Stout’s Aerospace, Defense, and Government Services Investment Banking team recently attended the Midwest Aerospace Conference. The conference featured decision makers from the world’s top aerospace companies and industry thought leaders discussing the latest aerospace trends.
Several themes recurred throughout the panels as well as Stout’s discussions with industry players.
1. Sustainability is shaping innovation as well as design and development.
The aviation industry has a long-term goal of net-zero carbon dioxide (CO2) emissions by 2050. Around 60% percent of these emission reductions is expected to be driven by sustainable aviation fuel. Technology (advanced materials, higher bypass ratio, etc.) is expected to drive an additional 20%, operations and infrastructure an additional 10%, and market-based measures (such as carbon credits) the final 10%.
Utilizing sustainable aviation fuel as opposed to hydrogen arose as a key topic. Hydrogen has tremendous energy value but has many challenges, including the need for infrastructure to liquify and store it for delivery and investment in a new fleet of compatible aircraft. Despite sustainable aviation fuel’s relative attractiveness, it is still expected to cost twice as much as jet fuel or more in the near term.
Aviation contributes only 2-3% of CO2 emissions today, but this percentage could be much higher in 2050 if aviation doesn’t make improvements. Sustainable aviation is the number one topic of industry participants in Europe and Asia and continues to grow in importance in North America.
2. Air travel demand is nearly back to pre-COVID levels, but airlines and the aerospace industry still face challenges.
Domestic air travel demand was 8% above 2019 levels, while international demand was 11% below 2019 levels as of July 2023.
However, relative to 2019, airlines are facing inflation of around 20% from increased costs primarily related to fuel and maintenance but also labor and benefits.
Internal and external factors such as supply chain challenges and labor shortages are also pressuring airlines and creating opportunities for outside vendors. These supply chain uncertainties are leading airlines and maintenance, repair, and overhaul (MRO) businesses to transition from “just-in-time” to “just-in-case” inventory (i.e., increasing inventory balances). This should be a tailwind for manufacturers and distributors, although there will likely be eventual destocking.
The slower rebound in production due to supply chain challenges is creating opportunities for the aftermarket as older aircraft remain in the fleet. Production going forward is expected to be 75-80% narrowbody compared to 65-70% pre-COVID.
3. Geopolitical tensions provide a favorable backdrop for military aircraft production.
Defense spending increased less than 1% annually over the past decade, but it is expected to grow almost 6% annually through 2030. While no clean sheet commercial aero programs are expected this decade, several new military platforms are forthcoming, including the B-21 Raider, NGAD-fighter, V-280, FARA, T-7, and E-7 Wedgetail.
Furthermore, the Air Force is planning for a fleet of 1,000 unmanned collaborative combat aircraft (CCA), with two CCA per each NGAD platform and F-35. Improvement in artificial intelligence is critical to the success of the CCA program.
Military aircraft production is expected to reach a new peak by the end of the decade with fighter aircraft representing over half of total production. On the other hand, several aircraft platforms are in discussions for retirement, including the A-10, F-22, E-3, E-8, and KC-10, among others.
4. Business aviation is showing signs of normalization after the COVID-driven boom.
Business jet flight activity is around 15-20% above 2019 levels but down about 15% from the recent peak. Used jet availability remains at record lows well below 10% of the fleet, which is considered a shortage of aircraft.
Sustainability pressures may drive a shift towards group aircraft ownership, which could slow business jet fleet growth but provide tailwinds for the fractional and charter market. Shrinking regional jet fleets and loss of service to regional airports is a tailwind for business aviation.
Additionally, several new business jet platforms focused on the large cabin segment are expected to enter service in the coming years, including the Falcon 6X, Falcon 10X, G400, G700, G800, and Challenger 650 replacement.
5. Access to specialty materials, reshoring, and suppliers are key considerations for the aerospace primes.
During the event, the aerospace primes highlighted access to specialty materials as the top challenge, compounded by production ramp rates in commercial aerospace and headwinds facing suppliers in Eastern Europe due to the war in Ukraine.
While reshoring is a topical subject, a lot of capacity in the U.S. has already been assumed. According to most of the aerospace primes, the U.S. needs to continue to take steps in terms of technology advancement and capacity expansion.
Aerospace primes value suppliers who can deliver a vertically integrated solution to meet end-to-end requirements. Given the long cycle nature of aerospace programs, suppliers need to be resilient, sustainable, and consistent in processes. Additionally, preferred suppliers to the primes also align culturally, are willing to collaborate, have a track record of performance supported by audits, and are willing to work in a supplier portal.
We welcome the opportunity to discuss these conference takeaways as well as how we can assist with your business's growth and strategic objectives.