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2012 Global aerospace and defenseindustry outlook:A tale of two industries
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ContentsOverview
Sector updates:
Commercial aircrat production
Air trafc control
Deense
Business jet and general aviation
County updates:
United States
Brazil
Canada
China
India
France
Germany
Japan
Mediterranean countries
United Kingdom
Trend updates:
Mergers and acquisitions
Talent
Diversiying portolio
Contracting process
Overall outlook or 2012
Contacts
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deense programs o record, as well as growth in commercial
aircrat backlogs and a capacity challenge or suppliers to meet
commercial aircrat and regional jet producers increasing
requirements.
The A&D industry is becoming more global due to
heightened competition, growing travel demands, and
security requirements in emerging markets. Globalization
provides opportunities or lower cost and or technologically
advanced product introductions, as these can be designed and
manuactured anywhere, anytime, largely due to the Internet
and digital product denition, design, and manuacturing
sotware. Globalization is also aecting product selections, in
that military and commercial customers alike are requiring that
value be oset by placing work in their countries o origin.
This tendency is likely to continue, as traditional countries arepressured to keep their jobs at home, but is balanced by the
need or companies to grow revenues and continue to reduce
labor costs. The trend in the industry toward globalization is
also marked by new market entrants, some o which receive
government nancial support that may potentially invite World
Trade Organization consideration in uture years. Expect to see
more governmental scrutiny and compliance requirements on
acquisition practices in the areas o anti-bribery, anti-money
laundering, and ethical business practices to provide a level-
playing eld o competition.
In the past, the A&D industry has experienced program
management challenges, resulting in delayed schedules andmissed budget commitments. Among other reasons, these
program management struggles could have been due to
intense competition, which would have necessitated optimist
pricing, cost, and delivery plans. A closer look at several large-
scale programs that have missed their commitments in the
last ew years reveals many root causes, including the use o
immature technologies, lack o appropriate levels o systems
engineering discipline, and a plethora o complex engineering
changes. Other causes or the overruns include inadequate
supplier business maturity, capacity, and perormance, as well
as optimistic scheduling with poor time and resources
planning or contingencies. In 2009, one-time impairment
charges amounted to an estimated US$10.5 billion, while
in 2010 this amount was signicantly reduced to an
estimated US$1.7 billion, suggesting that troublesome
programs are behind or now, and that the industry is
learning to manage programs more eciently.4 This
positive trend likely continued into 2011 and will probably
also continue into 2012.
What lies ahead in 2012 or commercial aircrat
production?
The commercial aircrat industry is likely entering a
prolonged upcycle o orders and production, as demon-
strated by recent Boeing and Airbus announcements
o plans or increased production, the rst delivery o
the B-787 Dreamliner, and the progress o new aircrat
programs underway globally5. Market orecasts o top
large commercial aircrat manuacturers describe an expec-
tation o between 26,900 and 33,500 commercial aircrat
to be produced over the next 20 years6. The diculty in
keeping commercial airlines protable, principally due to
the increasing cost o uel, is generating requirements
or more uel-ecient aircrat. This is driving demand or
derivative aircrats that are equipped with next generation
engine technology. The sales order success o the Airbus
320NEO and the Boeing 737MAX have demonstrated
that industry technology innovations can create signicant
product demand.
Advances in eciency jet-engine propulsion is one o the
most signicant technological innovations that have come
4 Deloitte United States (Deloitte Development LLP), 2010 Global
Aerospace & Deense Industry Perormance Wrap-up, 12 July 2011.
5 Aviation Week and Space Technology, Analysis: Airbus, Boeing Must
Weigh Production Increases With Care, 30 August 2011;Flightstory,
Boeing 787 Dreamliner Date or First Delivery, 26 August 2011.
6 Airbus, Global Market Forecast 2011-2030, June 2011, www.
airbus.com/company/market/orecast/; Boeing, Current Market
Outlook 2011-2030, copyright 2011, www.boeing.com/commercial/
cmo/.
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to the commercial aviation market in the last two years,
specically with the Pratt & Whitney PurePower Geared
Turboan (GTF), as well as the CFM LEAP-X jet engines7.
Because the price o jet uel continues to impact the ability
or global airlines to make a prot, the introduction o
new jet power plants, which lowers uel consumption is
an industry game changer. With a claimed uel-eciency
savings in the range o approximately 15 percent, airlines
are requesting that commercial aircrat producers developproducts incorporating these advances8. Thus, in the last
ew years, new programs, such as the Airbus A320 NEO,
the Boeing 737 MAX, the Mitsubishi Regional Jet (MRJ),
the AVIC ARJ21, the Irkut MS-21, and more recently the
Embraer ERJ product line, are planning customer deliveries
in the next several years that will incorporate these new
power plants. As o mid-December 2011, these engine
7 Aspire Aviation, The engine battle heats up, 10 May 2011.
8 Aviation Week and Space Technology, Smooth Start For GTF Flight
Tests, 22 August 2011; Aviation Week and Space Technology, Virgin
America Launches CFM Leap On A320NEO, 15 June 2011.
0
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2012E
2013E
Orders Production 7 Year Moving Avg. Production
Orders
Years
producers have racked up 4,720 orders and options or
new next-generation regional and single-aisle commercial
aircrat power plants, making them among the best-selling
products in aircrat production history9.
Figure 2 illustrates a 30-year history and orecast or large
commercial aircrat orders and production, including a
consensus estimate or 2012 and 2013. It should be noted
that the seven-year moving average or production isexpected to reach 1,000 aircrat by 201310. This is quite
an accomplishment given that only about 20 years ago,
the seven-year moving average or aircrat production was
approximately 500 aircrat per year11.
9 FlightGlobal, Narrowbody engines: Makers mark the way in 2012,
20 December 2011.
10 DTTL Global Manuacturing Industry group analysis, January 2012.
11 Ibid.
Note: The Order plot rom 1981-1988 represent gross orders and rom 1989-2013E represents net orders.
