The past several years have been kind to the aerospace industry. With an expanding need for air travel, enormous backlogs of new aircraft orders and a gradually resurging corporate jet sector, the immediate future of the industry looks strong.
That being said, there are signs the industry is going through major changes that will result in considerable consolidation and downward pressure on profits as manufacturers expand production of increasingly sophisticated platforms.
Consider the following trends that will be impacting the aerospace industry this year.
More sophisticated technology
Significant advancements in operating efficiency, avionics, cabin designs and noise reduction systems are all generating higher consumer demand. However, the broader use of composites, state-of-the-art manufacturing technology demands and changeover to new electrical systems are also quickly shifting the way aircraft are manufactured and creating issues throughout the supply chain as the supply base labors to keep pace with aircraft manufacturer demands. New, more complex platforms are already in production and more are anticipated for the near future.
Strong Replacement Demand
With quickly aging fleets in mature markets and developing demand from airlines and fleet operators for next generation, more fuel-efficient, technologically-advanced aircraft, many purchasers are now looking at replacing their older fleets. Over the coming two decades, about 40 percent of all new aircraft deliveries will be for replacement reasons. However, long periods of low fuel prices may push operators to delay replacing fuel-guzzling aircraft.
Changing supply-demand balance
Some experts have expressed concerns about manufacturers oversupplying the market. However, evidence indicates that supply and demand may be balanced right now.
With predictions pointing to a rise in build-rates of another 40 percent by the end of the decade, seat deliveries are anticipated to out-pace need for air travel. Manufacturers are anticipated to deliver seats at a rate of 8 to 9 percent of the active fleet, and airlines are projected to replace around 2.5 to 3 percent of their installed capacity while new growth is predicted to remain at around 5 percent of capacity, which is somewhat lower than the 5 to 6 percent projected, resulting in an oversupply of 1 to 2 percent of active fleet, about 300 aircraft or 40,000 to 50,000 seats.
Continued appreciation of the dollar and higher borrowing rates
The dollar’s strength is currently a significant consideration for aerospace. Since June 2014, the dollar has gone up 20 percent versus the currencies of major trading partners and has increased greater than 50 percent against emerging-market currencies. The gradual rate of Fed rate hiking should restrict further appreciation of the dollar. Even so, the recent strength of the dollar will still generate difficulties for non-U.S. players and even small modifications in short term rates may lower demand. The currency challenge may be especially distinct for developed market carriers who produce sales in native currencies but buy new aircraft in US dollars.
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