Aerospace and Defense Industry Scores Record Profit in 2017 Poised for Significant Growth in 2018

17 May, 2018

Scott Thompson
Aerospace and Defense Leader, PwC US

In 2017, the A&D sector reported record profits of $77 billion, an 18% increase over the prior year, and surpassed the previous record set in 2014. The top 100 A&D companies reported $728 billion in revenue, an increase of 4% over 2016, and $77 billion in operating profit in 2017. Operating margin was 10.6%, also a record, having reached double digits only once before in 2014.

We expect the A&D industry to outperform again and potentially reach new records in 2018 with the help of increases in aircraft deliveries, aircraft aftermarket and substantial increases in defense spending.

Commercial Aerospace 2017 Recap

The commercial aerospace landscape was bustling in 2017 and prospects continue to be bright. Growth in revenue passenger miles accelerated to 7.6% in 2017, more than twice global GDP growth, which is driving demand for new equipment and aftermarket in the near and long term. Another record was set with the number of new aircraft deliveries, which increased by 3% with a total of 1,481 large aircraft deliveries, and we also expect further production increases for narrowbodies and new delivery records in 2018.

We saw continued modest improvement in business jet operations. According to the FAA, the year-over-year change in business jet operations was up by 3.2% in 2017, second best since 2010.

Commercial Aerospace Outlook

Commercial aviation manufacturers (OEMs) are expected to report continued strong revenue improvement in 2018 and could also show modest continued improvement in operating margin. Economic growth combined with the US tax reform may also be the catalyst to finally get business aviation growing at a faster pace again.

Some have questioned the impact which low fuel prices could have on the demand for replacement aircraft. However, fuel prices are beginning to move higher and about 60% of deliveries are for market growth, while the remaining 40% is for replacement aircraft. With long-term demand at more than 2,000 aircraft per year, and current production rates at 1,500 per year, the industry could potentially support an additional 30% growth in OEM production, providing a considerable cushion for any softening in demand.

Defense 2017 Recap

The defense industry reported accelerating revenue growth in 2017 with the top six US defense contractors reporting a 3% increase in revenue and profit. We also saw a continuation of M&A activity in this sector focused on portfolio realignment and consolidation of government services companies. In 2017, there has also been a resurgence of European defense spending, as views have shifted due to the recent growing threat perceptions, marking a turning point. The Middle East and Asia also remain strong defense markets.

Defense Outlook

With President Trump signing the 2018 omnibus spending bill, which sets the Department of Defense budget at $700 billion, the outlook for defense contractors is strong and is expected to show accelerating growth in defense revenue and profit. As Europe’s perception on military expenditures are changing, we expect defense budgets to grow modestly in 2018 and beyond. Furthermore, the current administration is easing export regulations and encouraging an increase in defense exports.

To read the full report, visit Aerospace & Defense year in review and forecast.