Whether you are piloting an aircraft or manufacturing one, the same metaphor seems to apply to the future of aerospace: boundless potential, yet fraught with peril. After several years of solid growth, U.S. production of aerospace products in 2010 will suffer a moderate decrease of 4% to 5% from the previous year. This decline will increase to 6-8% in 2011. Commercial aircraft orders should begin to recover in 2011 and beyond, but long-term orders for future defense-related projects are in serious jeopardy due to the enormous budget deficits in this country and abroad.
As the accompanying chart illustrates, the production trend for the U.S. aerospace industry tends to lag the trend in the overall industrial sector by two to three years. The last cyclical bottom for aerospace production was in late 2004. That was the result of the overall economic recession that hit bottom for most sectors of the economy in 2001 and 2002. Aerospace hit a cyclical peak in 2008 and then continued to fare well during the recession in 2009 due to the backlog of orders.
But the latest recession caused new orders of aircraft from Boeing and Airbus to plummet by as much as 70% in 2009, and this drop in orders will result in a cyclical bottom in the production data in 2011 and 2012. The cycle will follow a logical order: Demand for air travel will begin to rise in 2010 and 2011 as both business travel and vacationers begin to recover from the recession. Airlines will then need to return to profitability, which should begin in 2011 and 2012. Once they are profitable, then new orders for commercial aircraft will start to rise again.
New orders for both business aircraft (small jets) and general aviation planes (propeller-driven) were rising nicely through most of 2008, but as might be expected, demand took a severe hit during the recession. Production of these aircraft will recover over time, but progress will be slow at first. A similar pattern is projected for the demand for civilian helicopters, where market demand took a dive in 2009 and will remain sluggish until 2012.
Output of military helicopters will remain strong due to the ongoing wars in Iraq and Afghanistan. The problem here is that while U.S. attention is focused on supplying current needs, strong competition from a new generation of European helicopters is emerging. American manufacturers will increasingly be challenged to keep up with demand for existing models from the Pentagon while at the same time develop new models so that they can compete for future orders on the global market.
One of the bright spots for decades to come could be unmanned aircraft (UAV’s). The U.S. currently holds a tremendous edge in UAV technology and production, but Europe and Asia are trying to catch up. Many analysts believe that the commercial potential for UAV’s is nearly unlimited. The only glitch is getting access to civilian airspace.
WHAT IT MEANS TO YOU
- Prepare for medium-term pain but long-term gains in this industry. Advances in design, materials, and manufacturing technology will characterize the next generation of aircraft.
- Increasing demand in developing economies such as China and India will drive global growth for aerospace products in the coming years. Demand in the U.S. and Europe will be spurred by a transition to a more energy-efficient fleet.
- Despite expanding budget deficits in many countries, geopolitical instability will persist. Therefore, defense spending will be a major factor in the aerospace industry for the foreseeable future, but the growth rate in this sector will be constrained. UAV’s will be a growth leader, especially for military purposes.
About the Author
Bill Wood, an economist specializing in the plastics industry, heads up Mountaintop Economics & Research, Inc. in Greenfield, Mass. Contact BillWood@PlasticsEconomics.com.