Aerospace and Defense is Poised for a Comeback

by | Jul 1, 2021 | A&D News, Aerospace, Defense, Featured | 0 comments

Aerospace and defense are critical to the global economy, with $909 billion in US sales alone in 2019. It’s also a cyclical industry, with broad swings upward and dramatic downturns. 2020 marked one of its worst downturns ever, after a 2019 that promised continued growth. But A&D is poised for a comeback from the global pandemic. 

How the Global Pandemic Changed A&D

The pandemic was especially hard on airlines, who faced a massive drop in domestic and international flights. Manufacturing, too, saw huge declines directly connected to decline sin other industries. Defense contracts offered some security for suppliers with bigger portfolios, and continued to see positive growth. Aerospace suppliers also had a challenging year, with significant declines in both valuations and M&A activity. 

Government support maneuvers helped support the supply chain, preventing significant structure disruption. But now, the question is what the recovery will look like. Most analysts are primarily concerned with how quickly suppliers can ramp up to support the recovery. 

A Recovery Ahead? 

The recovery is already showing signs of becoming a reality. But it may take a few years for air travel to rise to the same level as in 2019. We anticipate that there will be major shifts across the supply chain, as well as in the way companies transport goods. 

Domestic and leisure travel should recover first, while international and business travel will likely take longer. 

Suppliers and manufacturers are already in preparations for ramping up production of single-aisle aircraft. We anticipate an increase in revenue in Q3 as compared with 2020. The recovery should continue to improve in 2022, leading to more consolidation, an increase in research and development, and movement toward the next generation of aircraft in 2025. 

Global deal volume is becoming healthier. The US has seen significant increases in M&A, but in Europe, deal activities are still fairly slow. Global deal size in 2020 was roughly half that of 2019. 

What the Future Holds 

Restructuring and divestiture carve-outs will likely dominate the M&A market in 2021 and 2022. Valuation multiples continue to be relatively high, and overall confidence in the industry is good. But the security of any specific deal depends on the viability of the companies involved. A number of strategies can increase value and support successful dealmaking: 

  • Review your products: Consider whether alternative sectors or customers might offer a wider audience for your products. 
  • Gain control of cash and liquidity: Maintain steady operations and strong relationships with suppliers and customers, with a focus on timely delivery, as well as quality and cost controls. 
  • Examine your people strategy: Work to retain key talent, recruit new talent, and keep your teams working at optimal productivity. 
  • Look beyond the immediate future: In the wake of a pandemic, it’s tempting to focus only on the immediate recovery. But the most successful businesses keep one eye on the future beyond 2022 or 2023. This empowers innovation and industry leadership, and will ultimately offer significantly more value than a reactive, immediate future-focused stance.