Key Trends in Aerospace and Defense

Key Trends in Aerospace and Defense

There is no shortage of analysts plotting upside and downside scenarios on the A&D market. While this may help to understand how many aircraft will be sold over the next 24-36 months, it provides little insight into how these shifts will lead to revenue and supply chain demand.

Fremont, CA: The world changed remarkably in 2020. The new decade started with a sense of optimism and historically strong economies in both the commercial aerospace and defence sectors. Both sectors have seen a decade or more of continued growth. Healthy backlogs and strong demand seemed unlikely to end in the foreseeable future.

Unfortunately, by March, we all realised that we were in the middle of a real "Black Swan" event. In a matter of days, the market has gone from continuing optimism to an unprecedented decline in demand. At that point, most of the economy was put in an induced coma by governments around the world. Over the next few weeks, 60 per cent of the global commercial airline fleet was parked and over 80 per cent of air traffic worldwide was down. This resulted in the announcement of tens of thousands of layoffs in the sector, as demand for new aircraft has almost disappeared.

There is no shortage of analysts plotting upside and downside scenarios on the A&D market. While this may help to understand how many aircraft will be sold over the next 24-36 months, it provides little insight into how these shifts will lead to revenue and supply chain demand.In addition, with COVID-19 showing little sign of slowing down, there is considerable uncertainty as to how air travel will resume, what additional stimulus packages are needed, and what the effects on government spending will be in the medium and long term. This has resulted in the elimination of forward-looking guidance by most publicly traded firms, along with public delivery forecasts. This makes it extremely challenging to plan for the future when customers don't know what they're going to do in six months. This is compounded by estimates of overcapacity of ~40-50 per cent in the commercial aerospace supply chain. This is not a binary hit, however, and the supply chain will continue to ramp down until the airlines and OEMs have the right size.This adds to the uncertainty as the industry waits to see how far down the bottom it can go. In many places, this has led to a freeze in planning too far into the future. However, this is a mistake: there are things that can be done until the market stabilises and the future becomes a little less confused.

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