Surging Commercial Aviation Market Drives Record Year for Aerospace & Defence Industry: PwC

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Toronto – May 8, 2012 The aerospace and defence (A&D) industry experienced a strong year in  2011 thanks to the surging commercial aviation market, according to the Aerospace & Defence 2011 year in review and 2012 forecast  report from PwC.  In 2011, the top 100 A&D companies reported US $677 billion in revenue, marking a five per cent increase year on year, and US $60 billion in operating profit, an increase of two per cent from 2010.

“For 2012, we expect continued growth in commercial aerospace resulting from a strong and steady demand for global aviation and increased commercial aircraft production this year,” said Mario Longpré, Canadian aerospace and defence leader,PwC. “Conversely, defence revenues should continue to trend modestly lower, but recent cost-cutting actions should mitigate the impact to company bottom lines.”

With increasing production rates and record backlog, commercial aerospace companies predominantly reported strong revenue growth and delivered a record number of large aircrafts, exceeding the 1,000 mark for the first time. The strong order activity was largely led by the launch of two new single-aisle aircrafts, the A320NEO and 737MAX.  These re-engined and improved efficiency versions of existing models, unleashed a fury of orders, both in the expanding Asian market and among U.S. carriers.

“Although 2012 is already off to a great start, the industry will continue to face challenges such as rising production rates, supply chain inefficiencies, raw materials shortages, late deliveries and more. Suppliers and Original Equipment Manufacturers (OEMs) should perform thorough supplier capacity and readiness assessments to mitigate these risks. Also, current backlog levels provide ample cushion between demand and production rates, likely absorbing any reasonable softening in demand near-term,” continued Mr. Longpré.

Areas of opportunity and focus

One bright area of opportunity for defence contractors has been exports, where the growth of defence export deals has led to a record backlog of $327 billion at mid-year in 2011. However, defence companies still need to improve productivity, increase transparency and respond to increasingly complex government regulations. According to the report, the industry must overcome three challenges to thrive in the future: preserving innovation, improving productivity and abiding by the regulatory environment.

Mr. Longpré adds “The current focus remains on affordability, which means contractors need to stay dedicated to improving productivity. The industry also needs to recognize the value of innovation and research, as well as invest in knowledge retention and training.”

According to the report, 2011 was a record year for A&D transactions with 341 deals and a total value of $43.7 billion, along with divestiture of slower-growth defence businesses and private equity exits dominating the list of largest deals. European acquirers played a much more significant role in the 2011 A&D deal market compared to 2010. In 2011, all European outbound deals that exceeded $50 million were for North American targets, boosting the number of cross-border deals for U.S. targets.

“With OEM backlogs contributing to higher overall sector growth prospects, aerospace M&A is likely to continue to lead the A&D deal market in 2012. Defence M&A will likely remain oriented toward large spin-offs of lower-growth units and smaller acquisitions in growing areas such as cyber security. However, the further the defence budgets fall, the more likely there could be calls for larger-scale consolidations, which will strengthen M&A activity,” concluded Mr. Longpré.

For a copy of Aerospace & Defence 2011 year in review and 2012 forecast, please visit: www.pwc.com/aerospaceanddefence.

About PwC Canada

PwC Canada helps organizations and individuals create the value they’re looking for. More than 5,700 partners and staff in offices across the country are committed to delivering quality in assurance, tax, consulting and deals services. PwC Canada is a member of the PwC network of firms with close to 169,000 people in 158 countries. Find out more by visiting us at www.pwc.com/ca.

© 2012 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved.

PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.