Market commentary

With passenger traffic set to double¹ over the next 15 years – driven by rising economic growth, urbanisation and tourism – the long-term prospects for the aerospace industry remain extremely strong.

While the defence sector is showing only modest growth, rising commercial traffic continues to power the industry, driven particularly by growing passenger traffic in Asia-Pacific and the Middle East buoyed by rising demand, falling fares and increased infrastructure.

China plans to increase its number of airports from 200 in 2015 to 240 by 2020, while the Gulf remains a hub of extraordinary growth. For instance, Emirates is now the world’s largest operator of the Airbus A380 superjumbo and Boeing 777, while it has also started opening new routes to US destinations.

Record profits

For commercial airlines, the industry is forecasting² record net profits of €32.6bn in 2016, with more than half of the profit coming from North American carriers. The sector’s operating margins have been improving over the past few years, boosted by lower fuel costs as a result of lower oil prices. Such increased profitability also gives players greater leverage to upgrade aircraft to next generation models.

There is still strong growth in mature markets such as Europe too. For instance, the Spanish aerospace sector, which generates €9.4bn a year, has seen its civilian sector double in turnover since 2006, with growth at around 13% per annum and is forecast to carry on growing at double digit rates.

Against this backdrop the two giants of aircraft production – Boeing and Airbus – continue to experience record backlogs on the back of strong demand for newer aircraft. Latest estimates suggest they have a combined order book of more than 12,400 aircraft, worth an estimated nine years of production.

However, there are concerns that some airlines may be expanding too quickly and could yet defer delivery of new jets or cancel them. There are worries too over whether suppliers can cope with this rate of increased production and keep pace with their Original Equipment Manufacturer (OEM) customers as they demand greater operating efficiencies.

In addition, as aircraft programmes become more technologically complex, and increasingly look for more fuel-efficient and lightweight solutions, this puts even more pressure on supply chains to re-engineer their own business models, global operations and alliances.

¹ Airbus Group: global market forecast 2015-2034
² International Air Transport Association 2016 industry outlook