Who would have guessed that the aerospace industry would enter 2011 in good shape? After a 2009 of which the best that can be said was that it was not 2008, we have seen a 2010 in which the phrase "record profits" featured remarkably often in company accounts, Airbus and Boeing have both moved to raise output rates, air freight volume soared back to its pre-crisis trend line and even airlines made money.
Against all expectations, the world in 2010 enjoyed a surprisingly benign economic climate. Fears of double-dips were repeatedly batted away, money was scarce but cheap enough, the dollar held firmish and the euro eased off, and a palpable, if precarious, sense of optimism prevailed for much of the year. Oil spent much of 2010 down in an $80-ish a barrel range, owing in large part to subdued global demand but nicely within the range the makes the typical airline cost equation work.
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© Airbus ChinaChina remains an attractive partner |
On the finance side, 2010 was about tight credit; nothing is likely to change quickly there, with the result that really big mergers and acquisitions will remain off the radar in 2011 barring a major bankruptcy. What we saw in M&A last year was a tidying up of the small- to midsize companies sector. Surprisingly, given the ferocity of the 2008-9 downturn, movement was not about distress sales; rather, aerospace suppliers made discreet, tactical acquisitions, often following the "get bigger or get out" strategy as the primes look to reduce the number of suppliers they deal with, and expect their suppliers to be full-service design-and-build operators. Many of the sellers have been family firms with no family successor, so selling up is a ticket to retirement. With initial public offerings difficult to impossible and trade sales often difficult for want of available debt, private equity buyers have extended their timeframes for exit. None of these trends look likely to change in 2011.
What we are likely to see in the next 12 months, however, is a gathering momentum - fuelled by economic rebounds in Asia, the Middle East and Latin America - behind several long-term trends.
First, Western aerospace majors are going to find that 2011 is the year when their traditional home markets start to look less important than ever than export sales to the big, developing economies. China excepted, many of these rising powers are also the big spenders when it comes to defence exports. India, Brazil, Saudi Arabia and the United Arab Emirates are among the countries with large warchests and major contracts up for grabs.
These countries are all demanding much more than delivery of hardware and the offset packages of old, which absorbed cheap manpower but created little of lasting intellectual value. With major air shows coming up in Bangalore and Dubai in 2011, expect to hear promises aplenty from potential vendors in terms of genuine technology transfer and partnership with local industry in countries with ambitions to create entire domestic supply chains able to partner the giants of the West on major programmes, and eventually produce world-class aircraft and systems.
Sceptics are usually referred to the example of Brazil, which transformed its indigenous airframer into the largest regional jet manufacturer in the world. Embraer now also has a growing foothold in business and military aviation, but the company is at a crossroads. Many developing-nation rivals which would like to emulate the Brazilian champion would do well to watch carefully how it navigates the next few years.
The challenge Embraer faces is growing competition, particularly in its key regional jet business, so the company has to find new ways to be more competitive - in quality, price and innovation. There is no guarantee that the operation's rapid rise will continue - and the same can be said for any number of other up-and-comers.
INNOVATION
When it comes to innovation, people are key and there is a growing, global competition for resources. While the previous two years have been tough on aerospace workers, engineers remain in short supply.
Western manufacturers' push to tap talent pools in China and India is one of the driving forces behind Western investment in joint venture operations in the two giants of Asia.
But those talent pools - often Western trained and in any case bolstered by Western expertise coming through joint ventures - are also at the root of concerns (or hopes, depending on your perspective) that China and India will overtake their Western mentors to become the global leaders in aerospace engineering. For sheer numbers, there is no competition, but it is widely recognised that a key to successful innovation is extensive experience of getting one's hands dirty in the workshop, and here the engineering corps working for the traditional Western leaders has an enormous advantage.
In that respect, China's drive to become a manufacturing power contrasts with India's preference for investment in its people. The countries' rivalry is the most interesting battle of the decade to come. Both may be winners, of course, but as one European aircraft company boss told Flight International last year that if he had a dollar to invest it would go to India - where a highly educated class of engineers and entrepreneurs are lining up to ride the wave of their chaotic, boisterous democracy and overtake their centrally guided regional rivals.
Source: Flight International