Source: DTTL Global Manuacturing Industry group analysis, January 2012; The Boeing Company data on orders and delivery, accessed on 27
January 2012, www.active.boeing.com/commercial/orders/index.cm?content=timeperiodselection.cm&pageid=m15523;
Airbus company data on orders and delivery, accessed on 27 January 2012, http://www.airbus.com/presscentre/corporate-inormation/orders-
deliveries/?contentId=%5B_TABLE%3Att_content%3B_FIELD%3Auid%5D%2C&cHash=22935adac92cbbd4ba4e1441d13383; DA Davidson &
Company, Commercial Aerospace Industry Update, 26 May 2011; The Boeing Company, news release, Boeing Reports Strong Fourth-QuarterResults and Provides 2012 Guidance, 25 January 2012; QMT, 2012 to be Boeings year, January 2012; Airbus, news release, Ater a year
o records, Airbus sets its sights on continued industry leadership in 2012, 17 January 2012; JP Morgan, Aerospace and Deense - All About
Aerospace/Deense 2012, 5 January 2012; Credit Suisse, 2012 Aerospace & Deense Outlook, 19 December 2011; Morgan Stanley, Aerospace
& Deence Takeo, 21 December 2011.
Figure 2: Thirty-year history and orecast or large commercial aircrat orders and production (1981-2013E)
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What is the uture or advancements in air trafc
control (ATC), as a way to reduce aircrat uel burn?
Global air transportation system (ATS) transormation
initiatives, including the U.S. Federal Aviation Administrations
(FAA) NextGen program, as well as Europes public-
private Single European Sky ATM Research Programme
(SESAR), are expected to be implemented by 202512. When
ully implemented, satellite-based navigation and the
transormational programs are expected to save an estimated
three billion gallons o uel, our million fight hours in delays,
and 29 million metric tons o carbon emissions globally each
year13. With the expectation o increased demand or travel
in the next 20 years14, the new technology associated with
satellite positioning, navigation, and timing systems is expected
to increase uel savings per fight by orders o magnitude,
while reducing congestion and weather-related delays.
Altogether, it is expected that the net benet o implementing
global transormation initiatives could result in signicant
nancial value15. Specically, the projected net present value
o global transormation programs through to 2035 is US$897
billion16. The estimated regional breakdown is as ollows17:
U.S. NextGen program, US$281 billion
Europes SESAR program, US$266 billion
Rest o world, US$350 billion
Globally, the estimated savings accrued by dierent
beneciaries include:
Airlines, 31 percentOverall economy, 30 percent
Passengers, 34 percent
Airnavigationserviceproviders/airports/ATCorganizations,5
percent o the total benets
There are many challenges and risks to meeting the planned
implementation date or ATS transormation initiatives. These
include, but are not limited to, unding, technology risk,
regulatory reorm, ATC procedures, technical and certication
standards, harmonization, and workorce transormation.
Given the highly complex technology involved and the
requirement or saety and reliability, successul deployment
will likely require additional eort and possibly a new
approach, such as that being proposed or the U.S. FAA
12 Eurocontrol, 10 projects that changed the ace o European aviation, 8
February 2011.
13 Deloitte United States (Deloitte Development LLP), Transorming
the Global Air Transportation Systems A Business Case or Program
Acceleration, 10 May 2011.
14 Fox Business, Airbus lits demand orecasts on Asian growth, 19
September 2011.
15 Deloitte United States (Deloitte Development LLP), Transorming
the Global Air Transportation Systems A Business Case or Program
Acceleration, 10 May 2011.
16 Ibid.
17 Ibid.
NextGen program public-private nancing initiative18.
There may also be signicant risk that due to U.S. scal
constraints, implementation o the NextGen program
will be delayed, making 2025 potentially not achievable.
Furthermore, there may be some scaling o the capabilities,
which would delay the return on investment or such
programs, but could also contribute to risks o global
harmonization and interoperability with SESAR. Given
the nancial condition o the airline industry, it may be
a challenge to require airlines to pay or the necessary
equipage o new technologies on board the aircrat, i the
timing or amount o return on investment is not assured.
Lastly, plans will need to be developed and implemented
to address aviation system delays attributable to the
surace environment. ATS transormation and technologyplatorm benets are dependent on the successul
resolution o capacity challenges, including the insucient
number o runways, gate shortages, and overscheduling
o fights during peak trac periods. Avoiding the cost o
system delays, whether these are occasioned by airborne
congestion or ground-based constraints, is a key benet
to be achieved. However, in order to achieve this, the
development and implementation o plans that address
surace-based delays will be critical.
Where is global deense spending going in 2012?
Global deense spending is expected to be fat to declining
in 2012, mostly made up o reductions in the U.S.,United Kingdom (UK), and the rest o Europe, oset with
increases, principally in China, India, Kingdom o Saudi
Arabia, the United Arab Emirates (UAE), Japan, and Brazil.
In 2010, global deense spending, inclusive o armed
orces personnel, was estimated to be US$1.6 trillion,
with the U.S. the leader by order o magnitude, ahead
o second place China, ollowed by the UK, France, and
Russia19. Figure 3 shows the top deense spenders globally
in 2010. It should be noted that nine countries spend over
US$40 billion or deense each year.
In terms o aordability, the nominal amount spent on
deense does not necessarily equate to the importance,requirements, or priority o deense. Countries such as
the Kingdom o Saudi Arabia spend a signicant amount
o their national economy on deense because they have
national wealth created by their oil industry and security
requirements based on their location in the Middle East
and historical precedent. Israel spends a signicant amount
o its national wealth on deense or good reason their
homeland has experienced major military confict six times
18 Ibid.
19 SIPRI, SIPRI Yearbook 2011: Armaments, Disarmament and
International Security, 7 June 2011.
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since their ounding in 194720. India, Brazil, South Korea,
and others are increasing their deense spending rapidly
due to either their wealth, creating aordability and/or
signicant military threats to their national security.
Figure 4 illustrates aordability and importance o deense
by comparing military expenditures with gross domestic
product (GDP) or selected countries in 2010. As can
be seen, Kingdom o Saudi Arabia spends the highest
percentage o its GDP on military expenditures at 10.1
percent, ollowed by Israel at 6.4 percent, and then the
U.S., Russia, and South Korea21. The global average GDP
spent on deense is 2.7 percent which is a bit over-
stated considering the U.S. raises the average signicantly
with a large portion o total expenditures22.
