A&D Market Predictions for the Remainder of 2017

We’re six months in to 2017. Now, with the year halfway over, it’s a good time to revisit your marketing plan and make adjustments if required based on current market realities and predictions for what’s ahead in the third and fourth quarters.

Here’s a high-level segment-by-segment snapshot of where things are and where they’re headed.


Air Transport: up, up, and away

The post-Great Recession rebound for the world’s airlines continues practically unabated. Air traffic demand as measured in revenue passenger kilometers (RPKs) was up 8.1 percent in the first quarter, well above the rolling 10-year average of about 5.5 percent, International Air Transportation Association figures show.

IATA is projecting a global airline industry net profit of $29.8 billion this year. While the 4.1 percent net profit margin is thin by many industry standards, it means the airlines are making money, even after expenditures. This is good for suppliers of everything from new planes to used parts. Read more here.

On the new-equipment front, Airbus and Boeing are pressing on with long-planned narrowbody production rate increases, even as orders have slowed. Learn more here. Meanwhile, airlines are flying some older aircraft longer than planned. These scenarios bode well for all parts of the supply chain. Interiors are a particularly strong demand area, as airlines refurbish cabins to increase density with slim-line seating and other space-saving products. 

The connected aircraft is a major driver of future innovation, with near-limitless possibilities.

Connectivity is playing a strong role as well — and not just air-to-ground. The connected aircraft is a major driver of future innovation, with near-limitless possibilities. One example: Embedded sensors in seats could alert the cabin crew when a passenger on a long-range flight awakens, signified by the seat adjusts from lie-flat to upright, and signal that the customer may be ready for meal service. A different sensor could alert mechanics when a seat's actuator is showing signs of wear and should be replaced

The aftermarket will continue to be a dynamic space. Boeing stands up its Boeing Global Services (BGS) business unit later this year, with an eye on capturing more customers buying packages of services. Data will play a large role in future market-share grabs, as operators, OEMs, and MRO providers jostle over who owns data, where it’s housed, and — most importantly — how it’s used. 

Airlines also are ramping up MRO spending on nice-to-have items. Prime examples include expanding engine overhaul work scopes and adding aforementioned interiors spending to their budgets. Over-capacity is an issue on some airframe and engine models, which will hurt pricing and, for savvy suppliers, help drive marketing spend.

Takeaway: The largest near-term opportunities revolve around data management and analysis. Airlines and suppliers are trying to figure out how to capture, analyze, and use datasets from aircraft and passengers alike. Whether it’s the engine that needs predictive analytics or the passenger whose purchasing habits can help drive in-flight duty-free sales, data will play a central role in servicing — and profiting from —customers.

Defense: Support our troops

Eager suppliers in late May got their first semi-detailed look at the Trump Administration’s defense plans via the Department of Defense’s FY18 budget proposals. The $33 billion top-line increase comes via notable jumps in space-based systems (+36 percent), mission support (+17percent), and ground systems (+12 percent). 

Combating terrorism, both offensively abroad...will drive near-term spend — and likely not just in the U.S.

The proposed 9 percent increase would be the largest in a decade. But considering this is part of an overall federal budget that proposes major cuts elsewhere, it remains to be seen how much appetite Congress will have for boosting defense to this extent at the expense of some popular programs. Among the solid bets: a troop increase in Afghanistan, which will drive so-called “short-cycle” needs, such as training, logistics, and Optempo support. 

Combating terrorism, both offensively abroad and defensively via boosting detection and prevention capabilities, also will drive near-term spend — and likely not just in the U.S.

The Air Force budget continues investing in new equipment, such as F-35 Joint Strike Fighter and the KC-46A. It also sets aside money for legacy upgrades, such as software for the F-22A and Active Electronically Scanned Array radar for the F-16. Aviation Week provides more detail here.

Meanwhile, Brexit may trigger an early review of the UK’s defense budget. The country’s strategic defense and security review currently takes place every five years, with the next one slated for 2020. But once the ramifications of Brexit talks with the European Union become more clear — which could be by the end of next year — a review may make sense, the Royal United Services Institute think tank says.

Takeaway: Follow the money, and the headlines. Global military might is not on the decline. If you’re not part of funded platforms, consider the needs created by rapid ramp-ups and deployments, such as the aforementioned training and logistics pieces as well as must-haves like tactical gear. Homeland security also will continue to be top of mind and budget.

Business Aviation: flatlining 

The business-jet market’s doldrums are no secret. Many analysts expressed cautious optimism that 2017 would be the bottom of the market. If this is true, it’s only part of the story. 

Aviation International News reports that new data from JetnetIQ projects a “lull” through 2018. Operators, seeing too great a gap between residual values and new metal, are hanging on to business jets longer (seven to nine years, vs. a three-to-five-year window before the Great Recession). One-third of 21,800 business aircraft are at least 20 years old.

The business-jet market’s doldrums are no secret.

While OEM suppliers have another year or so before skies clear, there are plenty of opportunities for aftermarket players. The ADS-B and FANS 1/A upgrade needs — the former a mandate, the latter a necessity for transatlantic operations — have U.S. operators making more upgrade plans for older aircraft than they envisioned. Providers and installers of these avionics should do brisk business for the next several years.

The broader GA market is part of the avionics-upgrade push as well. The real challenge — or opportunity — is installation capacity. Repair stations are booking up quickly. 

Takeaway: The business-aviation world is in a steady state when it comes to aircraft, but that doesn’t mean operators aren’t buying at all. Efficiency-improvement services, such as flight planning software, have plenty of appeal in a stagnant market that demands stricter cost control.  In lean times, businesses may be well advised to look for strategic partnerships to help package their products as part of a larger offering. Rockwell Collins, for example is making a big bet that smarter marketing of B/E's interiors product line and its own legacy products (glass cockpits, etc) will drive a lot more spend per business jet upgrade cycle.

Innovation: opportunities aplenty

While aerospace is a global business, it's often seen as a small world. Part of that is the uniqueness of envelope-pushing needed for relevant breakthroughs, such as supersonic flight. But as aerospace strives to become safer and more efficient, it is increasingly looking beyond its theoretical borders for inspiration — and innovators are finding new opportunities. Data analytics and additive manufacturing are two of many examples.

Cybersecurity could be another area set for a major profile lift within aerospace.

Cybersecurity could be another area set for a major profile lift within aerospace. As airlines and OEMs explore ways to leverage data to boost profits and cut costs, keeping bits and bytes secure will become as critical as anything this side of safety. 

While the industry hasn’t exactly ignored the data-protection challenge, other businesses — such as the financial industry — are arguably out ahead of aerospace.

Takeaway: Companies that have solved problems outside of aviation could find the usually technologically advanced powered-flight business in need of some assistance. 

Our Advice: Be Prepared

Many aerospace cycles, such as commercial-aircraft orders, are notoriously long. But shifting micro-trends, such as changes in fuel prices, new regulations, or even politics, can create short-term opportunities. Understanding how your customers and potential customers will be affected as their relevant cycles are evolving should help you craft a marketing strategy and plan with near-term ROI potential.