Aerospace and Defence Biannual Newsletter – June 2011

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In this issue:

Editorial Overview | A&D Insights: Gaining technological advantage | Aviation Week Top Performing Companies | 2010 Year in review and 2011 forecast | Mission control Q1 | Spares forecasting - A commercial aviation perspective on value chain maturity and best practices

Editorial Overview

LeBourget Paris Airshow is at its peak and we wanted to take the opportunity to send you our June edition of our biannual newsletter. Optimism seems to be the best word to describe the general sentiment for the Quebec aerospace industry, with the commercial side of the industry picking up momentum. There will be close watch at LeBourget on the narrow body world to see what plays out - further order announcements for the CSeries by Bombardier, whether Boeing will re-engine or not, and the much awaited order numbers for the A320 NEO. Will Airbus be successful in securing orders from traditional Boeing customers? In a few weeks, all these questions will become much clearer.

The demand for lighter, quieter and more fuel efficient aircraft continue to be driven primarily by fuel prices, with continued investment in biofuels still in the forefront. We just released our second edition of A&D Insights which looks at new technologies and adjacent markets. Not surprisingly, composites top the list of important emerging technologies for the A&D executives we interviewed. There’s already a big market - and its getting bigger. One estimate suggests that total demand for composites in the global aerospace market is expected to be worth $41.8 billion over the next 10 years.

On the M&A front, the first quarter of 2011 exceeded expectations with the pace of activity rising significantly this quarter compared to 2008-2010 levels. Globally, it was the highest first quarter total for announced deals the global A&D sector has seen in more than 30 years. Q1 saw the announced acquisition of Canada’s Vector Aerospace by Eurocopter, a subsidiary of EADS, for US$611 million - the largest Canadian deal in the aerospace sector in more than three years. There have been no deals of this magnitude in the Canadian A&D sector since the fourth quarter of 2007 when Sweden’s Hexagon AB acquired Canada’s Novatel for US$430 million.

In summary, it seems to be a very busy time for the A&D industry with record deals, increased investment in new technologies, and growth in the commercial industry. We look forward to seeing you at the Paris Airshow, and if we miss you, we would like to wish you a wonderful summer. We hope that you summer holidays with family and friends are enjoyable.

Regards,

Mario Longpré, CA, CPA
PwC | Partner, Canadian Aerospace & Defence Leader
T : +1 514 205 5065

A&D Insights: Gaining technological advantage

Why talk about "gaining technological advantage"? It's really all about getting and keeping market share in your markets, old and new. Differentiation has long been critical to gaining and maintaining contracts, programme positioning and market share. It’s even more important today given the increasing globalisation of the industry. The A&D industry has been the source of some of the most influential technological advances in modern history - computers and computer networking, satellites and satellite navigation, and important advances in physics - all have their roots in the sector's research. That's why it should come as no surprise to anyone that we at PwC believe there is a strong innovation imperative for the industry. The executives we interviewed agree. PwC recently conducted a series of interviews with 18 CEOs and senior executives in the industry on the subject of new technologies and adjacent markets.

Aviation Week Top Performing Companies

PwC is proud to be, once again, the primary sponsor of the Top Performing Companies and participating on the 2011 TPC Council of Advisers. PwC has a feature article in the magazine "A formula for growth". Aerospace & Defense (A&D) companies achieved strong revenue and operating profit in 2010, resulting in a rebound in Top-Performing Companies (TPC) scores, nearing historical highs. Although defence budget cuts are looming, military spending for 2010 was in line with prior years and commercial aerospace was generally stronger. However, operating profit was up significantly over the prior year, primarily due to better program performance. Please find the articles on the Aviation Week website.

2010 Year in review and 2011 forecast

We are pleased to announce that we have released a new thought leadership publication Aerospace & Defence 2010 year in review and 2011 forecast globally. The report provides an analysis of how aerospace & defense (A&D) companies perform today - and of the challenges and opportunities they will face tomorrow.

The A&D industry achieved record financial results in 2010, as the top 100 companies in the sector reported a combined US$646.8 billion in revenue and US$58 billion in operating profit. While revenues in 2010 showed a modest increase of 2 percent compared to the previous year, operating profit experienced an uptick of 19 percent over 2009 levels. While overall industry results were at record levels, not all news was cheery. Pressure has continued to mount on global defense budgets and for contractors to improve productivity. Many defense contractors have already taken actions to reduce payrolls and consolidate operations in preparation for a leaner time ahead.

Mission control Q1

The pace of M&A activity in the A&D sector increased significantly this quarter compared to 2009 and 2010 levels, and will likely continue due to competition in commercial aerospace, budget headwinds in defence spending, and availability of capital. Deals with value greater than US$50 million amounted to US$9.5 billion with a total of 17 deals compared with 10 deals and US$5.7 billion in the same period of 2010 - this represents an increase of approximately 67 percent in deal value and 70 percent in deal volume over the same period 2010. The total number of deals announced in the first three months of this year, regardless of whether a value was disclosed, is the highest first quarter total for the global A&D sector in at least 30 years.

Spares forecasting - A commercial aviation perspective on value chain maturity and best practices

With a gradual return to global prosperity, the commercial airline and A&D industries are recognizing a need to develop adequate demand forecasts, allowing inventory and manufacturing capacity to meet the demand for planned and unplanned maintenance within the Supply Chain for the A&D Industry. This paper is based on an industry survey, representing OEMs, airline operators, third-party MROs and all other parties in the Spares work-stream. The results of the survey provide helpful recommendations to companies. Among these are improving the flow of information, leading to reduced lead times on aircraft parts and turnaround times, reducing spares inventories across the value chain, and defining indicators for future demand signals for repairs and spares.