Industry Analysis 2014: Aerospace Manufacturing

The aerospace manufacturing industry is currently facing an upswing. There is tremendous momentum propelling them out from the slump that they were experiencing as a result of the recession in 2008. Total backlogs for global orders in aircraft totalled 11,392 in May this year (Monaghan). Boeing, the US based aircraft manufacturer, alone  reported a backlog of 5,100 planes in 2013. Airbus has 5,559 planes in the pipeline. These backlogs require approximately 8 years to be fulfilled; a sizeable stream of future revenue for both companies (Bachman). The surge in demand for new aircraft is driven by airlines that are looking to update their fleets in operations, and new carriers expanding lines and routes all over the world. Currently, the aircraft sector is one of the largest single manufacturer exporters for the United States. Exports totalled $115 billion dollars in 2013, accounting for 7.3% of the national GDP for the US. As of May 2013, the aerospace manufacturing industry employed a total of 502,740 people (“Aerospace Product and Parts Manufacturing”).  From all this, it is reasonable to infer that the aerospace manufacturing industry is an important sector of the US economy. Even though the current market conditions bode well for the players in the industry, several headwinds are to be expected and considered for future planning. A big part of that stems from new players from foreign countries like China, Brazil, Canada, Russia and Japan wanting a piece of the global pie, as they seek to beef up their aircraft manufacturing industries.

Commercial aircraft production has proven to be highly sensitive to changes in economic conditions in the past. During times of recession, large commercial aircraft equipment manufacturers like Boeing and Airbus experience a decline in production. However, there is a lag between aircraft production and economic conditions.

As the global economy recovers from the recession, air travel is poised to grow. That in turns drives revenues for the airlines company who are the key end customers for aircraft manufacturers. This then leads to an increase in spending on replacing not only new aircraft but also maintenance parts for existing fleets. The trend of globalization has been a much touted term in the past decade; the airline industry is no exception to its reach. As economies become more intertwined, air travel is bound to increase. In Boeing’s Current Market Outlook report, they expect worldwide passenger traffic to increase by 5% annually from 2013-2032 and a total of 35,280 new aircraft to be fulfilled by 2032 (“Current Market Outlook”). From this bulk of demand, 28,030 or 79.45% of new aircraft comes from regions outside North America. Asia Pacific alone is projected to account for 36.3% of the total new aircraft. It is important for U.S manufacturers to be cognizant of this trend and develop ways to reach these markets.  One way of taking advantage of this trend is to moving production to Asia, which a few companies have already done. Some companies have even chosen to form joint ventures with local manufacturers to expand into these markets. But while that may work in the short run, companies would also have to realize that the manufacturers that they have partnered with could very well turn into their competitors down the line.

While the commercial airline industry’s profits are poised to grow this year, airline companies are also still making razor thin profit margins. Tony Tyler, International Air Transport Association’s (IATA) Director General and CEO noted that while industry trends are promising, overall industry returns are at “unsatisfactory levels with a net profit margin of just 2.5%” (“Industry on Track for Second Year of Improving Profits”). Fuel costs, alone, accounts for 30% of the average airline cost structure, and is one of the costs that directly impacts the bottom line of an airline company. As fuel costs continues to be a major burden and the age of the airlines’ existing fleet increasing, more companies and putting orders in for more fuel efficient aircrafts. That is why aircraft manufacturers should continuously reinvest into the business by developing engines and aircrafts that are fuel efficient to help draw in new customers.

Continuing with that train of thought, innovation is another aspect that companies have to increasingly compete on. But for aircraft manufacturers to design the next big thing, what they need is talent, and within the United States, there is a lack of talent in the aviation industry. According to Boeing’s 2013 Pilot and Technician Outlook report, the global forecast for airline technicians will reach 556,000 by 2032 and 97,900 (17.6%) of that will come from North America alone (“Pilot and Technician Outlook”). Also, according to the occupational outlook for aerospace engineers provided by the Department of Labor, jobs in this field will grow by 7% from 2012-2022 (“Occupational Outlook Handbook: Aerospace Engineers.”). As the US population ages, the percentage of people retiring from this field will increase. That is why for companies to continually innovate, they have to continuously work to replace the lost of personnel with new talents and attract the right people to further spur the industry. Attracting talent and building a pipeline for future employees requires a lot of effort, not just from the company but from external players too. But for the U.S aircraft manufacturing industry to remain competitive, this is an issue that needs to be addressed.

Currently, the commercial aircraft manufacturing industry is much like a duopoly led by Boeing and Airbus. Smaller players like Bombardier are looking to break into the mold and with globalization, competition will only rise. To remain competitive, not just domestically, but also globally, companies need to be cognizant of the macroeconomic trends that will affect the industry and tailor their strategies to meet them. With airlines replacing their older fleets with newer ones, innovation being key to designing the next generation of aircrafts, and talent shortages being big trends, companies should take these into account when charting their future path.

References:

“Aerospace Product and Parts Manufacturing – May 2013 OES Industry-Specific Occupational Employment and Wage Estimates.” U.S. Bureau of Labor Statistics. U.S. Bureau of Labor Statistics, 1 Apr. 2014. Web. 01 July 2014.

Bachman, Justin. “With Epic Backlogs at Boeing and Airbus, Can Business Be Too Good?” Bloomberg Business Week. Bloomberg, 29 Jan. 2014. Web. 01 July 2014.

Corridore, Jim. Industry Surveys: Aerospace and Defense. Rep. New York: McGraw Hill Financial. S&P Capital IQ. Web. 02 July 2014.

“Current Market Outlook 2013-2032.” Boeing. Boeing. Web. 06 July 2014.

“Industry on Track for Second Year of Improving Profits – Rising Fuel Costs Largely Offset by Increased Demand.”IATA. IATA, 12 Mar. 2014. Web. 02 July 2014.

Monaghan, Angela. “UK Aerospace Firms Eye £150bn Boost from Global Backlog in Aircraft Orders.” The Guardian. Guardian News and Media, 29 June 2014. Web. 01 July 2014.

“Occupational Outlook Handbook: Aerospace Engineers.” U.S. Bureau of Labor Statistics. U.S. Bureau of Labor Statistics, 8 Jan. 2014. Web. 05 July 2014.

“Pilot and Technician Outlook.” Boeing. Boeing. Web. 06 July 2014.

By Ken Lam Law



Leave a Reply