20 USA Today, The Arab Israeli Confict, 1947- present, 28 August
2001.
21 SIPRI, SIPRI Yearbook 2011: Armaments, Disarmament and
International Security, 7 June 2011.
22 Ibid.
The U.S. Department o Deense (DOD) is now
potentially acing up to US$1 trillion in budget cuts
over the next 10 years. What could be the impact
on the skilled workorce and to the industrial base
i all the cuts were enacted?
U.S. deense budget reductions in the order o US$487
billion over 10 years have essentially been agreed to by
U.S. administration and congressional constituents23.
A recent challenge o the super-committee to agree
on decit-reduction measures on 23 November, 2011
would, i implemented trigger the automatic sequester
budget reduction o an additional US$500 billion over 10
years, starting in 201324. Taken altogether, that implies
a reduction in orce structure, (e.g., soldiers, sailors,
airmen, etc.), as well as a reduction in investment accounts
(e.g., research and development (R&D), new program
starts, numbers o units ordered, etc.). Assuming that
23 Aerospace Industries Association, The Real Deense Budget
Challenges Lie Ahead, 26 January 2012.
24 Ibid.
JapanGermany
CanadaBrazilItaly
AustraliaChina
FranceIndia
WorldUK
South KoreaRussia
U.S.Israel
Saudi Arabia 10.1%6.4%
4.8%4.0%
2.7%2.6%2.6%
2.4%2.3%
2.0%1.9%1.8%
1.6%1.4%1.4%
1.0%
Source: SIPRI, SIPRI Yearbook 2011: Armaments, Disarmament and International Security, 7 June 2011.
Figure 4: Global military expenditures by country as percentage o gross domestic product in 2010
IsraelCanada
AustraliaSouth Korea
BrazilItaly
IndiaGermany
Saudi ArabiaJapanRussiaFrance
UKChina
U.S.World $1,611,437
$698,281$119,400
$59,598$59,322$58,668$54,527$45,245$45,152$41,284$36,972$33,538$27,591$23,972$22,788
$14,036
Source: Stockholm International Peace Research Institute (SIPRI), SIPRI Yearbook 2011: Armaments, Disarmament and International Security, 7 June
2011.
Figure 3: Global military expenditures by country in 2010 (US$ millions)
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What about business jets and general aviation?
Where is the market going?
The 2011 general aviation market was expected to
rebound slightly rom the devastating impact experienced
to orders, employment, and revenues that began with the
economic crisis in 200830. Unortunately, this was not the
case, as shipments or all segments o the general aviation
sector experienced continued declines through the rst
three quarters o 201131. Total shipments declined 9.8
percent, while total billings dropped 10.2 percent through
the rst three quarters o 201132. Figure 5 shows the
changes in shipments or piston, turboprop, and business
jet segments, as well as total billings or the rst nine
months o 2011, compared to the same period in 201033.
More o the same is expected in 2012 with only a slight
growth in orders anticipated. Several reasons may explain
the challenges the general aviation industry aces in
returning to growth. These include the number o high-
quality previously owned general aircrat available in the
market, tighter credit conditions, the smaller number o
younger people obtaining pilots licenses, and nally the
higher cost o uel. On the bright side, China is in the
process o liberalizing its air space and expects the general
aviation industry to lead business jet aircrat growth in
the country, due to the increasing number o wealthy
individuals and burgeoning middle class. Sales to the
Middle East also are expected to ollow the same patternand contribute to the slight increase in orders34.
30 GAMA, General Aviation Airplane Shipment Report, 7 November
2011; Aircrat Owners and Pilots Association, GAMA: Decline in
aircrat deliveries slows, 7 November 2011.
31 GAMA website, accessed on 2 December 2011, www.gama.aero/
media-center/industry-acts-and-statistics/shipments-billings/.
32 Ibid.
33 Ibid.
34 Avjet Corporation, Private Business Jets A Global Perspective, 1
December 2011.
Much has been reported about the A&D industrys
need or cost efciencies and overhead-cost
reduction. The industry continues to experience
program delays and signifcant cost overruns. Will
there be improvement in 2012?
Although one-time asset impairment charges to earnings
were down signicantly in 2010 compared to 2009, the
U.S. Government Accountability Oce (GAO) ound that
on average, A&D programs were 26 percent over budget
and only 33 percent were on schedule35. Nevertheless,
improvements have been occurring and are expected to
continue in 2012. As companies are pressured by military,
government, and commercial customers to ocus on
aordability, the need to manage costs in all phases o the
product lie cycle will become increasingly important. A&D
companies will need to mitigate costs during R&D and
initial production, and then maximize prots as operations
move into ull rate production and support.
Starting with the R&D process, successul companies have
implemented rigorous program and risk management
processes coupled with eective perormance metrics
to manage technical risks and avoid cost overruns.
As programs enter production, successul companies
assess uture market conditions, long-term operational
fexibility, and nancial return on investment when
considering whether to invest in new capacity or outsource
components to strategic suppliers. As an example,Gulstream strategically outsourced production o their
mid-cabin business jets to a key supplier36. Gulstream
traditionally operates a vertically integrated business,
but outsourcing this piece o production allowed them
to avoid making signicant investments to sustain those
products.
35 GAO Report to Congressional Committees (GAO-08-467SP),
Deense Acquisitions: Assessments o Selected Weapon Programs,
March 2008.
36 AIN online, Outsourcing Oshore Not a Gulstream Goal, 13
October 2010.
Figure 5: First nine months 2011 shipments o business and general aviation aircrat manuactured worldwide (US$ billions)
2010 2011 Change
Pistons 633 577 -8.8%
Turboprops 237 223 -5.9%
Business jets 491 427 -13.0%
Total shipments 1,361 1,227 -9.8%
Total billings (US$
billions)
$13.5 $12.1 -10.2%
Source: General Aviation Manuacturers Association (GAMA), accessed on 2 December 2011, www.gama.aero/media-center/
industry-acts-and-statistics/shipments-billings/.
