key for differentiation

ATS acquired Texas Air Composites Triumph acquired NAAS PCC acquired Aerospace Dynamics Int’l

Accurus (Liberty Hall) acquired McCann Aerospace

Ascenta

Other

Zodiac, B/E continue to acquire lower Tier players in effort to streamline production as rates increase

Continued encroachment of PMA parts forcing OEMs to expand portfolio

Zodiac acquired Greenpoint, Pacific Precision, Enviro Systems

Safran acquired Eaton Power Distribution Systems

Warburg acquired Wencor Wesco acquired Haas Chemical

Quickly shifting landscape; “acquire or be acquired” mentality

Silicon Valley aggressively positioning as FAA refines commercial UAS regulations

3D printing, new materials technologies forcing consolidation amongst legacy providers

Numerous small shops still ripe for acquisition

Facebook acquired Ascenta(UAS engineering shop)

Google acquired Titan Aerosapce

Alcoa acquired Firth Rixson


Commercial Aviation: Market DriversKey Trends Across the Industry

• Early-stage exploratory efforts to look beyond Passenger WiFi and bring connectivity to the entire airline (flight crews, flight operations, MRO, etc.)

– Exciting outlook for this segment, yet substantial airline organizational and strategic development hurdles to overcome to realize full benefits

IP Connectivity

• Airlines are increasingly challenged to optimize capacity while attracting customers via greater cabin comfort and amenities

– These counteracting forces are driving Interiors and Cabin Systems players to innovate more than ever

The Fight over the Cabin

Tepid Business Jet Recovery

• The Business Jet market hopes to claw back from the 30% decline in delivery values from 2008-2012, but “light jet” aircraft sales have been slow to recover

– Expensive Large Jets remain the primary growth driver; US economic growth will be important to kick start the “bottom half” small/medium jet segment

• Initial roll outs of FAA NextGen and European SESAR are providing early glimpse of air traffic efficiencies and modernization

─ Initiatives depend on IP-based network systems to enable faster, more accurate data sharing and processing

ATM Efficiencies

• With commercial UAS regulations on the horizon, players are positioning to capitalize on opportunities across the expected multi-billion dollar industry

– Aircraft systems, infrastructure, and supporting software and networking tools will all be critical areas for innovation

UAS Integration


Commercial Aviation: Strategic Considerations

Strategic Considerations

IT Optimization

ConsolidationCost Take-

Out

• Some sub-segments are highly consolidated and quite mature

• Dozens of other areas offer significant white space for efficiency improvement

• Location of work to lower-cost locations

• Significant work remains to be done, especially at consolidated firms

• Improved IT is enabling cost reductions and innovation to help absorb OEM pricing pressure

• Predictive analytics, improved inventory management, mobility are high potential applications


Discussion


Avascent Europe59, rue des Petits Champs

75001 Paris, FranceTel: +33 1 73 77 56 19

www.avascent.com

Avascent US1615 L Street, NW, Suite 1200Washington, DC 20036, USATel: +1 202 452 6990www.avascent.com

Jon Barney+1-202-280-6812

[email protected]

Jay Carmel+1-202-280-6847

[email protected]

Aleksandar Jovovic+1-202-280-6842

[email protected]

Please contact us if you would like to discuss these findings during the Paris Air Show or at a later date

Documents

A Primer for Paris Commercial and Defense Market Outlook · 2019-09-13 · An increasingly globalized market, which Avascent predicts will top $330B in the 2014-20 timespan, has increased