Aerospace M&A in the Post-COVID World
The economic disruption of COVID has had impacts in various A&D sectors. In commercial aerospace, the effects are immediate and dramatic, while defense remains mostly untouched. We don’t know yet what all of this will mean over the long-term, but as with previous disruptions, there are meaningful opportunities for growth for those who choose to take them. Here’s what you need to know about the current climate.
Life Before COVID
It might not seem like life before COVID ever happened, given how much the virus has disrupted the world. But just a few short years ago, we were all expecting a golden decade of growth. In 2019, though, the correlation between carrier profitability, GDP, air-traffic expansion, and orders and build rates suddenly changed. While airline profitability and GDP remained healthy, new orders dropped thanks to the 737MAX shock. Other undercurrents also started to pull things downward worldwide, even as U.S. defense spending continued to increase.
Players in many segments continued to be confident in the long-term sector fundamentals, and opted to use M&A to build scale. Others focused on content, and initiated horizontal and vertical integration strategies. A&D deal volume reached record levels, nearly doubling in just five years. These volumes moderated a bit in 2019, thanks to more uncertainty and a pending presidential election, though the overall outlook remained rosy.
COVID-19 Changes Everything
Air traffic collapsed in the wake of COVID, thanks to stay at home orders and travel restrictions. The MRO and aftermarket segments suddenly had to fight heavy headwinds. Defense has not faced a similar shock so far. There have not been major interruptions, nor service delays. However, a range of defense spending measures is possible, including cutting defense budgets to fund other initiatives.
Volatility in the financial markets is also increasing, delaying and decreasing funding and forcing companies to pursue alternative liquidity options. Many underway deals have been halted or slow. The new public offering market is essentially closed. Valuation gaps between sellers and buyers have increased thanks to different perceptions of the economic effects of COVID, contrasting views on reopening, and uncertainty about what the post-COVID world will look like. With few reliable projections, credible valuations are nearly impossible, making it difficult to bridge these gaps.
Important Developments to Watch
Health concerns, changes in consumer behavior, and the lag between now and a vaccine makes a v-shaped recovery unlikely, especially in air traffic. As governments shift to reopening economies, the pace of the recovery will vary greatly across the globe, and also between states. There may also be long-term or even permanent changes in A&D.
Developments to watch as economies reopen
Given the health concerns, changes in social behaviors (some of which may be slow to reverse) and anticipated lead-time to an effective vaccine, a V-shape recovery in air traffic appears increasingly unlikely. As governments move from combating coronavirus to reopening economies, the pace and extent of the economic recovery is expected to vary significantly around the world. Further, some long-lasting or permanent developments may trigger some dramatic shifts in the sector. An immediate return to pre-crisis levels is unlikely, but this sector should bounce back.
As we move closer to the next phase, deal makers must be prepared to adapt to a world that might be quite different from the one they once knew.
About KAL Capital Markets:
KAL Capital Markets is an aerospace investment banking company advising middle market clients on mergers, acquisitions, and accessing the capital markets. The firm’s professionals have an exceptional track record, rooted in deep relationships and experience within aerospace & defense manufacturing and aftermarket services sectors. For additional information, please visit https://kalcapital.wpengine.com/.