In the face of an increasingly dynamic business environment, according to a new industry report from consulting firm AlixPartners, the aviation industry will need to negotiate uncertainty in international trade relations, a rising oil price, significant stresses in a supply chain struggling with continued aggressive product ramp-ups and looming over-capacity in certain sectors.
The report calls out three key themes – services, M&A and digital transformation –that will change the shape of the industry.
The leading aircraft OEMs – Airbus, Boeing, Bombardier, Embraer – have significant services-focused ambitions with the leading players looking to increase services revenues by more than three times over the next 10 years from today’s $20bn per annum to $66bn. A key driver to achieving this revenue goal will be a growing focus on insourcing and partnership initiatives which will reshape many existing customer and supplier relationships. Target areas will include continued investment in the growing Manufacturing, Repair & Operations (MRO) sector as well as new product development, training and data management.
These ambitions will drive continued M&A across the industry, says the report. Last year was a record year for aerospace industry M&A and this momentum will continue as companies throughout the industry look to cut costs and seek new avenues for growth. Significant levels of M&A activity are predicted to continue, driven by strong appetite from both corporates and private equity with continued access to capital.
The report maintains that digital transformation will be a key driver of success in this new environment. Companies that adopt comprehensive digital transformation across their businesses – from inbound logistics to product development and marketing – could see efficiency gains of “up to 20% within three years, in addition to generating new revenue opportunities for those quickest to transform”.
Alix Partners claims that aerospace companies are currently leaving cost savings of between 1% and 3% on the table by failing to appropriately leverage existing data. These quick-wins require no significant IT investment and yet are being lost as digital is still not a tier one priority for many.
Eric Bernardini, Global Leader of the Aerospace & Defence practice at AlixPartners, said, “A new era is coming to this industry, one centred on new business models, an industrial step change on services, on partnerships and on digital transformation. Players in the industry are already moving at maximum velocity, but they can’t afford to be left behind in any of these areas. First mover advantage will be critical to success.”
Bernardini adds said “While the industry has certainly recovered in recent years, it faces big challenges ahead. Between big ramp-ups, new demand from end-user customers and big structural changes inside the industry, the entire sector is being stretched to capacity. OEMs and suppliers alike need to be extremely vigilant that nothing reaches breaking point—and that means anticipating problems before they arise and employing the latest in digital technologies to predict and combat them.”
While global airline revenue for 2018 is predicted to reach a record $834 billion, up from $754 billion in 2017, profits have declined from the peak of 2015/16 and are expected to remain flat at $57 billion this year. North America remains the world’s most profitable region, albeit margins are likely to decline here in 2018.
While fuel cost’s share of global commercial airlines’ total operating costs has decreased by 25% between 2006 and 2017, 2018 is likely to be the third consecutive year of growth in this metric, to 28%.
Middle-East carriers are expected to face over-capacity, driven by an expected fleet increase (including no new orders) of at least 80% by 2025. This will require significant action, for instance through operational improvements and partnerships with other carriers, says the report.
The global passenger jet fleet is expected to almost double in the next 20 years, driven by growing air traffic. The narrowbody sector has a record backlog of 9.9 years on average, with production expected to ramp up but engine availability remaining the key roadblock. In contrast, the Widebody backlog is at its lowest level since 2010, at an average of 5.9 years, as production rates are expected to stabilise following a doubling between 2010 and 2017. Nevertheless, there are serious tensions in deliveries ramp-up, with selected suppliers facing strong difficulties.
The report states that the aviation services market is ripe for consolidation.
The aviation services market is large (worth $257bn in 2017) and growing globally in line with manufacturing output. The world’s four leading aircraft OEMs are looking to increase their services revenue by more than three times in the next 10 years, with a growing focus on digital capabilities. 2017 saw 30 deals in MRO and aviation services alone. On top of this, several mega-deals involving system/equipment suppliers added up to more than $10 billion. This will continue as major OEMs increase their focus in this area and diversify their revenues.