destination farnborough: commercial and defense market ... · an increasing focus on localizing...

PRIVATE & CONFIDENTIAL

A discussion on intensifying market dynamics across defense and commercial aviation

Destination Farnborough: Commercial and Defense Market Outlook

Presented to:

Participants of Avascent’s Aerospace and Defense Webinar

June 29, 2016

In cooperation with:

PRIVATE & CONFIDENTIAL | AVASCENT | 2

Panel Participants

Aleksandar D. JovovicPrincipal• Thirteen years of experience in the A&D sector

and consulting• Expertise in defense systems, global markets,

industrial issues, and international political risk• Positions in private sector and at Brookings and

Georgetown University, M.A. SAIS-JHU

Jon BarneyManaging Director• Fifteen years of experience in strategy in the

global A&D sector• Focus on Avascent’s Global Expansion and

M&A efforts• Former Naval Officer, NATO Fellow; MBA

Harvard, B.S. Honors Naval Academy

Jay CarmelAssociate• Five years of experience in the A&D sector and

consulting• Focus on strategic growth, value capture, and

M&A support within Commercial Aerospace• Previously at Merrill Lynch, Department of

Commerce; B.S. Georgetown

Addison SchonlandPartner• Over twenty years of commercial aviation

experience• Project engagements with aircraft and

engine manufacturers, as well as airlines • Former President of Innovation Analysis

Group

Ernie ArvaiPartner• Over thirty years of aerospace consulting

experience, working with aircraft and engine OEMs as well as other key suppliers

• Former VP and Managing Director of Technology Management at Battelle Memorial Institute and former Director at Arthur D. Little, Inc.


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Over 125 full-time staff and network of 40 international advisors worldwide

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Organization

Avascent Global Coverage: Selection of Recent Projects


Today’s Objectives

Destination Farnborough – Commercial and Defense Market Outlook

– Today’s discussion will focus on the intensifying market dynamics across defense and commercial aviation

Three areas of discussion

–Early insights from Avascent’s survey on the role of innovation and global competitiveness

–Avascent Defense Markets Outlook and Trends

–Avascent and AirInsight Commercial Aviation Outlook and Trends

Format (1 hour)

–Presentation of our market outlook, assessments, and analysis

–Discussion of competitive and strategic implications

–Q&A


Global Innovation and Competition in the A&D Market

Defense Aviation Market Outlook and Trends

Commercial Aviation Outlook and Trends

Agenda


Surveyed senior leaders across A&D in June 2016

Asked 14 questions – ranking and open-ended format

Approximately 100 responses

Participants global – led by US, then Europe, Asia, and MENA regions

Broad participation across levels (CEO through manager) and function

Broad participation by company size – led by companies > $1B in annual revenue

Survey BackgroundIn order to understand the key drivers impacting the global A&D market as the Farnborough Airshow approaches, Avascent has completed its third annual survey on global competition and innovation


Global Competitive EnvironmentA major theme across the entire market continues to be an increasingly competitive global marketplace

A&D leaders will continue to operate in a global competitive landscape that will continue to grow in competitive intensity

2014

2016

80%: Competitive landscape will be more intense next

year

87%: Competitive landscape will be more

intense next year


Sources of Global CompetitionUS and Europe still lead, but non-Western firms are frequently seen as strong competitors as well and an even more potent potential source of competition in the future

0

10

20

30

40

50

60

70

80

90

100

% R

esp

on

de

nts

Leading Global A&D Exporters

Source of Competition Outside of Home Market

Consistent Occasional Potential Unlikely Not Relevant

Companies must understand this global competitive landscape and the potential competition coming from an increasingly broad set of players


Technology DisruptionsA&D leaders not only see significant change in the global competitive landscape, they also see significant disruption occurring across a number of priority market sectors

0% 10% 20% 30% 40% 50% 60% 70% 80%

Platforms

Weapon Systems

Sustainment/MRO

Missile Systems and Munitions

Training & Simulation

Space & Satellite

Propulsion/Structures

C4ISR

Electronic Warfare/Info Warfare

Unmanned Technologies

Cyber/IT

Markets Facing “Significant Disruption” in Next Decade

For companies operating in the “significant disruption” markets, speed and constant re-evaluation of the market ecosystem and competitive landscape will be crucial for success

