NEW YORK and LONDON, Feb. 21, 2006 (PRIMEZONE) -- After five challenging and turbulent years, many industry analysts believe that the civil aerospace business is finally returning to normal. However, a new report from PricewaterhouseCoopers LLP indicates that shifts in the market's traditional structure demonstrate it is in fact undergoing fundamental and lasting change.
"Civil Aerospace in the 21st Century: Business as usual . . . or a fresh start?" is the second in a series of aerospace and defense papers published by PricewaterhouseCoopers. It reviews the factors shaping today's civil aircraft industry, identifies those that will affect its future and details five critical issues for contractors.
"The growth of the Asia-Pacific market, the rise of the low cost carrier and the development of the regional jet all promise major changes in how the civil aerospace market will operate in the future," said Gregg Agens, U.S. Aerospace & Defense Leader, PricewaterhouseCoopers. "Together with the prospect of more stringent environmental regulation, it means we are not, in fact, returning to 'business as usual.' It looks like a fresh start, and for an industry that still has to prove it can create value over the long term, this is a turning point."
Economic activity is the primary driver of the demand for air travel, a concept thoroughly understood by governments throughout the world. Over the last 30 years, a steady three percent annual increase in world economic output has been accompanied by a range of measures to liberalize and deregulate the industry. From an initial exclusive focus on safety and service, the rules now increasingly address efficiency and value. Supported by a manufacturing industry supplying new aircraft, new equipment and new supporting services, these factors have driven an 800 percent increase in air travel since the 1970s.
After five years of trauma -- from SARS and international terrorism to soaring oil prices and conflict in the Middle East -- order books now stand at record levels. Suppliers around the world are looking at ways to increase output, share prices are up and investors regard the sector as booming.
"The problem for listed companies at the moment is that they can only create value for their shareholders if they exceed market expectations," said Richard Hooke, Global Aerospace and Defense Leader, PricewaterhouseCoopers. "So, in a market where expectations are already high, it won't be good enough just to increase volumes in line with record deliveries. For private companies, there are enormous pressures to spend any cash left over from a prolonged recession to invest in new programs and to ramp up production. Overtrading is one of the easiest ways to go bust, so it is vital to spend money on the right priorities."
While many expect a smooth return to a complete recovery in the civil aerospace market, the report identifies four factors that suggest that the future is going to be different. Dealing with them will provide the key both to managed cash flow and to unlock shareholder value:
-- Asia-Pacific will overtake the U.S. and Europe as the major
growth market for air travel over the next 20 years. As a
consequence, by 2023 the region will account for nearly a third
of worldwide passenger traffic -- more than North America and
only just behind Europe.
-- Low cost carriers (LCCs) and aircraft leasing companies are here
to stay as major buyers of new aircraft. While LCCs may provide
30 percent of the global fleet by 2015, leasing companies have
already increased their share of the fleet to 30 percent by the
end of 2005.
-- The Regional Jet (RJ) has finally come of age. By 2015, regional
carriers could be providing 50 percent of global seat capacity.
-- As the air transport industry shrugs off the effects of
recession, policy makers are being forced to turn their attention
to the environment. Aviation is not yet seen as a model citizen.
In September 2005, the European Commission announced its
intention to include aviation in its Emissions Trading Scheme.
While it has been assumed that airlines will pass any added cost
on to their customers, the report suggests the reality would be
different -- some operators would, some not.
"An industry that has been a driving force in globalization is now, itself, on the brink of becoming global," said Hooke. "So, while manufacturers are now leaner, more resilient and more efficient, fresh challenges clearly lie ahead."
Manufacturers need to take action in five areas that could be described as a template for value creation:
-- Managing a diverse customer base -- Four main customer groups
have emerged -- the legacy majors, carriers in Asia-Pacific,
leasing companies and LCCs. The products, services and support
they require from suppliers are markedly different, which has
implications for the contractor's selling process.
-- Investing in a changing mix of capabilities -- Providing thorough
life support is becoming an important source of revenue but
raises questions for management teams, since there is strong
competition at every stage of the product lifecycle.
-- Managing supplier risk through the lifecycle -- The resilience,
capability and credibility of the supply chain will be crucial
in ensuring orders are converted into value.
-- Achieving best value in manufacturing -- Sourcing decisions need
to reconcile the drive to make a better, less expensive product
more quickly and cheaply with a need, in some cases, to provide
work to a supplier or region favored by the customer.
-- Managing a transnational organization -- With contractors needing
to balance their customer, program and regional focus within an
international organization, the ability to direct, manage and
monitor performance across international borders is a basic
capability for the whole supply chain.
Notes to Editors:
1. "Civil Aerospace in the 21st Century: Business as usual . . . or a
fresh start?" can be downloaded at
www.pwc.com/aerospaceanddefence/civilpaper. Part one of the
series "The Defense Industry in the 21st Century: Thinking
global . . . or thinking American?" is also available.
2. PricewaterhouseCoopers (www.pwc.com) provides industry-focused
assurance, tax and advisory services for public and private
clients. More than 130,000 people in 148 countries connect
their thinking, experience and solutions to build public trust
and enhance value for clients and their stakeholders.
"PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
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