Commercial air traffic is slowly recovering, albeit at a stable interest rate. It is anticipated that passenger travel will remain roughly 40 percent below pre-pandemic levels in 2021. A COVID-19 vaccine that is successful could contribute to short-term growth in passenger traffic. However, it could take two or three years to rebound from the continued disruption to profitable business travel.
The pandemic has resulted in some behavioral shifts among travelers, including an increased focus on short-haul and domestic travel. By 2025, the International Air Transport Association (IATA) does not anticipate a return to pre-pandemics, and the total period of air travel is expected to decline worldwide by about 8.5%.
Due to anticipated lower aircraft utilization rates, the sale of aftermarket parts and services may also remain poor, especially as airlines delay budgetary repairs or upgrades to save cash. This is expected to have a disproportionate influence on profitability as aftermarket parts still have higher margins.
In 2021, defense budgets and profits for defense contractors are projected to remain largely steady, as military programs continue to be vital to national defense, especially given geopolitical uncertainty. Global military spending is expected to grow by about 2.8% in 2021, hitting the $2 trillion mark. Countries around the world continue to invest on enhancing their military ability.
Throughout the United States, military spending will remain balanced in 2021. Some nations are diverting spending to other social services in order to revive the economy and decrease the impact of the pandemic on economic growth. China announced a $178.2 billion defense budget in May 2020, up 6.6% from the previous year, and Japan is increasing its air-sea military capability.
Generally speaking, uncertainty in global and diversified defense supply chains could lead to small short-term cost overruns and timetable delays in 2021. The expanded work on defense projects helped the business shift more than 400 workers from its company to defense. This move will shift the company to security from its commercial business. The consequence is intensified economic demand for conventional security companies and the entry of emerging solutions and technology into the defense industry.
Considering the current pandemic, space launches for the first half of 2020 are approximately on track with previous years. If funding continues to grow and costs decline, prospects for the space industry, primarily in the area of satellite broadband internet connectivity, are likely to increase.It is predicted that space launch providers will report good growth in 2021, with market growth expected to increase by more than 15 percent.
The cost of launching satellites has now dropped from $200 million in the last decade to about $60 million at present and has the potential to drop further to as little as $5 million. The development, in 2019, of the “Space Force,” a sixth branch of the US military, could push public sector investment in 2021.
Furthermore, A&D businesses are expected to be supported by the US Space Command, which oversees space activities using Space Force-managed staff and resources, to speed up developments in advanced technology and capabilities. Both China and Russia are working on developing their military capability dependent on space.
Also with the pandemic, there was a breakdown in certain vital supply chains for A&D due to reduced aircraft production and limits on the transport of people and materials. This has an influence on smaller suppliers, especially those with a high degree of exposure to commercial aerospace and the aftermarket business. Suppliers that focus mainly on the commercial aftermarket would be forced to experience lower volumes. The crisis is expected to continue to influence vendors in different ways, depending on whether they are focused on commercial aerospace, defense, or aftermarket. Any spillover from the commercial side could leave defense OEMs exposed with regard to sourcing essential pieces.
The industry’s attention is likely to shift in 2021 to converting supply chains into more resilient and dynamic networks. In order to do this, techniques such as onshoring, vertical integration, and enhanced cyber defenses can be used. Most A&D organizations are now adopting an ecosystem strategy in order to optimize their supply chains.
After a strong year for M&A in 2019, 2020 stayed flat with year-to-date contract volume still at about $17 billion. The operation of global deals is likely to recover in 2021, led by improved liquidity, especially among financially strong firms.In contrast, US A&D businesses sell at lower valuations compared to their multinational competitors, with an EV/EBITDA of 11.6x, 12.1 % below the five-year average.
Well-capitalized suppliers are expected to explore opportunities for acquisition, as lower production prices for commercial aerospace could lead to weakened players selling and reforming assets. In particular A&D markets, firms are likely to pursue M&A to build size, while others could launch vertical and horizontal growth campaigns to gain more demand, improve cost-competitiveness, or acquire focused niche strengths and emerging technologies.
That being said, certain cross-border transactions may be influenced by a tightening of US foreign investment laws placed in place to restrict opportunistic purchases by foreign companies.
While the market has been impacted by the pandemic, continuing technical advancements in 2021 are expected to fuel long-term growth and shape the A&D sector. The following are some developments that could transform the A&D sector: