Aerospace Component Manufacturers 10 th Anniversary

Transcription

1 OCTOBER 9, 2009 Aerospace Component Manufacturers 10 th Anniversary THE CHANGING AEROSPACE/DEFENSE ENVIRONMENT STRATEGIES FOR SUCCESS University of Hartford Wilde Auditorium West Hartford, CT 1300 Wilson Boulevard, Suite 320 Arlington, VA (703)

2 Agenda 1 Defense Budgets & Future Growth 2 Commercial Aircraft Cycle 3 Q&A 2 Renaissance Strategic Advisors 2

3 THE MACRO ENVIRONMENT Cyclical trends vs. long term trends vs. discontinuities The fiscal crisis ( the black swan appeared ) Started as a banking/liquidity crisis, spread into the general economy, bottoming out Banking/liquidity crisis a discontinuity in post War II context, very routine in 18 th and 19 th century America (reforms of the 1930s were meant to stop them) The liquidity crisis abated, environment still fragile The economic slowdown working its way through in normal cycle Started as a US problem, spread globally (Iceland, Ireland, Hungary), recovery in Asia first Impact on the aerospace/defense industry Shifting focus of government to domestic issues Triggered the next downcycle in commercial aerospace Reminded everyone that business jet industry is cyclical Aerospace/defense firms with heavy leverage/finance exposure vulnerable Renaissance Strategic Advisors 3

4 THE MACRO ENVIRONMENT Second order consequences of the fiscal crisis Slowing economies and collapsing commodity prices as drivers of global instability Complexity of China relationship placed into stark relief Fundamental rethink of role of government in economy? Impact on the aerospace/defense industry Demand for national security/security constant Complexity of national security challenges driving imperative for whole of government solutions and multilateral solutions A more benign view of near peer threat? Increased demands on financial resources of government buy stability or impose stability Renaissance Strategic Advisors 4

5 THE DEFENSE BUDGET ENVIRONMENT Cyclical? Does the old band function or a discontinuity? $800 U.S. Defense Budget, 1948-present $700 Constant FY09 $ $600 Average High in Budget Cycle =~$550B in FY08$ $500 $400 $300 Average Low in Budget Cycle =~$350B in FY08$ $200 $100 $0 Current $ Current Constant Source: DoD, RSAdvisors Analysis Renaissance Strategic Advisors 5

6 THE DEFENSE BUDGET ENVIRONMENT The Very Long View A Fourth Band or Not? 1000 U.S. Defense Spending Current and FY08 Constant $ Defense Spending, ? Defend the Nation Ex-war, spend 0.9% of GDP on defense (flat trend as % of GDP) 1 Defense Spending FY08 Constant Defend the West Ex-war, spend 5.4% of GDP on defense (declining trend as % of GDP)` Defense Spending Current Defend the Hemisphere Ex-war, spend 1.1% of GDP on defense (flat trend as % of GDP) Source: Dept. of Commerce, DoD, RSA Analysis Renaissance Strategic Advisors 6

7 THE DEFENSE BUDGET ENVIRONMENT Obama Administration s long range defense plan at upper end of range yrs 3-5 yrs 5-10 yrs 700 Billions Constant FY09 $ DoD Budget Authority year upper bound average 50-year lower bound average Obama FY How much will change given the economic slowdown (catalyst for change or catalyst for status quo) Renaissance Strategic Advisors 7

8 US DEFENSE MARKET Gates talks about the 50/40/10 defense enterprise = the barbell Bar bell Shaped Markets Gates: 10% Gates: 40% Gates: 50% The Long War: rapid acquisition, Off the shelf/short development, quick response is key, COCOM centric Reset/Retrofit: Install black boxes in existing equipment to plug into network, maintenance/repair Slice #1 Slice #2 Dissuade: very long cycle, Technology development, platform oriented but limited production, service centric Transformation : Desire for large, horizontally integrating networks, leverage the IT revolution Strategic Question: How Do You Organize to Address Is it one or two industrial bases? Can they be the same suppliers? Renaissance Strategic Advisors 8

9 DEFENSE ENVIRONMENT Cycles Trends Discontinuities Cycles Trends Defense budgets Emphasis on particular military service/capability Acquisition reform Industry knows how to handle many current executives forged in last cycle Demographics/human capital (actually a very long cycle) Technology Discontinuities (wild cards) An event that puts at risk large capital investments/forces recapitalization Also technology The only significant changes in the structure of the defense industry over the last 130 years driven by technology introduction of aircraft, electronics, IT or business processes contracted services Industry adapts/survives more broadly based, more services, moving into other government, better run as a business Renaissance Strategic Advisors 9