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During production, improved supplier collaboration
will help companies tend to manage and control costs.
Forecasting, planning, and scheduling maturity has been
shown to have signicant impact on the ability or a
company to meet customer delivery schedule demands.
Working with suppliers to provide an accurate view o
lead times, budgets, and orecasts will improve on-time
delivery, responsiveness, and cost eectiveness. Forecasts
that include high-delity production lead times, work-
fow dependencies between suppliers, and accurate due
dates are critical to nding ways to reduce lead time and
mitigate potential problem areas.
Lastly, as production volumes drop and eventually cease,
successul companies monitor sustainment requirements
and continually assess the impact that the erosion involume and inrequent demand streams can have on
total program costs. For example, the inrequent demand
associated with sustainment requirements can cause
signicant breaks in production. A break o 12 months can
increase production costs by 15 percent, or example, and
a break o 18 months can increase costs by 20 percent37.
In order to control costs, successul companies proactively
monitor product support proles and potentially shit the
business model used to deliver a product and/or service to
ensure that sustainment costs or the customer are kept
low, while prots are maintained by the company
Signifcant attention is being paid to U.S.Government Deense Contractor Audit Agency
(DCAA) contract compliance, with several
companies having their business systems criticized
by government auditors. What should the industry
expect in 2012?
Regulators have long held government contractors
accountable or how their money is being spent; however,
there are additional and more intense consequences or
non-compliance based on new regulations. Contractors
are already subject to numerous regulatory requirements,
contract audits, investigative oversight, certications,
and sanctions. It is expected that continued scrutiny o
contractor business systems, a renewed ocus on access to
internal audit reports, and a return o incurred cost audits.
In recent years, the U.S. government has been highly
ocused on the role served by the DCAA in overseeing
compliance with requirements, such as the Deense Federal
Acquisition Regulation Supplement (DFARS). As a result,
the DCAA has taken a more aggressive and comprehensive
approach to their auditing o deense contractors38.
37 DTTL Global Manuacturing Industry group analysis, January 2012.
38 Deloitte United States (Deloitte & Touche Financial Advisory Services
LLP) observation, December 2011.
Further underscoring the situation, in May 2011, the
DOD issued an Interim Rule amending DFARS in an
eort to improve the eectiveness o DOD oversight
over contractor business systems39. The rule establishes
specic compliance requirements spanning a wide variety
o deense contractor business processes, including
accounting systems, earned value management systems,
estimating systems, materials management and accounting
systems, property management systems, and purchasing
systems. With the issuance o the Interim Rule, deense
contractors will likely experience even greater DCAA
attention. The stakes have been raised, as the Interim
Rule species that deense contractors may ace nancial
consequences or non-compliance, including withholding
o payments i signicant deciencies are identied40.
Penalties include payment withholding o 5 percent o
amounts due per system or 10 percent maximum, which
can continue until such time as the signicant deciencies
have been corrected, as determined by the governments
contracting ocer. Faced with the possibility o substantial
delays in receiving payment or services rendered,
successul deense contractors are proactively evaluating
their compliance with the new DFARS requirements to help
ensure that their business systems are not in violation41.
In December 2011, the GAO issued a report regarding
DCAAs access to deense company internal audit reports42.
The report ound that many o these internal audit reports
reviewed contained inormation relevant to DCAA audits,but certain inormation was not provided or requested.
While acknowledging existing case law regarding access to
these condential internal reports, the GAO recommended
that DCAA take steps to acilitate access to internal
audits and assess periodically whether other actions are
needed. The DCAA is expected to increase its eorts in
perorming incurred cost audits at contractors. DCAA
management has stated it will be orming dedicated teams
to ocus on perorming these audits and decreasing the
current backlog o open years43. As these audits are being
conducted, contractors will likely experience challenges
in providing adequate documentation in support o its
transactions.
39 U.S. DOD, Federal Register / Vol. 76, No. 96 / Wednesday, May 18,
2011 / Rules and Regulations.
40 Ibid.
41 Deloitte United States (Deloitte & Touche Financial Advisory Services
LLP) observation, December 2011.
42 U.S. GAO, Actions Needed to Improve DCAAs Access to and Use o
Deense Company Internal Audit Reports, 8 December 2011.
43 National Deense Industry Association, management presentation,
12 to 13 September 2011.
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What is the emerging tax picture or U.S. A&D
companies?
In the past, the tax departments o A&D companies have
been viewed as cost centers that manage the companys
tax compliance and tax nancial reporting obligations. This
model may have been sucient or U.S.-based companies
operating primarily within the United States, serving
primarily American customers. However, as companies
expand internationally and encounter new complicated
tax laws o oreign countries, in addition to the uncertain
and complicated U.S. tax laws, tax departments are being
asked to do more than what they are accustomed to
without additional resources. Furthermore, companies
may not be able to handle or coordinate their global tax
compliance obligations and may require assistance in
the U.S. and abroad. Proactive tax departments that arewell integrated with a companys nance and operations
unctions and viewed as a value driver can deliver
meaningul benets exceeding department costs, including
lowering eective tax rates and obtaining cash tax savings
through upront tax planning.
The U.S. tax picture or beyond 2012 is still developing.
There is a debate in Washington D.C. currently underway
on the need to reorm U.S. corporate tax rules and lower
the top rate in order to make U.S. businesses more
competitive internationally. However, the prospect o
a reduced corporate tax rate comes with a signicant
amount o uncertainty or taxpayers, as Congress wouldlikely have to make oundational changes to longstanding
deductions, credits, and incentives upon which businesses
have relied, such as the R&D tax credit, domestic
production activities deduction, completed contract rules,
and accelerated depreciation. While no action is expected
until sometime ater the 2012 U.S. elections, companies
could be taking several actions to prepare or and
successully cope with change.
What can be expected in Brazil, with increasing
levels o wealth, the pending selection o new
fghter aircrat, and growth in the civil aviation
market?
