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With an industry revenue of $760 billion – exceeding the previous record of $729 billion in 2014 – and operating profit of $81 billion, surpassing the previous record set in 2017 by 9%, the A&D sector scored record revenues and profits in 2018. We’ve also seen a very active M&A environment in 2018 where the industry recorded the third highest deal value in history, causing a number of changes in the top 100 list, as well as pending changes for 2019.
Both the commercial aerospace and defense sectors are expected to experience continued strong revenue and operating profit improvements in 2019 with the help of projected increases in aircraft deliveries, aircraft aftermarket and increase in defense spending.
Commercial Aerospace 2018 Recap
Growth in revenue passenger miles was 6.5% in 2018 and the fifth consecutive year above 6%, about twice the global GDP growth, which is helping to drive demand for new equipment and aftermarket in the near and long term. We saw another record being set in 2018 with new aircraft deliveries increasing by 8% for a total of 1,606, 125 more than in 2017, with further production increases planned for narrowbodies. The sector is also experiencing a healthy aftermarket, as the fleet of aircraft in service continues to grow. Backlog duration also improved in 2018, falling from an average of 9 years to 8 years, at current rates.
Commercial Aerospace Outlook
Commercial aviation has become a critical part of our global infrastructure and it’s expected to continue to grow faster than the overall economy. For example, 82% of the global population has never taken a single aircraft flight, and the global middle class is projected to grow from 25% to 60% by 2030. That in turn will create a huge market of potential new customers for the aviation industry. The commercial aerospace sector should sustain growth in 2019 and beyond, driven by the continued increase in aircraft deliveries and the consistently strong demand in revenue passenger miles.
Defense 2018 Recap
In 2018, we have seen defense budget increases around the world, led by the US defense budget at $700 billion, about a 20% increase in two years, in addition to increases in Europe and Asia. Overall, the defense industry saw an acceleration in revenue and profit growth in 2018 with the top six US defense contractors reporting a 12% increase in revenue and 6% improvement in profit and the top five European defense companies reporting a 4% increase in revenue and 21% increase in operating profit.
Defense revenue is expected to show continued growth in 2019 due to an increased U.S. defense budget, and we also expect operating profit and margin to improve in 2019. With the high level of tension between the West and Russia, China and Iran, and improved but continuing tense relationship with North Korea, we could see a shift in new defense priorities as well.
In terms of M&A, as geopolitical uncertainties and other factors have contributed to an increase in defense spending, we believe bolstering military capabilities with emerging technologies such as artificial intelligence, cybersecurity, hypersonic and more, will be drivers of deal activity next year and beyond.
To read the full report, visit Aerospace & Defense year in review and forecast.