PwC’s global aerospace and defense: Annual performance and outlook
2022 edition
The 2022 edition of PwC’s Global Aerospace and Defense: Annual Industry Performance and Outlook shares key performance metrics of the global commercial aerospace and defense (A&D) industry, notable developments and future prospects. Our data are drawn from financial reports for fiscal year (FY) 2021 and include financial results for the largest 100 A&D companies by revenue.
A&D performance in 2021
Operating profit more than doubles. The aerospace and defense industry reported $712 billion of revenue in 2021 (up 4% over 2020), and $62 billion of operating profit, up 136%, according to PwC analysis. However, industry performance remains well below pre-pandemic record levels. Industry revenue was 6% below the 2019 record of $754 billion and industry operating profit was 24% below the 2018 record of $82 billion.
Partial industry recovery led by Boeing, Airbus and Raytheon Technologies. A PwC analysis of the A&D industry’s 2021 financial performance shows that Lockheed Martin remained the industry’s largest company, reporting revenue of $67 billion, up 3% from 2020. It was also the most profitable, reporting operating profit of $9.1 billion, up 6%. Raytheon Technologies reported a revenue increase of $7.8 billion, or 13%. However, this is primarily due to the reporting impacts of the merger of United Technologies (UTC) and Raytheon in the second quarter of 2020. After adjusting for the estimated impact of Raytheon’s first quarter 2020 revenue, Raytheon Technologies’ 2021 revenue was roughly flat.
Boeing reported a loss from operations of $2.9 billion, but this was nearly a $10 billion improvement over 2020’s loss of $12.8 billion – due to a combination of pandemic impacts as well as the 737 Max grounding. Airbus returned to profitability of $6.3 billion after reporting a loss of $582 million in 2020. Raytheon Technologies also rebounded, reporting a profit of $5 billion compared to a $11.9 billion loss in the prior year, with an estimated $600 million of that improvement attributed to reporting impacts of its merger with UTC.
Defense steady, global military spending hits record. Meanwhile, the defense sector was steady, reporting modest growth in the US and significant growth in Europe, with global military expenditures hitting an all-time high of $2.1 trillion in 2021, according to the Stockholm International Peace Research Institute. In February of 2022, Russia’s invasion of Ukraine reverberated throughout the defense sector. The full implications of this event are still unfolding but are already influencing future defense budgets globally in terms of funding and priorities. Specifically, defense priorities accelerated a shift from counter-terrorism equipment back toward Cold War-style priorities.
A&D deals activity sets record, topping $100 billion in value. The A&D sector’s M&A deal activity went on a torrid streak in 2021 with deals valued at $104 billion, up from $46 billion in 2020. Deal volume rose to 555 deals in 2021 from 377 the previous year. The record level was largely driven by special purpose acquisition company (SPAC) activity. However, A&D dealmaking slowed in the first half of 2022. (For more information on M&A activity and the outlook for 2022, please refer to PwC’s Aerospace and Defense: Deals 2022 Outlook.)
Commercial aerospace performance
On the heels of the tumult in 2020, 2021 was a year of partial recovery for aviation manufacturers, even though there is a significant way to go before returning to pre-pandemic levels of output.
Deliveries are up and backlog is strong. Boeing delivered 340 commercial aircraft in 2021, a substantial improvement over 2020’s total of 157 but far below the company’s 2018 record of 806. As of December 31, 2021, Boeing reported a backlog of 4,250 commercial airplanes (3,414 of them 737s). Meanwhile, Airbus deliveries rose 8% to 609 aircraft (vs. 566 in 2020, but well below the company’s record of 863 in 2019), led by 483 A320-family craft. The total 2021 year-end order backlog stood at 7,082 commercial units (vs. 7,184 at the end 2020).
Adjusted net orders soar. Perhaps the most important prospective figure for both companies is adjusted net orders (i.e., with past orders unlikely to be delivered filtered out due to buyers’ poor financial condition, this year only for Boeing). Airbus experienced an 89% rise in adjusted net orders – from 268 in 2020 to 507 in 2021 – while Boeing’s figures leapt from -1,194 in 2020 to 535 in 2021.
RPKs recover. International passenger demand in 2021 was 75.5% below 2019 levels, while US domestic demand in 2021 was down by 28.2%. However, despite suppression of holiday travel due to the Omicron variant (with total traffic for December 2021 45.1% below December 2019), demand in early 2022 has surged. The recovery in passenger travel is gathering momentum, with total traffic in February 2022 (measured in RPKs) rising year-on-year by 115.9%, yet still down by 45.5% from two years previously.
Commercial aerospace outlook
Commercial aviation could soar again by 2024. As international flight restrictions are being loosened, we are seeing exceptionally strong, pent-up demand for air travel. RPKs could return to pre-pandemic levels, or at least near pre-pandemic levels, in 2023. Forecast International projects that Boeing and Airbus will deliver 483 and 694 commercial jets in 2022, respectively, a 42.1% increase for Boeing and a 22.6% increase for Airbus over 2021 levels. Boeing is on track to return to its 2018 level of deliveries by 2024-25 while Airbus is likely to out-deliver its rival for several years to come. Therefore, we expect 2022 to be another year of significant recovery with full recovery happening in 2023 or 2024.
