Industry pundit offers predictions for the mil-aero market

HOUSTON, 15 Dec. 2009. The compound annual growth rate (CAGR) for the aviation market from 2003 to 2008 was 7.9 percent, said Richard Aboulafia, vice president of analysis at Teal Group Corp. in Fairfax, Va., at Mentor Graphics' Integrated Electrical Solutions Forum (IESF) in Houston. "It is the best growth in decades, and the largest contributor is military rotorcraft," he said in his talk, "Coping with the Downturn: Aviation Markets and Companies Enter Uncharted Territory," at the IESF.

Dec 15th, 2009

Posted by Courtney Howard

HOUSTON, 15 Dec. 2009. The compound annual growth rate (CAGR) for the aviation market from 2003 to 2008 was 7.9 percent, said Richard Aboulafia, vice president of analysis at Teal Group Corp. in Fairfax, Va., at Mentor Graphics' Integrated Electrical Solutions Forum (IESF) in Houston. "It is the best growth in decades, and the largest contributor is military rotorcraft," he said in his talk, "Coping with the Downturn: Aviation Markets and Companies Enter Uncharted Territory," at the IESF.

"Certainly the best part of this industry is military rotorcraft," Aboulafia added. "It's the last good news story in the industry: up 30.1 percent this year." During 2008, the first year of the downturn, the overall aviation industry increased 4.6 percent, "not bad for global economic heart attack."

"So far, this industry is holding on very nicely," Aboulafia said. The civil market grows to the tune of roughly 5 percent a year. The military market is more complicated, making a nice recovery along with higher defense budgets. He describes the civil market as having guaranteed growth, and military market as showing guaranteed profit with cost-plus contracts.

"The likeliest scenario is a slow 2010, with a few bright spots," Aboulafia predicted. He expects a three-year global downturn (2008 through 2010), with hope for growth in 2011. "We are counting on military to get us through this valley.

"In the defense market, the rug is not being pulled from under R&D and procurement, save a couple of big contract pulls, Aboulafia continued. In general, he foresees market stabilization, with some risk of further shocks.

"We're back to the Reagan years--and that's not bad--when you look at the numbers of DOD (Department of Defense) tactical aircraft procurement, which has been on the upswing since FY95," Aboulafia explains. Yet, he cautions, "recovery isn't the same as growth. The industry is experiencing recovery, not growth." He sees a convergence between supply and demand; yet, "profit is another line and it is down."

Aboulafia advises mil-aero firms to learn to live in a post-growth environments. "Think more about doing the same thing with smaller numbers of products and improved designs to make things better."

The goal today is to take one platform and make it do five or six discrete roles. Modernization is another key market driver, Aboulafia noted. He sees: fewer airframes doing more things, high commonality for very different missions, longer-lived models, and aircraft in need of upgrades. "There is an aging fleet of 7,000 vehicles that need to work through 2025. I have never seen such abundant cash and talk of reengineering, such as adding new radar and so on," Aboulafia said. In the U.K., for example, the entire fleet is worn out and they are looking to recapitalize rotorcraft assets. "The one strong growth market this year: the world rotorcraft market is firing on both turbines," he concludes.

At the same time, the F-35 Joint Strike Fighter is a bright spot in the industry. World fighter production numbers are strong through 2018. Export activity is heating up, including Brazil, with an order for 36 fighters.

"Export is where a lot of hope lies for a lot of military platforms," Aboulafia mentioned. "Aircraft production and design work are shifting to new places, including Germany, Japan, Korea, Canada, Mexico, France, China, and Italy. "International defense spending is robust and there are great export opportunities with Asia and the Middle East, for example."

Aboulafia sees real value in sensors and networking. "It is important as an area of growth from a design standpoint. An awful lot of money is being spent on R&D, but little is going on in production numbers." The same is true of unmanned aerial vehicles, an area in which European companies are investing heavily in R&D.

Mentor Graphics' tenth IESF—this time focused on complexity management, wire harness engineering, systems integration, and virtual prototyping in automotive, commercial, and off highway industries—will take place March 18, 2010 in Dearborn, Mich.

Mentor Graphics is a provider of software tools and consulting services for electronic design, headquartered in Wilsonville, Ore.

For more information about the IESF, visit www.mentor.com.

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