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PwC’s Global Aerospace and Defense: Annual Industry Performance and Outlook

2021 edition

The 2021 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 and notable developments. Our data are drawn from financial reports on fiscal year (FY) 2020 and include financial results for the largest 100 A&D companies by revenue.

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A&D year in review

A&D performance: 2020

The aerospace and defense industry reported $697 billion of revenue, down 8% from 2019, and $25 billion of operating profit, a decrease of 61%, primarily due to the impacts of COVID-19 on commercial aerospace, as revenue passenger kilometers (RPK) plummeted by 66%.

$25 billion in operating profit, a decrease of 61%

Heavy losses for Boeing, Airbus, Spirit AeroSystems and suppliers. Boeing’s performance weighed heavily on industry results, with operating profit down nearly $11 billion (making up more than a quarter of the total industry decline) because of the combined effects of COVID-19, the grounding of the 737 MAX and charges on their 777X and defense programs. Airbus reported a $2.1 billion profit decline, with revenue down $22 billion, and Spirit AeroSystems’ revenue plunged by 57%. The four largest tier 1 suppliers to commercial manufacturers, Raytheon Technologies, GE Aviation, Rolls-Royce and Safran, reported an aggregate operating profit loss of $1.4 billion for a decline of $16.3 billion. These seven companies represented more than three-quarters of the overall industry profit decline. L3Harris Technologies reported revenue growth of 42%, largely due to the first full year of the merger of Harris and L3. SAIC moved up the revenue rankings by 12 spots, mainly a result of its acquisition of Engility.

Lockheed Martin tops revenue ranking. Lockheed Martin reported revenue of $65 billion, up 9% over 2019, to become the industry’s largest company by revenue. The growth was driven largely by expansion of the F-35 program and sharp decreases at Boeing and Airbus. Lockheed Martin remained the largest company by profit, reporting operating profits of $8.6 billion for an increase of 1%.

Operating margins dive to 3.9%. Industry operating margin plummeted by 470 basis points to 3.9%, with Garmin Aviation capturing the industry’s best operating margin at 72.7%

AD year in review graphic

Companies with over 20% operating margins reduced from 12 in 2019 to five in 2020

Operating margin

Garmin Aviation
Honeywell Aerospace

Commercial aerospace performance: 2020

Airbus delivered 566 aircraft in 2020, a 34% drop from 2019, breaking 17 years of consecutive record production. Boeing delivered 157 aircraft, a 57% decline from 2019 and just 20% of 2018’s record production of 806, as the 737 MAX grounding weighed heavily on orders and deliveries. The 737 MAX completed recertification before the end of 2020 and is returning to service globally.

Airbus’ 17 years of consecutive record production broken

Airbus reported 268 net orders in 2020, a 65% decline from 2019. Boeing reported 471 fewer net orders, following 87 fewer net orders in 2019, which was the first negative order rate in at least three decades. As a result, industry backlog declined by 926 units and $245 billion. However, industry backlog remains healthy at more than $600 billion and nearly 12,000 units, which is more than seven years’ worth of production at 2019’s record production level.

RPK down 66%. For 2020, the International Air Transport Association (IATA) reported a 66% drop in RPK—snapping consecutive annual records since the 2008–09 financial crisis—as global airlines reported losses of about $370 billion. Passenger load factors were 65% for the full year, after achieving a record in 2019. The air cargo market dropped 11% during the year, but load factors improved as capacity dropped at a steeper rate.

AD year in review graphic
AD year in review graphic

Commercial aerospace outlook

IATA is forecasting about a 50% improvement in revenue passenger kilometers for 2021, which would hit only about half of 2019 levels. Boeing has more than 400 737 MAX aircraft in inventory to deliver and has stated plans to ramp up production of that model to 31 per month by 2022. Airbus plans to increase production of A320s to 45 per month by the end of the year. 2021 looks to be a year of substantial improvement, but full recovery is not expected until the end of 2023.  

The unprecedented nature of the COVID-19 pandemic means that there is little data upon which to base estimates. While it is projected that 2021 will be an improvement over 2020, travel restrictions will likely continue to have a significant negative impact on the industry for the 2021 annual results. Furthermore, airlines have suffered long-term damage by taking on large amounts of debt that could dominate their capital allocation priorities for years to come.