It is anticipated that the Brazilian A&D industry will
continue to thrive over the next ew years, driven by GDP
and individual income growth, as well as wealth creation
particularly in the middle class. In addition, the expansion
o credit and long-term nancing has been powerul
drivers o economic growth. Finally, real-dollar exchange
rates have stabilized, resulting in lower oreign exchange
credit risk. These drivers have provided a oundation
or robust economic activity and bode well or the A&D
market in Brazil.
Air travel demand has increased at impressive levels and
nearly tripled in the past decade, as more people can
aord to fy or business and leisure44. In commercial
airlines, revenue rom domestic and international regular
fights operated by Brazilian companies has increased
rom R$13.8 billion in 2003 to R$21.6 billion in 201045.
In deense and security, the Brazilian Air Force budget has
increased rom R$4.6 billion to R$8.02 billion, signaling
an increased priority or national deense46. This is one o
the most signicant military investments or the Brazilian
government.
In addition to organic market expansion, Brazils
involvement in the 2014 International Federation o
Association Football World Cup and 2016 Olympic
games will increase travel to the country generatingadditional revenue or the industry. These mega events
are likely to expand the interest in tourism, business, and
inrastructure development. The Brazilian government
plans to invest R$5.6 billion to modernize airports in
preparation or the sporting events47. Another important
actor driving the markets is the high-speed development
o biouels or aviation. Thus or the next year, industry
sector activities in Brazil appear to be increasing.
How will the Canadian industry beneft rom the
growth o the industry in the next years due to
increasing demand or aircrats?
The Canadian A&D industry is composed o more than400 companies, including a ew original equipment
manuacturers (OEMs) and many tier two and tier three
suppliers48. It employs more than 80,000 employees,
generates revenues o approximately CND$24 billion, and
ocuses primarily on the commercial aircrat sector which
represents 83 percent o the industry49. This situation
positions Canada to benet rom the increasing demand
arising rom the global commercial sector and protects it
against deense spending reductions.
The Canadian A&D industry is beneting rom the
opportunities o the global A&D industry since more than
77 percent o its revenues are generated rom sales to
44 Star Tribune, Brazil air travel triples since 2002, stoking worries
about preparation or WCup, Olympics, 25 January 2012.
45 National Civil Aviation Agency, 2010 Yearbook o Air
Transportation, developed in 2011, www.stats.gov.cn/english/
statisticaldata/otherdata/brics2011/P020110412517544487450.pd.
46 Ibid.
47 Empresas Concremat, Build ing or a more competitive Brazil,
April 2011.
48 Aerospace Industries Association o Canada (AIAC), Canadas
Aerospace Industry Statistics, accessed on 2 January 2012.
49 AIAC, Backgrounder Deloitte Study Report Highlights, 26
October 2011.
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oreign markets50. The increasing demand in developing
countries such as China and India will thereore benet
Canada. Canadian companies are likely to continue to
invest in those developing countries in order to maintain
market share and remain competitive in these markets. In
addition, industry has also ocused on the development o
green aerospace technology to provide uel-eciency
relie as the price o uel rises. As the demand or greener
aircrat increases, many Canadian A&D companies that
have invested heavily over the past ew years will likely
gain nancial benets.
What impact will China have in the industry?
China is expected to continue the modernization o the
industry, with several development programs underway. In
the commercial aircrat industry, the COMAC C-919 singleaisle commercial air transport program is well under devel-
opment, with rst fight scheduled in 2014 and entry into
service in 201651. COMAC orecasts 2,000 C-919 aircrat
to be produced over the next 20 years, approaching 7
percent market share o the consensus market orecast or
global production52. In addition, COMAC is developing the
ARJ-21 regional aircrat, which has already undergone rst
fight, and is expected to be delivered to airline customers
in 201253. Together, these two aircrat launch programs
represent the emergence o an industry that has struggled
over time, but now appears to be emerging as a credible
producer o commercial air transportation products. It is
expected that the Chinese commercial aircrat industrywill continue to gain attention in 2012, with continued
western supplier involvement and partnership creation, as
well as continued technology development.
In the space sector, the Chinese industry continues to
advance its space program with the development o a
space station. A plan announced by the Chinese govern-
ment at the end o 2011 includes the launch o a space
lab and collecting samples rom the moon by 201654. It
also includes plans or a manned spaceship and space
reighters. The new space plan would include the design,
manuacture, and deployment o the Beidou Satellite
Navigation system, Chinas version o a global positioning
systems (GPS), navigation and timing system, similar to the
U.S.-based global positioning system. Recent achievements
made by Chinas aerospace industry in 2011, including a
50 Ibid.
51 Flightglobal, C919 project at crucial point in detailed design
Comac, 25 November 2011.
52 Deenceweb, COMAC C919 orders reach 165 aircrat, 16
November 2011.
53 Flight Global, Comac ARJ21-700 ready or type inspection
authorization, 30 December 2011.
54 The New York Times, Space Plan From China Broadens Challenge
to U.S., 29 December 2011.
successul docking between the Shenzhou-8 unmanned
spacecrat and the Tiangong-1 space lab module55.
China is also increasing its deense capitalization,
expanding its submarine feet and developing its rst
aircrat carrier, purchased rom Russia56. It also has a th
generation stealth ghter, the J-20, under development,
which has captured the attention o global competitors57.
What is expected or India in 2012?
India is a nation on the ascent in terms o wealth creation,
spending on space, commercial air transportation, and
deense sector. First, the Indian space sector has been
experiencing growth with the launch o Chandrayaan-1,
the Indian Remote Sensing series and Indian National
Satellite system58
. The Indian Space Research Organization(ISRO) is experiencing success with the in-country design
and production o spacecrat. ISRO is likely to establish
new acilities and develop a host o technologies or
Indias rst manned mission scheduled or 201659. A new
project, the Indian Regional Navigational Satellite System,
has been developed or improving national intelligence,
surveillance, and reconnaissance capabilities with a launch
o the rst satellite planned during 2012-2013. Finally, the
Chandrayaan-II mission is expected to launch in 2013, with
the objective to collect samples o lunar soil and conduct
in situ chemical and mineralogical studies60.
