The Strategist

Moody's: Aerospace industry will rise up

06/12/2018 - 04:11

Moody's agency issued another report on the state of the aerospace and defense industries, and gave a forecast for their development for the next 18 months. On average, the operating profit of companies related to these industries will grow by 7% by the end of 2019. Airbus and Boeing will be doing the best in the emerging market conditions.

A bright future - at least in the coming years – is coming for the aerospace industry. This is forecasted by Moody's, which annually assesses the state of the aerospace and defense industries. In its new report, the agency claims that, on average, the operating profit of companies related to these industries will increase by 7-9% by the end of 2019. Thus, Moody's improved its own forecast, released 12 months ago. A major increase in the company's revenue growth will be elevated by growth in sales of passenger aircraft.

The growth in demand for airliners will primarily help such aerospace giants as Boeing and Airbus, as well as their suppliers. However, the latter is not expected to receive the same high profits as those of the aircraft manufacturing companies. Recently, both the American and the European aircraft building concerns aspire to reduce expenses on bought details as much as possible, thus lowering revenue of suppliers.

The main source of revenue for aircraft companies will be a significant increase in sales of large aircraft. According to Moody's forecasts, demand for them will grow by 10.5% this year, and by another 8% in the next year. At the same time, a gradual increase in the supply of narrow-bodied aircraft will also contribute in the situation. For example, Airbus will bring the level of production of its A320 from the current 32 aircraft per month to 63 items by the end of 2019. The release of the Boeing 737 will accelerate from 43 aircraft per month to the projected 57 items.

Profitability of aerospace companies and enterprises of the defense industry will also grow due to defense orders. However, their contribution will be more modest than that of commercial aviation. "This is because some of the major defense programs are still at the final stage of development (such as the KC-46a military tanker aircraft) or at a relatively early stage of production (the F-35 fighter)," the report says. Another source of revenue growth in the defense industry could be shipbuilding, however, most of the projects here are low-profitable.

Moody's experts forecast that the growth in operating profit will be significantly higher for European producers in the coming year and a half. However, in many ways this can be explained by weak performance in the last year. Companies such as Airbus, Rolls-Royce Plc and MTU Aero Engines have spent considerable money on developing new products and increasing production volumes associated with launch of programs like the A350, or introduction of new engines. Now comes the time of receiving the proceeds from the invested funds. 

Still, profitability of American companies remains significantly higher than that of their European competitors. The margin of European producers, with a favorable development of events, will reach 8-9% by the end of 2019. At the same time, the figure for their US colleagues will be 12%. In many ways, this is can be explained by the US military budget, which is much larger than the defense costs of all other countries. Therefore, American companies have the opportunity to obtain in advance much larger contracts than their competitors. So, the US military budget was increased in 2018 by $ 70 billion, and this is more than, for example, the GDP of the UK. In total, the US plans to spend $ 594 billion on the military industry, not including funds that will be spent on freelance foreign operations. With them, this figure will grow to $ 659 billion.

Moody's expects that global defense spending will grow by 5-7% in 2018-2019. The main items of military expenditures of the countries will be shipbuilding, military aviation and anti-missile defense. At the same time states are increasingly focusing on cybersecurity, mindful of the frequent cases of large cyber-attacks.