Aerospace markets outlook: 5 key insights from Richard Aboulafia

The managing director at AeroDynamic Advisory shared insights in an April webinar into where the industry is headed in the second half of 2023.

Courtesy of Richard Aboulafia

The aerospace industry is in a unique situation this year where the supply chain and labor supply—not market demand—will determine production rates.

That was one key takeaway from Aerospace Manufacturing and Design’s April webinar, “Aerospace Industry 2023 Outlook – Spring, presented by Richard Aboulafia,” where Aboulafia, the managing director at Ann Arbor, Michigan-based Aerodynamic Advisory and a Fellow of the Royal Aeronautical Society, shared insights into where the industry is headed in the second half of 2023.

Here are 5 key takeaways from Aboulafia’s presentation on what the aerospace supply chain should know about the state of the industry.

Editor’s note: Watch the full webinar here or listen to the Manufacturing Matters podcast here.

1. Production rates are driven by supply chain challenges and labor availability.

The aerospace market, like many other industries, fell on hard times between 2019 and 2021, Aboulafia said. For the first time in his 35 years on the manufacturing side of the industry, it became extremely difficult to simply get planes built.

“It was a 28% drop in aggregate [production] and jetliners were hit particularly hard, particularly twin-aisle jets,” he said. “Typically, what you see after a drop like that is a full-throated, double-digit recovery. We did not get that last year. We got a 9.7% recovery.”

In the military sector, although tensions have emerged and the demand for weapons has increased, Aboulafia said market recovery is still down 2.3%.

“Why was it down rather than in the black? Believe it or not, that was just seven aircraft,” he said. “Seven F-35s couldn’t be delivered due to concerns about flight control software. If it weren’t for those seven planes, we would have at least broken even. But in general, everything is struggling with terrible supply chain difficulties, the likes of which, again, I haven’t seen in my career.”

The labor market is also tight following the COVID-19 pandemic, Aboulafia said, leaving many companies unable to hire and retain the staff necessary to keep up with production demand.

“Labor inflation has led the way,” he said. “People just cost more these days.”

Many businesses also laid off part of their workforce or took on debt to survive the pandemic, and they are now feeling the after-effects of these decisions.

“To survive the pandemic, they had to do everything they could,” Aboulafia said. “They had to fire lots of people. They had to sell off everything that wasn’t nailed down. Most of all, they had to stop spending on capital equipment, like machine tools. And then, of course, they had to load up on debt. And now interest rates are rising.”

2. Interest rates are high; fuel costs are low.

The overall financial health of the aerospace industry, Aboulafia said, is largely determined by the difference between the cost of cash and the cost of fuel.

“You want a world where there’s a big gap,” he said. “You want a world where fuel is somewhat      expensive, so people want new jets to replace the older, thirstier equipment, and a world where cash is in heaps [and] you can finance it. The majority of new jet transactions are financed by somebody other than the airline themselves, whether it’s a bank, an export credit agency, or a lessor, a very common form of financing, and of course, these depend upon reasonable interest rates.”

Industry stakeholders are hoping interest rates stabilize or come down, while Aboulafia says the price of fuel seems to be hovering around a reasonable rate of roughly $80 a barrel.

“It doesn’t challenge airlines in making money and getting strong passenger demand, but it sure does incentivize them to replace those older jets with newer stuff that doesn’t drink as much,” he said.

3. Book-to-bill is making a comeback.

The book-to-bill ratio, or the difference between orders and deliveries, also indicates the overall health of the industry, and Aboulafia said orders have come back to a 1.5 to 1 or even a 2 to 1 ratio between orders and deliveries as people once again want new jets.

“People were ordering jets. We’ve got a very big backlog in this industry,” Aboulafia said, adding the backlog equates to roughly 13,000 jets.

While there used to be roughly equal demand for single-aisle and twin-aisle jets, he said demand for both collapsed in 2020, and demand for single-aisles has since skyrocketed as consumers look for the lowest cost option to fly.

“Now you can’t build single-aisles fast enough,” Aboulafia said. “You can’t order machine tools for them fast enough. You can’t build engines for them fast enough. Twin-aisles, not so much. They’re promising, but it’s just not the return to the great times we saw in the last decade. It’s going to take a long time before twin-aisles get back to where they were.”

4. There is strong growth in the defense sector.

Global defense spending keeps breaking records, Aboulafia said, exceeding $2 trillion for the first time in 2021. He expects defense spending to see roughly 7% annual growth through 2029.

“In terms of global defense from addressable market countries, it’s heading to $2.5 trillion by the end of the decade,” he said, adding research and development (R&D) will drive much of this growth.

F-35 jets dominate the U.S. defense sector, Aboulafia said, but supply chain and labor issues continue to hobble production.

“We’re having, again, a heck of a problem building them,” he said. “We think we’ll get to 156 in two years, and then we’re going to get to probably 171 to 180, somewhere in that zone, by the end of the decade.”

High defense spending is starting to crowd out the commercial sector, Aboulafia said, which is something industry stakeholders should watch heading into the rest of the year.

5. The MRO business is recovering.

Maintenance, repair, and overhaul (MRO) has been an important part of the aerospace business, and Aboulafia said it’s making a nice recovery this year.

“You’re seeing key figures that are pretty respectable,” he said. “Two-and-a-half percent on the military, 5.7% on air transport, and business aviation is at 3%. I didn’t touch on this as much, but I should mention it’s come out of this pandemic very strong.”

Aboulafia forecasts a total 10-year MRO demand compound annual growth rate (CAGR) at 3.8%.

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