Second, regarding commercial aviation, India is one othe astest growing aviation markets and is expected to
be the third largest domestic market ater the U.S. and
China by 202061. The commercial aviation market in India
during that time is expected to grow at a compound
annual growth rate (CAGR) o 18 percent, and the market
or new passenger aircrat in India is expected to be
US$150 billion, with 1,320 new airplanes delivered over
the next 20 years62. Traditional mainline as well as low-
cost carriers are expected to participate in feet renewals
55 CNN US, Space docking marks new milestone or Chinas stellar
ambitions, 30 November 2011.
56 The Guard ian, Chinas rst aircrat carrier: From Russia with love,
10 August 2011.
57 ABC News, Chinese Stealth Fighter Could Rival U.S.s Best: Report,
9 May 2011.
58 Deloitte India (Deloitte Touche Tohmatsu India Private Limited),
Antrix Corporation Limited, and Conederation o Indian Industry,
Overview o the Indian Space Sector 2010, August 2010.
59 Flightglobal, Indias space sector shits to new rontiers, 1 February
2011.
60 ISRO, website inormation included in Future Programme, accessed
on 18 January 2012.
61 India Brand Equity Foundation, Website inormation included in
Aviation, accessed in December 2011.
62 Indian Aviation, Sky is the limit, 18 January 2012; Boeing, Boeing
values India Market or 1320 New Airplanes at $150 Billion Over Next
20 Years, 6 July 2011.
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both rom German companies investing in target markets,
as well as Asian investors investing in Western companies
in order to gain technological know-how.
In general, the German A&D industry could see some
urther consolidation initiatives driven by eorts or
diversication, key system supplier platorm capability,
more risk sharing, and assistance to distressed key
suppliers by OEMs.
What are the emerging trends or the Japanese
A&D industry?
The current global role o the Japanese A&D industry
is primarily as a tier-one supplier. Indeed, more than
35 percent o Boeing 787 components are made by
Japanese companies, and ully 20 Japanese companiesparticipate in the Airbus A380 program71. Although
the recent appreciated Japanese Yen has resulted in
protability challenges or the industry, it is expected that
rate increases in these and other programs will help grow
revenues, employment, and related economic activity or
the industry in Japan or several years to come.
The industry is maturing and in selected cases is
transitioning to a ull-scale platorm integrator. Major
programs under development are the MRJ, a next
generation regional aircrat being produced by Mitsubishi
Aircrat Cooperation, Honda Jet by Honda, commercial
derivatives o the XC-2 by Kawasaki Heavy, and US2by ShinMaywa. The Japanese industry has high hopes
or the commercial success o these programs because
they represent an opportunity to showcase indigenous
engineering and systems integration capabilities. They also
represent a key pathway or economic development, job
creation, and national pride.
Key success actors or the Japanese A&D industry have
been and continue to be technology and quality. However,
the industry has also realized the criticalities o voice o
customer, needs-driven engineering, and globalization to
reach the next level o perormance and improve global
status. The largest impact to Japans A&D industry is the
transition rom product- driven manuacturing companies
to global and customer needs-driven engineering
companies.
71 The Society o Japanese Aerospace Companies, Aerospace Industry
in Japan 2010, April 2011.
What will the budget defcit challenges in
the Mediterranean countries mean to their
contributions to the NATO organization or their
own countries deense budget impact and ability to
be a leader?
Since the end o the Cold War, military policy and
expenditure have been the subject o a constant evaluation
to ensure the ability to intervene eciently. Furthermore,
the U.S. and North Atlantic Treaty Organization
(NATO) relationship was balanced towards greater U.S.
contribution in terms o both leading crisis situations and
military spending. The recent Arab Spring events and the
military security campaign in Libya have demonstrated the
need or Europe, particularly the UK, Italy, Germany, and
France, to take the lead72. European nations are becoming
more aware that security is not a zero-cost product andthat they cannot enjoy the benets o security without also
helping to guarantee it.
As shown earlier in Figure 2 and 3 ocused on global
deense spending, the UK, France, and Germany are by
ar, the countries that invest most on military expenses,
with the UK at 2.3 percent o GDP compared to 1.7
percent or France, 1.8 percent or Germany, 0.9 percent
or Italy, and 0.7 percent or Spain73. However, considering
the combined European population and GDP and the
corresponding U.S. gures, European expenditure on
military investment is a ourth the amount spent by the
U.S, while spending on military R&D amounts to just asixth o the U.S. gure74.
With the economic challenges in Europe, particularly with
the Mediterranean countries o Spain and Italy, increases
in deense spending are not likely in the short to medium
term. According to preliminary budget projections, the
gap between U.S. and European deense spending is likely
to widen, as NATOs 2011 spending cuts o 18 percent
in the next ew years are orecasted compared to 201075.
However, the term smart deense has been coined
to dene the trend towards selective European military
spending at a time o limited available economic resources.
Smart deense involves a streamlined, more ecient model
with the adoption o a range o measures and armaments
that will enable NATO to ace up to any type o threat:
From cyber war to missile deense against possible attacks
by rogue countries. It will seek to increase eciency
72 The Global Policy Institute, The Arab Spring is an Opportunity...or
Europe, 2 September 2011; Deutsche Welle, European divisions on
Libya hold up U.S., NATO leadership decisions, 23 March 2011.
73 SIPRI, SIPRI Yearbook 2011: Armaments, Disarmament and
International Security, 7 June 2011.
74 Ibid.
75 NATO, NATO Review 2011, accessed on 3 January 2012, www.
nato.int/docu/review.
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by encouraging member countries to cooperate on the
basis o interoperability and specialization. Plans are or
resources to be better allocated, no longer based on
national interests, but in the more general interests o the
alliance as a whole76.
What is the industry in the UK doing to address the
slowdown in deense spending?
The UK A&D industry is the third largest globally, behind
the U.S. and China, and has 520,000 direct and indirect
employees dependent on the sector77. Importantly, over
hal o the revenues generated by UK-based rms derive
rom sales made to export markets, with the U.S. DOD
being the primary export customer78. Thus, the industry
is important to the UK industrial base as the employer o
a highly skilled UK workorce and as an earner o oreignrevenues. As such, understanding the UK industry going
orward requires consideration o all three key revenue
generators, including UK MOD, U.S. DOD, and the
commercial aerospace sector, along with an understanding
o the UK government response.
