[Avionics Today 02-23-2015] The commercial aerospace industry is expected to enjoy close to an 8 percent growth rate this year, according to Deloitte’s recently released “2015 Global Aerospace and Defense Outlook” report. Revenue growth in the commercial sector will be driven by record airframe production rates, an accelerated cycle for airlines and operators replacing obsolete aircraft, growing international passenger demand and millions of new people entering the middle class in emerging countries, says Tom Captain, vice chairman and U.S. aerospace and defense leader for Deloitte.
Boeing rolled its 5,000th production Next Generation 737 aircraft last year, and has plans to increase its 737 production rate to 52 per month by 2018. Photo: Boeing.
"China, the Middle East and India will lead in terms of demand, that’s because Revenue Passenger Kilometers (RPKs) are accelerating, and demand for travel is accelerating most in those regions relative to the U.S. and Europe," Captain told Avionics Magazine. "The reason for that is that there are millions of people entering the middle class in those regions of the world. When you enter the middle class, you have higher demand for business and leisure travel, and that’s what’s driving the travel demand."
Captain believes each region also has different factors driving the demand for their commercial carriers revamping and expanding their fleets with new, more fuel-efficient aircraft. The Middle East for example is a global hub, a "crossroads" for traffic between North American and European routes to the Asia Pacific. "They were nowhere 30 years ago and now they have some of the busiest airports in the world," said Captain. Additionally, he mentions oil revenue and population growth as other reasons for the increasing importance of the region for the aviation business. "They have the financial means because of oil revenue, and an emerging population — albeit small —, indigenously to create travel demand themselves."
That's different from the regional demand from carriers in India, which has a "huge indigenous population coming into the middle class driving the need for travel," he said.
Over the next two decades, Deloitte expects global passenger travel demand to increase by 5 percent annually, which will also influence the continued increase in airframe production. Boeing for example, plans to increase production of its best-selling aircraft, the 737, from 42 to 52 airplanes per month by 2018. Boeing's 2014 global market outlook projected demand for more than 25,000 single-aisle aircraft over the next 20 years, a $2.56 trillion total market value.
While Boeing and Airbus will continue to see revenue growth from new purchases in the Middle East and Asia Pacific, avionics manufacturers will also benefit. In fact, avionics suppliers should see just as much, if not more, revenue over the next two decades due to their ability to innovate and provide the technology that will allow airframes to fly in the modernized NextGen and Single European Sky (SES) air transportation systems, according to Captain.
"The three major avionics suppliers in the world make some of the highest operating margins of any of the suppliers in the aircraft production business, compared to the OEMs who make some of the lowest operating margins," said Captain. "There are weight increases that have been announced by the major OEMs that will result in more orders that are being placed, so there’s a higher volume for the avionics manufacturers. There are new technologies that the avionics manufacturers are selling so they’re adding more content. They are the ones that allow aircraft to operate in the NextGen environment, they’re making the [Automatic Dependent Surveillance-Broadcast] ADS-B receivers, they’re also making the next generation cockpit to allow for more autonomous operation."
Deloitte's 2015 outlook also indicates that, while passenger demand will continue to increase, driving airline demand for new aircraft, the commercial aerospace supply chain will face issues from the ripple down impact of the flying public's demand for lower airfares. According to the outlook, "as the continued demand of the flying public for lower airfares ripples through the value chain, from OEMs to tier-one suppliers and on down, competitive pricing in the supply chain is anticipated to be an ongoing challenge in 2015."
"OEMs are demanding price concessions, and the suppliers are having difficulty in changing to the new business model," said Captain. The new business model that Captain refers to requires suppliers to engineer and design products that fit a certain function or capability that the OEM desires, rather than bidding on a new platform directly.
"As the supplier, I now have the responsibility of hiring engineers to design things, to hire supply chain specialists, to manage a tier of suppliers themselves, I also have to put my own balance sheet at risk if I want to be a supplier to this OEM by paying for inventory and not getting paid until my OEM customer gets paid by the airline," Captain said, referring to the new business model. "That means that companies are taking on financial risk, marketplace risk, inventory risk and human resource risk to become a super supplier in this new world. That is changing the dynamics of where money is getting made in the supply chain."