Russian-Ukraine war effects. As a consequence to Russia’s invasion of Ukraine, rerouted international flights are taking longer and therefore adding costs to many international flights. Meanwhile, the long-term effects of Russia’s expropriation of leased aircraft appears likely to be limited. The long-term effects will likely be increased insurance costs, especially for war-related risks, and a reluctance to lease to Russian entities, perhaps for decades to come.
Defense performance
Top US contractors’ revenues inch up. The top six US defense contractors reported increased revenue of 5%, but only 1% after adjusting for the reporting anomalies of the merger of UTC and Raytheon in the second quarter in 2020. Revenue was also affected by divestitures at Northrop Grumman and L3Harris in 2021. After these adjustments, revenue was up about 2%, which is in line with the FY 2022 defense budget increase. For FY 2023, the White House has proposed a Department of Defense budget of $773 billion, subject to congressional approval.
Operating profit margins rise. These six companies reported a 16% improvement in operating profit, 13% after adjusting for Raytheon’s merger with UTC. The increased operating margin was driven primarily by Raytheon’s defense businesses due to a combination of productivity and changes in contract adjustments. Beginning in the third quarter of 2021 and into the first quarter of 2022, supply chain challenges had a negative impact on defense production, revenues, operating profit and cash flow.
Global military spending rose for the seventh year in a row in 2021, surpassing $2 trillion for the first time, led by the US, China, India and the UK. Total military expenditures in Europe, which have risen steeply since Russia’s annexation of Crimea in 2014, reached $418 billion.
European contractors’ revenues, operating profit margins up in 2021. The top five European defense companies reported an 8% increase in revenue and 34% increase in operating profit. BAE Systems reported an 18% increase in revenue while Thales and Leonardo each reported 9% growth, substantially organic. All five leading European defense companies reported significantly higher operating profit.
As expected, the Air Force announced in September 2021 the awarding of contracts to Boeing, Lockheed Martin and Raytheon to develop a solid-rocket, air-breathing hypersonic cruise missile that can be launched from fighter or bomber aircraft. Boeing won a $39.7 million contract, Lockheed $27.2 million and Raytheon $27.9 million to advance to a preliminary design review stage by August–September 2022. The program is part of the Southern Cross Integrated Flight Research Experiment (SCIFiRE), in collaboration with the Australian Department of Defense.
Defense outlook
The president’s FY 2023 defense budget request of $872 billion represents more than an 8% increase. Some in Congress are arguing for an even higher increase, given the high level of inflation and war in Ukraine. Multiple European countries, including Germany, are vowing to boost military spending to 2% of GDP or even more in response to the war in Ukraine, and Sweden and Finland are expected to join NATO. Additionally, defense spending among Pacific allies was already trending higher in response to China’s military modernization. Much of these increases won’t be reflected until 2023. Accordingly, we expect modest growth in the defense sector for 2022, with the potential that lingering supply chain challenges could even result in flat to declining performance. However, we expect high single digit growth for 2023.
We expect defense priorities to be on near-peer threats and the following stated areas of modernization: hypersonics; small satellites; unmanned systems; directed energy; 5G; artificial intelligence.
International military exports typically amount to some 20% of US contractors' revenue. In the first quarter of 2022, foreign military sales notifications for US defense manufacturers (indications of interest approved by the State Department and submitted by the DoD to Congress for review) hit three times the five-year historical average. With nearly 70% of the expected exports being aircraft (both fixed and rotary), this is a sign that the US defense aviation manufacturing sector can anticipate a jump in sales in 2023–24.
The state of A&D: the big picture
The performance of the top 100 A&D companies is a barometer for the health of the industry.
A path to pre-pandemic activity? Commercial aviation is experiencing strong growth from pent-up demand. As international travel restrictions ease, we expect to see RPKs recover to near pre-pandemic levels toward the end of the year, with a full recovery happening by the end of 2023. There is still some uncertainty, however, as China, the world’s second largest and fastest growing aviation market, continues with lockdowns. Some health officials are forecasting another wave of COVID-19 infections this fall which could impact travel, depending on the severity of the variant. However, full recovery for the industry is not a matter of “if” but “when.”
The net-zero effect. At the same time, the industry is evolving to focus on net-zero carbon emissions, through the scaling of sustainable aviation fuels and development of electric aircraft. The long-term growth for aviation is extremely bullish. Consider that approximately 82% of the global population has never experienced an aircraft flight. And with the global middle class projected to grow to 60% by 2030, that’s billions of new potential customers.
Defense could be entering a new era amid geopolitical uncertainty. The defense industry should experience a year of modest growth in 2022, followed by a year of high single-digit growth in 2023. We expect that supply chain challenges will continue to restrict performance in 2022. We also expect that the industry will be focused on military modernization priorities in its product development and M&A strategies. However, the geopolitical environment is complex and unpredictable. Developments in the Ukraine War or the Pacific could rapidly change the priorities.
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