The UK decit reduction program has resulted in deense
procurement reorms, which have delayed contract
placements, and will reduce spending over the next three
years by approximately 8 percent in real terms. In addition,
the Currie review regarding single-source procurement
is expected to be nalized in early 201279. Amongst the
expected recommendations are open book accountingso that the UK MOD is in a better position to negotiate,
incentivizing eciency to encourage the industry to
reduce its cost base, and a push to reduce single-source
procurement and open competition.
A similar picture to the UK is being seen, as discussed
elsewhere in this outlook. However, it could be argued that
there are still opportunities to access additional revenues
in the U.S. market via a ocus on small-to medium-sized
acquisitions, as has been the case or the UK industry over
the last decade or so. The challenge now, given what is
happening in the UK market, is both securing unding
and being able to meet vendor price expectations. In
addition to the Currie report, the UK government is looking
76 NATO, Smart deense website, accessed on 7 February 2012, www.
nato.int/cps/en/natolive/78125.htm.
77 A|D|S, Aerospace: A recipe or recession recovery, 2011; A|D|S,
Deence: sound investment, strategic choice, accessed on 18
January 2012, www.engineeringcapacity.com/__data/assets/pd_
le/0006/405168/ADS-Deence-maniesto-FINAL.pd; The Telegraph,
UK military spending, accessed on 18 January 2012, www.
telegraph.co.uk/news/uknews/deence/8002911/Deence-spending-
the-worlds-biggest-armies-in-stats.html?image=2.
78 Deloitte UK observation, 14 December 2011.
79 UK MOD, Review into single-source military equipment contracts,
11 October 2011.
to support the industry in accessing new markets and
growing exports. This government/industry partnership
will need strong commitment on both sides as it will be
up against other countries seeking a similar export-led
recovery or their industrial base. In order to address the
above challenges and opportunities, the UK A&D industry
is preparing itsel or the uture by80:
Increasing ocus on the broader security and intelligence
markets
Increasing access to customers preerential areas o
spend and/or customers in new geographic markets
Addressing internal costs to refect changes in customer
requirements and reduced business activity
Focusing on operational eciency
Looking to work more closely with the UK governmentor support on exports, as recognized by the UK
government in its recent whitepaper81
Continuing to improve internal data capture, and
leveraging this knowledge in negotiations with uture
upskilled government procurement agencies
Enhancing the robustness and appropriateness o their
business portolios through targeted acquisitions and
disposals
Where do you see M&A activity in 2012?
Global M&A activity in 2012 is likely to be driven by a
variety o actors, including the impact o the recent global
economic crisis on both corporations and private equityrms. Specically, investible cash, as well as borrowing
capacity will likely lead many companies to pursue M&A
activity as a vehicle or growth and to access new markets.
Many A&D companies have used their cash over the last
several years to pay down debt, buy back stock, increase
dividends, and to make elective contributions to pension
costs. At the beginning o 2011, global A&D companies
had an estimated US$49.5 billion in ree cash fow, and
some used this asset to participate in the M&A market82.
Indeed, M&A deal value in the A&D industry in 2011
was approximately twice the level rom the previous
year, driven in large part by the US$16 billion Goodrich
Corporation acquisition by United Technologies
Corporation deal announcement83. Additionally, the vast
80 UK MOD, Spending Review 2010, covering the period to the 2014
to 2015 nancial year announced on 20 October 2010.
81 UK MOD/Government, National Security Through Technology:
Technology, Equipment, and Support or Deence and Security,
February 2012.
82 Deloitte United States (Deloitte Development LLP), 2010 Global
Aerospace & Deense Industry Perormance Wrap-up, 12 July 2011.
83 DTTL Global Manuacturing Industry group analysis, January 2012;
Wall Street Journal, UTC Deal Reached to Acquire Goodrich, 22
September 2011.
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level o capital raised by private-equity rms in previous
years should serve as a driver to deploying those unds
in 2012. Private equity investors are likely to compete or
many o the same assets as strategic buyers and in some
cases paying higher values. During 2011, multiple deals,
large and small, were announced and similar levels o M&A
activity are expected or 2012.
It is anticipated that increased activity will remain high
within commercial aerospace given the anticipated
overall increases to production levels and new program
ramp-ups. Buyers will likely continue to use M&A to
position themselves on these growing programs, as well
as increasing scale and integration capabilities to become
Figure 6: Recent energy market investments by leading A&D companies
Source: DTTL Global Manuacturing Industry group analysis, January 2012.
Figure 7: UVA data capture
Note: The quantity o data captured by UAVs has increased 50 times over the past two years, creating a market
or ltering and processing UAV sensor data.
Source: DTTL Global Manuacturing Industry group analysis, January 2012.
more relevant to the customer. Within the deense world,
the challenges o the U.S. Super Committee will likely
lead to a decline in certain deense programs, as the U.S.
government looks or ways to reduce the budget decit.
This will likely have a negative impact on overall deense
industry attractiveness o certain assets. At the same time,
expect ever-increasing budget support or, and thereore,
M&A interest in, those areas which support new
realities technologies, such as intelligence, surveillance
reconnaissance, precision strike, cyber security, energy
security, data usion, mission sotware development, and
unmanned and autonomous controlled vehicles.
0
5
10
15
MarineNuclearSolarWindFuel cellsBiofuels
13 13
10
8
5
3
Energy markets
Numberofcompaniesinvested
0
300
600
900
1200
1,500
20112009
13
10
8
3
30
1,500
Year
Continuous
year
s
ofvideo
feed
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What are the trends in talent recruitment,
development, and retention in the A&D industry?
Talent is one o the biggest challenges companies ace
in the coming years, particularly the A&D industry given
its demographic composition. The oten cited shortage
o engineers in the U.S. remains a challenge, but skilled
production workers are also in short supply. In the U.S.,
74 percent o manuacturers indicated that workorce
shortages or skills deciencies in skilled production roles
represent a major challenge to productivity84. Cuts in
deense spending threaten to exacerbate this problem i
diversied manuacturers and smaller companies leave
thesector and skilled production workers seek employment
in other sectors.