10 DEFENSE BUDGET DEEPERDIVE By Budget Category CBO View Renaissance Strategic Advisors 10

11 DEFENSE BUDGET DEEPERDIVE Army driven by the war Renaissance Strategic Advisors 11

12 DEFENSE BUDGET DEEPERDIVE Navy dual needs of war and recapitalization Renaissance Strategic Advisors 12

13 DEFENSE BUDGET DEEPERDIVE Air Force recapitalization is key Renaissance Strategic Advisors 13

14 Agenda 1 Defense Budgets & Future Growth 2 Commercial Aircraft Cycle 3 Q&A 14 Renaissance Strategic Advisors 14

15 COMMERCIAL AEROSPACE Although air traffic has significantly declined, with both RPKs and fares dropping to lows this spring, a turn around may beginning Fares & Passenger Kilometers Flown (August 2007 June 2009) Source: PaxIS, IATA 15 Renaissance Strategic Advisors 15

16 COMMERCIAL AEROSPACE But airlines (which lost $17 billion in 2008), and may not return to profitability until after 2010; revenue will not return to 2008 levels until 2012 or later Global Commercial Airline Profitability ( ) Source: ICAO, IATA 16 Renaissance Strategic Advisors 16

17 COMMERCIAL AEROSPACE The Long View..Clearly Cyclical, But The Trend is Growth Air Travel Growth Renaissance Strategic Advisors 17

18 COMMERCIAL AEROSPACE Cycles Trends Discontinuities Cycles Aircraft demand Insourcing/outsourcing work Trends Long term air traffic growth Despite talk of video conferencing, etc. Increased environmental concerns Discontinuities (wild cards) Technology supersonic? Speed has always been the game changer Dramatic regulatory change Industry adapts/survives it s increasingly about business processes and efficiency until next significant technological change Renaissance Strategic Advisors 18

19 COMMERCIAL AEROSPACE To mitigate the losses, airlines have been reducing capacity through utilization, not fleet size; in anticipation of the turn around, aircraft are now being pulled from storage Aircraft Retirements and Deliveries (July 2008 July 2009) Source: ICAO, IATA 19 Renaissance Strategic Advisors 19

20 COMMERCIAL AEROSPACE To date, Airbus and Boeing have been supporting their backlogs; however despite their optimistic forecasts, most analysts believe production must be cut by 20 40% Airbus & Boeing Commercial Aircraft Forecast ( ) Source: Airbus, Boeing 20 Renaissance Strategic Advisors 20

21 COMMERCIAL AEROSPACE Regional aircraft production peaked in 2001 and because of their cost effectiveness, regional turboprops have seen a comeback; overall however, the market looks flat Regional Aircraft Production (Units, ) Source: GAMA, Teal, RSA analysis 21 Renaissance Strategic Advisors 21

22 COMMERCIAL AEROSPACE For business aviation, the near term forecast looks bleak; it may take a five to ten years to return to 2008 levels; in the out years, demand is expected to grow, primarily in international markets Business Aircraft Production (Units, ) Source: GAMA, Teal, RSA analysis 22 Renaissance Strategic Advisors 22

23 COMMERCIAL AEROSPACE Ongoing program problems with the A380 and 787 have created a window for new commercial entries into the narrow body segment, with regional players moving upstream New Commercial Jet Programs ( ) Airbus Narrow Body Replacement Legacy Commercial OEMs Airbus A Airbus A350XWB F Boeing Narrow Body Replacement Boeing Freighter Boeing Legacy Regional OEMs Embraer 195 Bombardier CRJ 1000 Bombardier CS110/130 Embraer RJ NG New OEMs Sukhoi Superjet 100 ACAC ARJ / Mitsubishi MRJ70 90 COMAC Narrow Body Source: Company released data, RSA analysis Current Program Likely Program Program Launch Entry in Service 23 Renaissance Strategic Advisors 23

24 Lessons of the 1990s Downturn Significant shifts in market positions winners and losers Those who had a strategy were rewarded Those who moved first were rewarded Share price performance 2 3x that of peers and that of followers Delivered growth and earnings when others didn t P/E doubled Figure it out and do something! Renaissance Strategic Advisors 24

25 Agenda 1 Defense Budgets & Future Growth 2 Commercial Aircraft Cycle 3 Q&A 25 Renaissance Strategic Advisors 25

26 RENAISSANCE STRATEGIC ADVISORS MULTI DISCIPLINARY FOCUSED EXPERIENCED TRUSTED Renaissance Strategic Advisors 26