Like many industries, aerospace and defense will go through a major transformation in the next five to 10 years.
Navigating the changes won’t be easy. Some companies may decide to leave the market altogether. But others — particularly those able to identify important trends and act on them — will discover major opportunities.
What’s clear is that traditional aerospace and defense contractors
will face increased competition for fewer contracts. Technology startups
are rapidly moving into their turf. Though some have been bought up by
the big players, more significant changes lie ahead.
Here are some of the key trends you should be watching:
Aerospace
Navigating the changes won’t be easy. Some companies may decide to leave the market altogether. But others — particularly those able to identify important trends and act on them — will discover major opportunities.
Here are some of the key trends you should be watching:
Aerospace
- New markets and competitors.Many manufacturers and suppliers are shifting toward Asia, so executives need to start rethinking their business models to take advantage of this trend.
- Volatile oil prices.Low oil prices may allow some airlines to delay replacing aircraft with more fuel-efficient models. But those carriers that reinvest profits in new equipment will be in a stronger position once oil prices rebound.
- Aging infrastructure.Demand for air transportation is clearly growing in emerging markets like China and India. But growth may be limited by outdated airport facilities and a lack of available airspace. Governments will need to address these shortfalls to realize the full potential for air traffic growth between now and 2030.
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- Maintenance operations.Most major airlines have shed their “in-house” maintenance, repair and overhaul (MRO) facilities. The market has largely consolidated into geographic centers such as Singapore, though China and India are rapidly making inroads. Aircraft and equipment makers (original equipment manufacturers) will need to monitor — and likely invest in — these lower-cost centers to remain relevant.
- Budget uncertainty.What Congress does about spending caps enacted in 2011 remains unclear. If the caps are allowed to continue, the Defense Department is expected to sharply reduce spending. Defense spending in Europe and the Middle East also is volatile.
- Rising costs, lower margins.Most U.S. defense contractors have successfully cut costs in recent years. But expenses are starting to rise again due to growing research and development, the possibility of an increased pension burden and the need for reinvestment. Profit margins are also being squeezed by tougher defense contracts, limiting opportunities for further cost-cutting.
- New business models.Defense contractors are seeking to transform themselves to drive growth. Some have entered new markets abroad to increase military and commercial sales. Others are focusing on civilian and commercial uses for their products. The more forward-looking contractors are getting into key growth areas such as cybersecurity and data management.
- No world peace this year.The Middle East remains highly unstable. Russia and China have expanded military operations. And state-sponsored cyber warfare continues to rage. Significant shifts are underway as contractors try to adapt to the new reality of U.S. defense priorities and budgets.
- Fewer but bigger contracts.Defense contractors are increasingly getting into “all or nothing” situations. The loss of one significant contract or tender could lead to the failure of a key division or even the entire enterprise.
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