The uture o A&D industry talent is the generationentering the workorce today. This workorce has
signicantly dierent values and expectations than the
baby boomer workorce that makes up the majority o
A&D companies today. The industry is aced with the
challenge o attracting this new workorce and changing
some o the undamental aspects o their culture, while
retaining the elements o the culture that have made them
successul or decades. Todays entry-level workers value
84 Deloitte United States (Deloitte Consulting LLP) and Manuacturing
Institute, Boiling Point: The Skills Gap in U.S. Manuacturing, 17
October 2011.
Figure 8: U.S. deense contract spending by competition (US$ billion)
0
50
100
150
200
250
300
350
400
Competition with multiple offers
Competition with single offer
No competition
2010200920082007200620052004200320022001
Year
US$
billion
Source: David Berteau, Deense Contract Trends (Washington, D.C.: CSIS, May 2011), {page 24}.
open environments, rapid advancement, fexible work
arrangements, diverse assignments, and non-hierarchical
organizations. A&D companies have traditionally been
characterized by the opposite: Facilities are at times old,
utilitarian, and closed; access to inormation is tightly
controlled, advancement can be slow and measured,
hierarchies are clear and rm, and many people work a
single program or 10 to more years.
A&D companies have the opportunity to use the incoming
workorce to catalyze culture change not only to attract
the next generation, but also to address changing
trends in the industry: Increased use o xed-price and
perormance-based contracts, signicantly increased
ocus on aordability, and transition away rom traditional
large procurement programs to new geographies andnew markets (e.g., oreign military sales, inormation
technology management, and cyber security). These
changes lend themselves to culture change that aligns
with the values o the uture workorce. The challenge or
companies is making themselves more attractive to the
next generation, while retaining the core elements that
have made them successul: Commitment to the mission,
ocus on the warghter, and relentless pursuit o results.
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How is the global deense industry diversiying?
The anticipated cuts in deense spending in the U.S. and
in Europe or the oreseeable uture will orce companies
to evolve their businesses to better suit markets outside o
their traditional customer base. As seen in Figures 6 and 7,
continuing energy concerns and a drastic increase in the
demand or UAV data capture have created new market
opportunities. In order to address these new markets,
many companies have already made investments or
acquired niche companies with the necessary capabilities
to capitalize on these opportunities.
Success in these new markets will likely require changes in
business models. As companies within the industry adapt
their business models to meet shiting demands, they will
reorient processes or interacting with customers, suppliers,and the general marketplace. For instance, shiting rom a
product-orientated business model o building ships, to a
service-oriented business model o analyzing captured data
rom UAVs, requires the rationalization o manuacturing
capabilities, build-up o service operations, and customer
service delivery models.
Companies have successully managed this transition in
the past. For example, VT Group, originally a UK deense
shipbuilding company, managed to successully transorm
its business model rom a traditional shipbuilder to a major
provider o communications, deense, and education
support services by divesting 55 percent o its shipbuildingbusiness to BAE Systems and acquiring/integrating a
portolio o small support service companies85.
85 Shipping Times, VT and BAE Systems announce shipbuilding
merger agreement, 25 July 2007.
Figure 9: U.S. deense spending by contract type (US$ billion)
Source: David Berteau, Deense Contract Trends (Washington, D.C.: CSIS, May 2011), {page 25}.
Will perormance-based contracts become more
popular as a deense industry contracting process?
The A&D cost-reimbursable contracts that are currently
commonplace with militaries and governments are likely
to be less suitable or uture commercial clients. As seen
in Figure 8, or the past 10 years, cost-reimbursable
contracts have made up a signicant portion o deense
spending. In Figure 9, due to the lack o cost-type
contracts in commercial markets, and the decreased use
o these contracts by the U.S. government, companies are
becoming more adept at utilizing and managing to xed
price (i.e., perormance-based contracts).
Companies shiting rom cost-type, transactional contracts
to perormance-based contracts successully dene up-
ront customer needs, accurate perormance metrics, andcontrolled risk management. In addition, the sole-source
and limited-competition contracts that military clients enjoy
are less likely to happen in the commercial marketplace.
GE, Rolls Royce, and Pratt and Whitney are leaders o
perormance-based logistics services, utilizing accurate
orecast models, and proactive real-time perormance
data to anticipate and prevent service interruptions, while
maintaining a consistent service level.
What are your predictions or the uture o the A&D
industry?
Although it has only been 108 years since the WrightBrothers rst fight, the industry has contributed
undamentally to the way we live, work, travel, and
communicate with the technologies created and continued
0
50
100
150
200
250
300
350
400
Cost and type
Fixed price
2010200920082007200620052004200320022001
Year
US$
billion
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innovations developed in jet aircrat, communications
satellites, the Internet, and GPS, or example. Also,
the industry is primarily responsible or the reduction
o casualties in armed confict due to the technology
innovations that keep warghters out o harms way
with UAV, sophisticated surveillance sensors, and over
the horizon strike capability. This industry has created
the technology innovations that have contributed to the
very abric o society rom the ability to communicate
globally around the clock rom our personal digital
assistants, to sae and ecient air travel, to securing our
borders, and deending our way o lie.
Past is prologue, expect game-changing technology
innovations to continue to be created within the global
A&D industry into the uture. Some o the science and
technology being developed include directed energy
and high-powered microwave weapons, supersonic
missiles, long-range and high-altitude unmanned aerial
systems, satellite-based high-resolution ull motion video
cameras, and extraordinary sotware that can trace
nancial transactions o known terrorists. Interesting
technologies are being experimented that can harvest
solar power rom space-based solar arrays, converted to
microwaves, or high-voltage wireless signals, to ground,
air, and sea-based distribution networks. These kinds o
innovative technologies will change the lives in society in
immeasurable ways, just like during the rst century, the
industry has changed the way humans interact on a global
basis. This is indeed something to look orward to in the
near term, as well as in the uture.
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