High

Aerospace & Defence (Private Sector)

The impact of COVID-19 will be long-lasting in the sector. The risk of failure within the supply chain has increased with liquidity pressure felt throughout.

Sector trends & challenges

  • Reduced aviation activity

    Prior to COVID-19, the order books for new planes were at record levels. Today, airlines are cancelling or delaying taking delivery of new planes whilst reduced travel demand also impacts aftermarket and MRO services.

  • Defence review

    The five year defence review published in March 2021 indicates a number of significant changes are planned to operational resources which will impact the supply chain.

  • Changing business models

    COVID-19 is likely to result in a shift in business model for many airlines, with a reduced proportion of business-class and long-haul travel. This will, in turn, impact on sector economics and demand for specific models.

Sector rating profile

The sector was facing some stresses prior to COVID-19. These were largely driven by the B-737 Max grounding and wider supply chain challenges in fulfilling record order books for new fuel-efficient models. Since the pandemic, the collapse in air travel has had knock-on demand both for new orders and maintenance of existing planes.

Aerospace & Defence (Private Sector)

Aerospace

Up to early 2020, the aerospace sector had been relatively buoyant, with record order books building across the industry over the last 10 years and several major new aircraft models going through final assembly phases. This, we anticipated, would lead to the focus of businesses within the supply chain moving away from sales and development activities towards driving efficient and cost-effective production and order book delivery.

Fast forward and COVID-19 continues to leave its mark right across the sector, from cancelled or delayed orders through to reduced demand for maintenance and servicing activity.

As the acute phase of COVID-19 passes and the economy emerges into the new reality, the aerospace sector is likely to be one of the slowest to recover. Aviation demand - particularly long-haul - will be subdued for the foreseeable period, with airlines unlikely to be seeking to increase aggregate capacity in the near-term. The risk of corporate failure within the supply chain is similarly elevated, necessitating careful risk management to reduce financial and operational exposure.

There remain other challenges within the sector:

Changing business models – COVID-19 will likely accelerate a change in business model for many airlines, which may see a smaller proportion of business-class and long-haul travellers. This, in turn, will impact on the economics within the aerospace sector and demand for specific variants

Climate change – environmental regulations will force innovation across the sector as airlines move from large wide-body planes to fuel-efficient, narrow-body jets. There is also mid-term potential for significant disruption as sustainable aviation fuels and similar green agenda items dominate discussions on where to focus investment. The push for more efficient models is likely to remain as governments grapple with the demand and desires for international travel with the demands placed upon them to reach carbon net zero in the next few decades.

Defence

In March 2021 the UK Government unveiled its latest defence spending review. Titled ‘Defence in a Competitive Age’, the paper outlines proposals to update the UK’s defence capabilities against emerging threats.

For defence contractors, the proposals provide both opportunities and threats. On the one hand, £3bn has been set aside for new vehicles, drones, electronic warfare and such like, providing clear new opportunities for contractors specialising in, or diversifying into, non-conventional defence capabilities. On the other, it’s also clear that investment in conventional military equipment may stagnate or diminish over time. As an example, one-third of the Army’s 227 Challenger tanks are due to be scrapped as a result of the review (though the remainder will be upgraded). Similarly, the total number of Royal Air Force planes and Navy frigates will gradually decline.

Find Your Expert

Kenny McKay is Interpath Sector Leader for Industrials, which includes Aerospace & Defence as one of three core segments.  Roraigh Kirkness leads our approach to the Aerospace & Defence sector nationally.  For a full list of our senior people with experience in this sector use the button below.

Our senior team