% of Respondents


Adapting to a Changing EnvironmentA&D leaders are operating in a rapidly changing market environment, but leaders more often than not do not believe their organizations are ready

• Only 38% agree that their company is better positioned for international expansion relative to key competitors

• While 78% believe their company has the means to keep abreast of technology developments among partners/competitors, less then 50% are confident in their company’s ability to adapt and exploit technologies to enhance their competitive position

• Key words from survey responses highlight this dynamic: Solutions vs. Products, Partnering, Nimble, Disruptive Change

As companies prepare for Farnborough, this combination of a shifting global competitive environment and technology disruption will continue to drive the military and commercial aviation landscape





Agenda


Sustainment

Industry Trends

Customer Developments

Defense Aviation: Developments since the 2015 Paris AirshowIncreased focus on competitions outside US and Europe; greater demand for low-key but lucrative sustainment markets; local content key differentiator in platform decisions

Fighter gap remains, in manageable form in the US, while India faces a dramatic shortfall

Decisions on the US Long Range Bomber continue to reverberate, while focus increases on the T-X program, as well as emerging CAS platform that could have global market implications

End-users increasingly begin to grapple with the so-called sixth generation fighter question, while a number of high profile global competitions remain undecided

An increasing focus on localizing addressable MRO, which Avascent predicts will top $350B in the 2016-20, setting up a confrontation between OEMs, sustainment providers, and customers

Continued emphasis on aircraft life extension via incremental updates, e.g. F-18C+

Increased emphasis on virtual training, as flight times decline in some countries; skills and certification retention plague developing countries

Facing uncertainty in the air combat sector, Boeing announces greater emphasis on sustainment and services; its rotorcraft and surveillance offerings gain in prominence

Competitive market reaching peak intensity with mature and new platforms from the US, Europe, Russia, and increasingly China vying for market share; secondary market looms as well

Local content and industrial participation play an ever increasing role in aircraft selection

Maintaining situational awareness of the competitive environment and working to develop an agile and flexible business structure is key to successfully navigating these emerging challenges


2015 Defense Aviation Market Share AnalysisTop OEMs dominate over 70% of defense aerospace markets at the “prime contractor” level but systems players, emerging OEMs, and major suppliers, contribute significant value-add

Systems Providers

BRIC OEMs

Other OEMs

$505B 2011-15

Other

Aircraft Prime/OEM Market Share(Top Dozen Firms; Aggregate Value 2011-15)

Beyond the top OEMs, a quick look at the 50 most important airborne players yields prominent systems providers, smaller OEMs, and a growing number of players outside the “West”

Note: Captures investment (acquisition and R&D) spending in top 55 industry-accessible international markets including the US; sizing does not include spending in Russia, China and other non-addressable markets; Source: Avascent Analytics.


2015 Defense Aviation Mission AssessmentAir Combat and Mobility continue to dominate the sector but as we suggested last year, ISR spending has seen significant growth recently

Air Warfare39%

Mobility & Lift24%

ISR12%

Land Combat Operations9%

Ground Attack & Strategic Deterrence

4%

Information Dominance2%

Undersea Warfare2%

Other Missions8%

$103B

Along the same vein, Land Combat Operations has seen nearly a 50% increase since last year, driven in part by investments propelled by intense combat operations in the MENA region

Note: Captures investment (acquisition and R&D) spending in top 55 industry-accessible international markets including the US; sizing does not include spending in Russia, China and other non-addressable markets; Source: Avascent Analytics.


Illu

stra

tive

Th

em

es &

Dri

vers

Global Addressable Defense Aviation Spending OutlookManned platforms, driven by the fixed wing segment, continue to dominate the airborne defense market through 2020; rotorcraft spending still expected to be flat

Major US programs, notably JSF, dominate; attention on T-X, LRB…

New entrants in mobility and ISR markets

Final round of current fighter competitions worldwide

ROTORCRAFT UAVsAIRCRAFT

SYSTEMS & TECHNOLOGY

Spending outlook remains flat

Attack and armed reconnaissance platforms in demand

Mobility and transport stabilize; new programs on the horizon

MALE and HALE systems continue to dominate

Shift to maritime domain led by Asia

Tactical and armed systems on the rise, to include loitering munitions

Niche segment populated by both research & development and procurement efforts for platform, engine or electronics upgrades

Notable growth with platform life extensions

Note: Captures investment (acquisition and R&D) spending in top 55 industry-accessible international markets including the US; MENA includes South Africa; sizing does not include spending in Russia, China and other non-addressable markets; Source: Avascent Analytics.

FIXED-WING

Airborne Investment by Platform Type (2015 and 2020 Snapshots)

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2015 2020 2015 2020 2015 2020 2015 2020

Bill

ion

s Middle East & N. Africa

Europe

Asia

Americas


Defense Aviation Market: Parting Thoughts Five developments that may impact the defense aviation business and beyond in the coming period

Taking up Arms in the Unmanned Sector

• Last year’s movement to armed unmanned systems continues, with new competitors such as China’s Wing Loong now appearing in Pakistan and elsewhere

• The trend is driving new partnerships: Raytheon is working with Israel’s UVision on their loitering UAV in order to capture US domestic defense opportunities

An International Flavor for Unmanned

• The unmanned space is driving increasing partnership, often with a cross-border flavor, as evident above; but buyer beware—cooperation has been difficult

• Some examples: MALE2020 program in Europe, US-India cooperation has driven Raven co-dev opportunities; Qatar is investing in UAV R&D with academic partners

FW Mobility & Logistics Market Still

Turbulent

• Two major programs, the US KC-46 tanker and Europe’s Airbus A400M military hauler continue to suffer delays, cost-overruns, and technical difficulties

• BRIC competitors are ramping up as well, with Russia’s UAC announcing a milestone for its Il-90A aerial tanker; China launches the massive Y-20 transport; and Embraer’s KC-390 passes a number of critical flight tests

Rotorcraft Merger of the Decade

• Last year we discussed the profound technological changes that are re-shaping the rotorcraft sector—this year a business one

• Lockheed Martin’s acquisition of its erstwhile partner has had profound implications for the sector and defense consolidation writ large

Close Air Support (CAS) Renaissance

• The fate of the A-10 continues to reverberate through the halls of Congress and the Pentagon, but the debate over CAS, rekindled by ISIS, has broader implications

• CAS is provided by a host of aircraft, from militarized props to high-end fighters; requirements are spawning new light attack variants & even an A-10 replacement?





Agenda


Commercial Aviation: Production Outlook as of June 2016Forecast opinions are relatively aligned through 2017 as A320neo and 737MAX ramp-ups begin, however there is notable uncertainty surrounding Boeing and Airbus’ ability to sustain its current build rate growth trajectory

Forecast Discussion

Overall Outlook

• Aircraft production is expected to continue along its 10-year growth path, although at a lower rate due to softness in twin-aisle demand

• A number of questionable macro market factors (oil prices, interest rates, global economic health) could bring significant volatility to future production

9.5%

4.5%

8.5%

3.0%

4.9%

1.8%3.2%

-5.3%

2015-20 CAGR

Un

its

Un

its

• We expect sustained growth in overall output through 2020, yet well below the historical 8-10% growth rates

• Airbus and Boeing have done well to fill delivery slots for current A320/737s before A320neo and 737MAX arrive, yet both OEMs’ stated goals of ~60 aircraft per month appear unlikely

• Twin-aisle production is driven by the A350 and 787 ramp, yet there is concern that Airbus and Boeing will struggle to bridge production between the old and new A330 and 777 variants

− A330 deliveries are expected to fall ~30% from 2015 to 2016, a major blow to suppliers (especially Rolls Royce)

