Aerospace and Defense Sector
In times of economic uncertainty, an accurate risk assessment becomes very important for companies to succeed and likewise proper implementation of financial policy is also important as it ensures the judicious use of cash. The Aerospace and Defense sector faces particular challenges that differentiate it from the rest of the economy. Being one of the most important industries which deals with the national security, A&D sector is highly impacted with policies. Due to the challenges faced by the A&D Industry it is differentiated from the rest of the economy.
Concerns of the Aerospace and Defense Sector
The issues:
- The lag between orders and deliveries
- Long time span between R&D of new products and their launch
- Risks associated with innovation
- Increasing cost of R&D
- Scarcity of skilled labor
These issues mainly determine the policies concerned in the industry. At the same time the A&D companies have two main growing concerns. One is the Pension Risk and other being Labor Shortages. Aging workforce with well defined pension benefit plans is creating a financial burden on A&D companies and on the other hand lack of talent is also taking a toll over the growth of the sector. At this point of time training and development comes handy, but again no lunch is free and thus a cost is incurred for the Training as well which is not regarded as a positive move for the companies.
Also Read on GWI Aviation Sector – Foreign Investment changing DNA of the Sector.
Aerospace and Defense Sector during the Times of Recession
Talking of the historical trend seen in the sector, the year 2008 saw a declining trend in the sector, when the industry was not able to maintain its high flying tag. As a result of the global economic and financial condition becoming worse, A&D became risk ridden and the sector’s state remained uncertain. The deal value in 2008 reduced highly and was recorded at less than half from the preceding year. Also during the last quarter of 2008 with the intensification of credit crisis and widening of the economic downturn, the industry outlook was becoming highly unstable. The weakening dollar was taken as a first mover’s advantage by many European companies along with the North American companies and deals were closed by the end of the year 2008.
The drying up of deals in the last quarter of 2008 didn’t lead to a fruitful beginning for the year 2009. Private Equity too fell largely in the year 2008 due to the prevailing negative sentiments in the market. For civil aviation, a cut in delivery was seen by majority players due to the conservatism policy adopted. This led to slow growth and the number of airlines operating decreased as well.
Year 2008 and 2009 were the most challenging years for the world’s airlines as key external business factors viz., oil prices, economic growth, exchange rates, financing terms experienced high levels of volatility. With the tightening of the credit policy, A&D companies have paid more interest for their liabilities than the rest of the economy. The first half of 2008 airlines primarily focused on adapting to spiking oil prices, while the focus later shifted to the fallout of the global credit crisis and recession with fuel prices reaching an all-time low. For passenger and cargo traffic, the year 2009 saw the worst ever declines and the business environment curtailed the airline industry profit recovery spree, which started in 2006.
Conclusion
Global airline industry reported heavy losses and resulted in bankruptcy of over 30 airlines since the beginning of 2008. As a measure to sustain the operations airlines started adapting themselves to the changing and challenging business environment so that they could meet the realities of the markets they operated in. As a major step the airlines reduced global passenger capacity by 2% in 2009, which was achieved through the combination of frequency and route cuts mainly in unprofitable market wherever applicable. They also lowered the daily airplane utilization which is the total flight hours per day.
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