The aerospace and defence (A&D) industry delivered its best year ever in 2011 in terms of revenue and profit on the strength of a surging commercial aviation market that more than offset a soft defence performance. For 2011 the top 100 A&D companies reported $677 billion in revenue and $60.0 billion in operating profit, setting records. Revenue was higher by 5% compared with 2010, while operating profit was up 2% over 2010. Operating margin dropped 27 basis points to 8.86%.
The mood in commercial aerospace is described by industry leaders as optimistic. Air traffic is strong and steady, driving the lucrative aftermarket business; the industry delivered a record number of large aircraft and the orders continue, driving record backlog—more than eight years—at current production rates. Times are so good, some people are asking whether there’s a bubble. While there are risks, particularly the availability of aircraft financing, we believe it is real.
Recent volatility in oil prices threatens to derail near-term economic growth; however, forecasted demand is based on reasonable assumptions about long-term economic growth and demographics. More importantly, backlogs provide a significant cushion between demand and current production rates that could absorb any reasonably anticipated softening in demand.
Defence faces some challenges, but is well positioned to respond to these challenges so long as sequestration in the U.S. doesn’t become a reality. 2012 should be another strong year for the industry and possibly another record year.