In the long term, commercial aviation remains bullish. The current projections are for 4% CAGR, or 60% above forecast GDP growth. Over the next several decades, the industry will be focused on innovation and developing new products that contribute to the net-zero carbon emissions goals. The forecast demand over the next two decades supports an estimated 43,000 new aircraft deliveries and a services market value greater than $9 trillion.

Defense performance: 2020

The top six US defense contractors combined reported a 2% increase in revenue (5% increase adjusted for the acquisition of Raytheon by UTC) and an 18% decrease in profit (6% decrease adjusted for the Raytheon acquisition). The drop in profit was driven primarily by a 41% decline at Boeing Defense, Space & Security, related to charges recorded on the KC-46A Tanker and VC-25B programs.

Revenue up 2% at top six US defense companies

The top five European defense companies combined reported flat revenue and a 20% increase in operating profit. The higher profit was driven primarily by a $1.5 billion improvement at Airbus Defence and Space and Helicopters due to charges on the A400M program in 2019. This was partially offset by a $700 million decline at Leonardo.

Lockheed leads industry with 9% gain

Lockheed Martin reported the strongest revenue improvement of $5.6 billion, or 9%, with its performance driven primarily by a ramp-up of F-35 production. L3Harris’ revenues increased by $2.4 billion, or 19%, primarily related to the merger of the two companies, partially offset by some divestitures.

The US operating margin decreased to 9.9% from 12.4%, while the European operating margin improved to 7.5% from 6.2%. British firm Rolls-Royce Defence reported the highest operating margin overall at 13.3%, while Lockheed Martin reported the highest operating margin in the United States at 13.2%.

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Defense outlook

The defense sector is stable, and companies are generally forecasting moderate growth for 2021. Some industry observers believe that defense budgets will inevitably come under heavy pressure in the near future, as world governments grapple with the massive cost of COVID-19 relief.

The Biden administration plans to request $715 billion for military spending for FY 2022, up from $704 billion allocated in FY 2020. Europe’s elevated levels of terror threat and continuing tensions with Russia marked a turning point, and we expect defense budgets to grow modestly in 2021 and beyond. The UK, Germany and France all confirmed their intention to reinforce their defense capabilities. However, this may not result in a large number of new programs because of the asymmetric nature of the threat. Instead, European defense contractors will need to develop new intelligence and cyber capabilities rapidly, while facing competition from nontraditional technology companies. The global security environment continues to be dynamic, and the coming year could usher in additional repercussions on defense policies, given persistent global crises.

In recent years, we have seen a focus on market growth and a pivot from a “return of capital to shareholders” strategy to an “invest for growth” strategy. The latest examples include Lockheed Martin’s acquisition of Aerojet Rocketdyne, the Harris-L3 Technologies merger, Northrop Grumman’s acquisition of Orbital ATK and General Dynamics’ acquisition of CSRA. While the defense sector has been relatively insulated from the COVID-19 crisis, it has created an environment of caution in the short term. We expect to see moderate increases in the levels of M&A and investment in research and development.

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.

Commercial aviation has become a critical part of our global infrastructure. COVID-19 has put the industry into crisis, and a full recovery is not expected until the end of 2023. Furthermore, many airlines will likely be hampered by large amounts of debt that could dominate their capital allocation strategy.

In the past two decades, aviation has become increasingly inelastic, as witnessed by its resiliency during the last recession and subsequent recovery. Globalization and increases in the global middle class have spurred demand. Even as there is a trend toward moderating—or even reversing—globalization (as supply chains are moved closer to their end markets), the long-term forecast for commercial aerospace nevertheless appears positive. Just consider, for example, that 82% of the global population has yet to set foot in an airplane, and, with the global middle class projected to grow from 25% to 60% by 2030, there is an enormous untapped segment of new customers.

The outlook for defense remains strong. Global defense budgets are plateauing but at healthy levels. While escalating deficits pose a risk to defense spending, global threat levels remain elevated in some regions, including those undergoing military modernization programs.

Furthermore, the restructuring actions begun by commercial aerospace companies in 2020, combined with digital transformation and process improvements, will improve competitiveness for many years and position the industry for a profitability boom as end markets recover.

The state of A&D
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Scott Thompson

Scott Thompson

Global Aerospace and Defense Leader, PwC US

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