Outlook Positive for Global Aerospace and Defense Sector

The outlook for the global aerospace and defense sector is positive, with deliveries of large commercial aircraft expected to grow, Moody’s Investors Service said in a new report. Defense spending, after a multiyear downturn, is also set to increase.

“The long-running commercial aerospace supercycle has a bit more room to run, and defense is now picking up,” said Moody’s Senior Vice President Russell Solomon. “Aircraft manufacturer order books remain near all-time highs despite a slowdown in new orders, rising deferrals/cancellations and modestly lower aircraft retirement rates—all as expected.”

Solomon added that deliveries of large commercial airplanes, which have 120 seats or more, will likely grow from 6% to 8% next year due to demand from developing markets. Over the long term, however, supply chain risk remains, as original equipment manufacturers push for cost reductions and pursue an increase in production rates for single-aisle jets and the latest widebodies.

“In 2017, airlines will continue to benefit from steady passenger demand, relatively stable GDP rates and still-cheap jet fuel, all of which are broadly supportive of the coming production ramp,” Solomon said.

Defense spending is expected to rise from 3% to 5%, with the sector’s operating profit to grow from 4% to 6% globally in 2017. Growth prospects are good in the U.S., with expected bipartisan support for increases in defense spending and relief from budget caps. Rising security concerns and geopolitical risk should support the industry globally, according to Moody’s. Higher defense spending may come from countries that increasingly need to defend their own borders if U.S. support for allies is reduced. Heightened tensions related to such potential withdrawals, however, may also lead to reduction in purchases of U.S.-made equipment and services.

In an increasingly political environment, cost control will remain important, Moody’s said. Merger and acquisition activity is expected to continue.

– Adam Fusco, editorial associate

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