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E

Narrowbodies

Historical deliveries

Mfr-stated rates

Avascent projection

Third party forecast range

Third party forecasts: JP Morgan, Bernstein Research, Teal Group

150

200

250

300

350

400

450

500

550

600

2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E

Widebodies


18

17

17

11

10

7

55 3

Commercial Aerospace: M&A Activity ReviewAn Overview Across Key Segments and Notable Transactions

93commercial aerospace

transactions in 2015

Mechanical Components/Subsystems (18)

Machined/Cast Parts & Structures (17)

MRO & Aftermarket Services (17)

Electronic Systems / Avionics (11)

Composites (10)

Unmanned Aerial Systems (7)

Transdigm led consolidation activities, including both fluid control (PDI, Adams Rite) and cargo accessories (Breeze, Telair)

TDG acquired Breeze-Eastern, Pneudralics (PDI), Telair Cargo and Adams Rite

Adams Rite Aero

Structures remains highly active for both strategics and PE investors; roughly 50/50 split in acquisitions

Aftermarket interest continues to grow as investors seek to capitalize on maintenance of growing fleet

Berkshire acquired PCC 2 weeks after acquiring Noranco

RC acquired ICG and Pacific Avionics to bolster its Pax and Aircraft Ops Connectivity portfolio

Significant uptick in electronic systems and connectivity investments as all aviation stakeholders vie for secure positions in the emerging “Connected Aircraft” domain

Despite slow-moving regulations, start-up companies are consolidating and seeking greater vertical integration

EDAC and Cobham’s composite units have given

Meggitt a formidable presence in niche components

Acorn Growth Companies added composite repair capabilities to

its broad acquisition portfolio via Aerospheres

Strat Aero acquired Aero Kinetics

LaCroix Industries

Accurus (Liberty Hall) added its 3rd company to its platform

Veritas acquired StandardAero from Dubai Aero (DAE)

Wencor bolstered its MRO, DER and PMA capabilities with PHS/MWA

masFlight (data platform) and navAero (EFBs) will serve as the foundation for GEE’s A/C Ops unit

Composites M&A activity is increasing as legacy players seek differentiated technology to gain access to new platforms and the aftermarket

Martin UAV acquired MLB Company

Engineering / Ground Support (5)

Distribution (5)

OEM (3)

Lockheed Martin acquired Sikorsky

ONE Aviation merged Eclipse and Kellstrom


Commercial Aviation: Key Issues Impacting IndustryHot-button issues to monitor that will have strategic implications for the entire industry

Cyber Security for the

“Connected Aircraft”

Single-Aisle Aircraft Engine

Ramp-Up: How will

OEMs fare?

100-150 Seat Aircraft

Market: Ready for a

Resurgence?

Next-gen Aircraft

Development: Tough

Decisions Ahead

1 2

3 4


Cyber Security for the “Connected Aircraft”Aircraft systems and networks are divided into three domains, organized according to performance, safety and security needs; while secure from one another, increased use of IP networking across the aircraft presents new security risks

PIESPax Info & Entertainment

AISAircraft Info Services Domain

ACDAircraft Control Domain

Systems and networks (ATC) that support the safe operation

of the aircraft

Provides operational and airline administrative info to the flight

deck, cabin, and passengers

Provides passengers with in-flight entertainment, passenger travel info, and access to the internet

Flight controls

Environmental controls

Passenger address/ indicators

Smoke detection

Airline administrative info

Non-safety airline comms

Pilot operational information

Aircraft maintenance info

In-seat entertainment

Connectivity for passenger-owned devices

Passenger flight information

PAR

TITION

ED

Architectures are Safe, yet Increasingly at Risk: While current system architectures ensure secure separation of flight controls from the rest of the aircraft – the increased interconnection of systems across domains via IP networks presents new cyber security challenges

Hacking Concerns Increasing: Recent news about hackers gaining access to a United Airlines’ aircraft’s flight controls via IFE systems is unproven, yet still alarming; other instances of compromised airline networks (i.e., LOT Airlines) point to growing need for continued investments in network protection

