The aerospace and defense (A&D) industry achieved record revenue and profits in 2012 on the strength of a surging commercial aviation market. Industry revenue and operating profit increased 2% and 4%, respectively. Median Top-Performing Companies (TPC) scores for the largest A&D companies improved to their highest levels since 2007, the year before the Great Recession. Mid-size company scores were flat, but remained at historic highs, and smaller company scores dropped considerably, after a brief peak last year.
improved its TPC score to 90, the third-best ever achieved in the large-company category, and won top honors for the second consecutive year (see page 50). improved its profit by an impressive 29%, but less than the 38% posted in 2011, which contributed to a lower TPC score. improved its TPC score and has the best five-year average mark.
The commercial aerospace industry delivered 1,189 large aircraft, to set a new record and surpass the 2011's top mark by 18%. Last year also was the third best for orders, and the second consecutive year of more than 2,000. This pushed backlog to another new record of more than 9,000 aircraft. This year's sales appear to show no sign of slowing down: In the first quarter, the industry booked another 651 orders, an annual pace of 2,600.
Defense revenues were generally down, but operating margins improved as companies took actions to reduce overhead. One potentially bright spot is defense exports, which have quadrupled from a decade ago. Sequestration took effect in the U.S. on March 1, but contractors are still waiting for impacts on specific programs, which will likely be unknown until a new defense budget is passed. All the uncertainty has created a “wait-and-see” approach. There were few major strategic decisions in 2012, and the mergers and acquisitions market did not see a single large defense deal.
We may be entering a period of extended uncertainty and budget battles in the U.S., and defense priorities could change rapidly, based on emerging threats. Uncertainty appears to be the new normal. Contractors should become more agile and intensify their focus on non-U.S. markets. PwC recommends companies focus on the following areas:
•Strategy—The pace of significant strategic decision-making likely will accelerate as companies align around the new priorities: lifetime affordability, fewer new platforms, upgrades and sustainability of existing platforms, C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance), energy and efficiency, and international markets.
•Innovation—For many companies, innovation is the most important success factor. Innovation should be considered in enterprise risk management and treated as a business process. Companies should align innovation priorities and funding around long- term strategies and evaluate results.
•Talent Management—A&D companies are facing aging workforces and shortages in engineering and skilled manufacturing talent. They should develop strategies for developing, attracting and retaining key personnel, as well as knowledge management, to improve productivity.
•Productivity and Affordability—Areas that present opportunities include program management/shortened development cycle, supply chain management, information technology and knowledge management.
•Supply Chain—While the A&D supply chain may be the most complex of any industry, companies should no longer accept long lead times and marginal performance. Improved performance and just-in-time delivery are essential.
•Globalization—The Asia-Pacific region is expected to see more aircraft deliveries over the next 20 years than North America and Europe combined. Companies should evaluate the best ways to gain a competitive advantage in these markets in both commercial and defense segments.
•Cybersecurity—Companies should prepare for the increased focus and regulation that are heading toward this field.
•Regulation—A&D companies are facing myriad new regulations and increased enforcement. Companies may wish to seek regulation reform, but at the same time should develop more efficient and effective means of compliance.
Defense companies that embrace the affordability challenge and commercial aerospace companies that can most effectively manage high growth rates, likely will be the top-performing companies of the future.