The financial performance of top global aerospace and defense companies is expected to stay flat in 2012, a British consultancy firm says.

Despite the challenging environment, the aerospace and defense industry is likely to continue to develop game-changing technology innovations, according to the report, “Global Aerospace and Defense Outlook: A Tale of Two Industries,” by Deloitte Touche Tohmatsu Limited’s (DTTL) Global Manufacturing Industry Group.

“The global defense market is expected to experience flat or declining growth due to anticipated decreases in military spending, principally in the United States and Europe,” it says.

Nidhi Goyal, director of Deloitte India, says, “While a trend in the U.S. and Europe is seen for [a] decrease in spending in defense, countries like India are on the ascent in terms of spending on space, commercial air transportation and defense sectors.”

Continued global economic challenges, coupled with revenue gaps and cost pressures, may result in margin contraction for global defense players.

“As a result, the defense sector is likely to undergo more streamlining of its cost structure, divestiture of non-core assets, and additions of gap filling, as well as transformation acquisitions,” the report says.

Tom Captain, global aerospace and defense sector leader for DTTL, says, “We expect to see more aggressive competition for the fewer large defense programs of record, as well as growth in defense sales to India, Brazil, the United Arab Emirates, the Kingdom of Saudi Arabia, Brazil, Japan, and South Korea — countries with emerging wealth and a need to strengthen their defense capabilities.”

Overall, the financial performance of the top global aerospace and defense companies in 2012 is expected to be similar to 2011 performance, with the decline in defense revenues offset by cost-cutting and aggressive growth actions, the report says.

In 2012, the aerospace and defense industry is likely to continue to develop technology innovations in areas such as cybersecurity, directed energy, high-powered microwave weapons, hypersonic missiles, long-range and high-altitude unmanned aerial systems, and software that can trace the financial transactions of known terrorists, the report says.

However, the commercial aircraft sector is likely to enter a prolonged upcycle in production in 2012 as a result of increasing demand for leisure and business travel, particularly in the Asia-Pacific region, it says.

According to the report, growth in the commercial aircraft industry is expected to be driven by continued production and development of next-generation aircraft programs that aim to address increasing fuel costs.

“The development of fuel-efficient aircraft that utilize next-generation engine technology has resulted in a significant rise in aircraft orders,” Captain says.

Certain suppliers will be challenged to keep pace with the expected increase in production rates and new program introductions this year, he says.

“India is also amongst the fastest-growing aviation markets in the global arena. The government of India appears to be keen to provide the best possible support given the limitations of regulations, political situation and capacity of the industry in India. The industry should take advantage of the opportunity by adopting global best practices. This should help the Indian industry to integrate with the global supply chain and in the process create an indigenous base in India,” Goyal says.