The financial performance of the global aerospace and defense (A&D) industry generally fell in 2011, according to the 2011 Global Aerospace and Defense Industry performance wrap-up by Deloitte Touche Tohmatsu Limited’s (DTTL) Global Manufacturing Industry group.
Despite the uncertainty in the defense sector, the report found that the global A&D industry as a whole grew in 2011 to $681 billion, posting a sluggish revenue gain of 2.3 percent, compared to 2.5 percent in 2010.
The 2011 Global A&D Industry performance wrap-up also found that reported operating earnings for the global industry decreased 3.1 percent, as did reported operating margins (down 5.3 percent), free cash flow (down 13.3 percent), and reported operating earnings per employee (down 5.2 percent). On the positive side, the report found that book to bill (BTB) ratio, an indicator of future revenue growth, increased 17.4 percent, primarily as a result of higher sales of new fuel-efficient commercial aircraft.
According to the report, financial performance differences widened between the commercial and defense segments in 2011: commercial revenues grew 10.1 percent while defense revenues declined by 3.3 percent. The report also suggests that factors contributing to the growth of commercial revenues were record production levels of large commercial aircraft and increases in demand for aircraft services. Additionally, the report indicates that defense revenues were likely impacted by decreased defense budgets, competing domestic priorities, weaker than expected economic performance in the western world, and the drawdown of forces in Iraq and Afghanistan.
“With the defense segment comprising about two thirds of the global A&D industry, the 2011 Global A&D Industry performance wrap-up suggests that a continued uncertain defense outlook is likely to impact overall financial performance in 2012,” Tom Captain, Global A&D Leader, DTTL, said.
“However, the report findings indicate that defense spending is increasing in geographies such as India, China, Japan, the United Arab Emirates, Saudi Arabia, and Brazil as a result of increases in wealth and in light of growing national security concerns.”
The report found that regionally, the financial performance differences between A&D companies based in Europe and the united States continue to diverge. According to the report, the European A&D industry grew less than one percent (only 0.8 percent) while the U.S. industry achieved 3.3 percent revenue growth in 2011. Most significantly, the report found that reported operating earnings in Europe fell by 21.6 percent, while companies in the United States were able to grow operating earnings by 2.9 percent.
Furthermore, the report suggests that European A&D companies continue to lag in employee productivity, with Europe reporting operating earnings per employee down 25 percent, while their U.S. peers improved 1.9 percent in that important metric. According to the report, in 2011, reported operating margin in the United States was 10.5 percent and 4.7 percent in Europe; reported return on invested capital was 20.7 percent in the United States, while in Europe it was 8.7 percent.
“Findings in the 2011 Global A&D Industry performance wrap-up report show that European and U.S. A&D company financial performance gaps widened, continuing a trend from 2010 and suggesting ongoing differences in work force practices between Europe and the United States,” Pauline Biddle, A&D Sector Leader, Deloitte United Kingdom and Deloitte Switzerland, said.
“However, the report suggests that increases in commercial aircraft production and decreases in one-time impairment charges in Europe in 2012 are expected to improve financial performance.”
On the supplier side, companies experienced revenue growth in 2011, the report found. Other report findings: Tier one, two, and three A&D suppliers, many of which have significant participation in the commercial aerospace segment, reported revenue increases of 5.1 percent, 11.1 percent, and 29.1 percent respectively. And according to the report, these increases compare with revenue growth of just 0.1 percent for original equipment manufacturers, many of which are defense segment companies.