Call to Action: Industry and regulators must take cyber security threats seriously in order to realize the true benefits of a connected aviation ecosystem

1

PAR

TITION

ED

THREE AIRCRAFT NETWORK DOMAINS

DESPITE PARTITIONS, REGULAR INFORMATION EXCHANGE ACROSS DOMAINS INTRODUCES SAFETY RISKS


New Single-Aisle Aircraft Engine Ramp-upIt will get done, but OEMs and the supply chain must continue to invest in new technologies and efficient production processes in order to support record build-rates

GE and Pratt & Whitney have invested in new facilities, new more

productive processes and technologies, and new assembly lines

that change the way engines are built to meet ballooning demand

– i.e., GE’s 3D-printed fuel nozzles

But this will not be an easy task, nor likely to occur without some

hiccups for both companies, particularly as they phase-out

existing engines and replace them with new ones during the

transition period

– i.e., PW GTF engine start time issue

With thousands of engines to be built over the next decade,

infrastructure will need to grow to keep up with demand – both in

production and at airport and maintenance facilities

– Larger assembly facilities and increased MRO capacity will be

vital

$0

$2

$4

$6

$8

$10

$12

$ M

illio

ns

New Engine Production Costs

Reducing production cost is key, especially when OEMs are massively discounting aircraft

Today’s Cost : ~$10M/engine

Target: $2M/engine

2


100-150 Seat Aircraft Market: Ready for a Resurgence?With operating economics that outpace current aircraft, the CSeries and Embraer’s E2 Jets are poised to rejuvenate the dormant 100-150 seat market, especially in light of ~4,500 replacement candidates in service today

NOTE: CRJ1000 and Superjet 100 both fall into market category, but were excluded as recently launched programsSources: Ascend, Avascent analysis

Current In-Service Fleet Counts, by Age Bracket (Aircraft between 80-160 average seats)

3

TOTALS:

NEW

A

IRC

RA

FT


Next Generation Aircraft Development DecisionsWhile OEMs are focused on near-term development projects like the 737MAX/A320neo, A330neo and 777X, Airbus and Boeing have difficult product strategy decisions ahead that will shape the industry’s next decade

Will build the 737 MAX10?

An additional stretch

New landing gear to accommodate larger engine

LEAP with 81” fan instead of with 69” fan

190 seats compared to 185 for A321

EIS in ~2020

Single-Aisle Aircraft

Wait for a new narrow-body family in the 2025-2030 time frame, or begin work earlier in the hope of capturing share?

Does Boeing have the resources for a clean sheet program?

Advantage: Leap-frogs A321neo

Disadvantage: Relatively short production life before an all new technology single-aisle enters the market

Boeing’s Decision:

Will offer the A350-2000?

An additional stretch to compete with 777-9

Capacity of 400 seats in dual class

Higher thrust Trent XWB engines

EIS in 2020-2021

Twin-Aisle Aircraft

Uncertainty exists with global economic downturn and deferrals of A350 orders by Delta, LATAM and others –is there enough demand for Airbus to go forward?

In addition, where would adding the A350-2000 leave the A380 in Airbus’ product strategy?

Advantage: Stretch design is feasible, relatively easy to introduce

• Disadvantage: Rolls Royce may have to redesign the Trent XWB to provide additional thrust

Airbus’ Decision:

4


Discussion


Avascent Paris59, rue des Petits Champs

75001 Paris, FranceTel: +33 1 73 77 56 19

www.europe.avascent.com

Jon Barney+1-202-280-6812

[email protected]

Jay Carmel+1-202-280-6847

[email protected]

Aleksandar Jovovic+1-202-280-6842

[email protected]

Please contact us if you would like to discuss these findings at the Farnborough Airshow or beyond

Avascent LondonPortland House Bressenden PlaceLondon, SW1E 5RS, UKTel: +44 20 8282 6357www.europe.avascent.com

Avascent US1615 L Street, NW, Suite 1200Washington, DC 20036, USA

Tel: +1 202 452 6990www.avascent.com

destination farnborough: commercial and defense market ... · an increasing focus on localizing...

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