Soaring airplane demand to boost aerospace, defense sector: Moody’s

JEDDAH: Airliner deliveries are expected to grow by around 7 percent in 2017 before accelerating to just over 10 percent growth in 2018, said a report issued by Moody’s Investor Services.
The report said that accelerating deliveries of large commercial airplanes, such as Airbus’ A320 and A350 and Boeing’s B737, combined with some recovery in global defense spending will drive steady profit growth and underpin the positive outlook for the global aerospace and defense industry into 2018.
“The positive outlook on the global aerospace and defense sector reflects our expectation of aggregate operating profit growth of around 3 to 5 percent through 2018 as commercial aircraft deliveries ramp-up, global defense spending recovers, revenue from lucrative service fees rises and cost cuts bear fruit,” said Jeanine Arnold, a vice president and senior credit officer at Moody’s.
Despite the still positive industry outlook, Moody’s revised its operating profit growth expectations for the sector down from 4-6 percent due to protracted pressure on aerospace margins as companies transition to next-generation aircraft from more mature, profitable ones.
The report said that the current order backlog of about eight years means that fewer commercial aircraft orders than deliveries do not present a risk to aerospace firms, at least for the time being. The combined book-to-bill rates for Boeing (A2 stable) and Airbus SE (A2 stable) fell below 1.0x in 2016 for the first time since 2009, indicating a slowdown in new orders for large commercial aircraft, especially higher-margin wide-body planes.
Moody’s expects large commercial airplane deliveries to increase between 7 and 9 percent through 2018 as the airframers increase future production rates to meet demand and help support the development of their new aircraft programs.
According to the report, increased geopolitical tensions, growing cyber threats and the need to replace aging equipment will fuel a 3-5 percent rise in global defense spending over the next 12 to 18 months.
“US defense spending, which typically represents around 35-40 percent of the total global spending, will increase by just over 3 percent in 2017 to just over $598 billion and rise by a further 6 percent in 2018 to over $630 billion,” the report said.
However, the 2017 US budget bill only committed to half of the increase sought by the Trump administration in its initial base defense funding request, signaling some continuing budget pressures in the world’s largest defense market.