Several weeks ago, as the Farnborough Airshow approached, some in the aerospace industry again questioned the relevancy of the 64-year-old aerospace and defense tradeshow.
In an increasingly global industry, profoundly transformed over the past quarter century, new venues such as Singapore, Dubai and Bangalore have grown in importance given the significance of their regional market opportunities and potential partnerships.
In spite of these developments Farnborough is not an anachronism and it remains a premier venue to take the industry's pulse and assess its global health ahead of what promises to be a very challenging production surge for commercial aircraft suppliers and a contraction for most U.S. and EU defense prime contractors.
Commercial aerospace has been a beacon in an otherwise depressed global economy still struggling to return to growth following the financial crisis. While the U.S. and Europe appear to have again stalled for myriad reasons, it is evident that continuing policy errors in Washington, Brussels, Paris or Athens could negatively impact air travel, jeopardizing sales of commercial, business or general aviation aircraft.
The commercial air transport production surge will be the primary topic at this year’s Farnborough airshow. Concerns remain and original equipment manufacturers, OEMs, are particularly aware that supply chain vulnerabilities may not be fully addressed prior to ramp up.
While Boeing projects demand for 34,000 aircraft over the next 20 years (our numbers are within 2 percent of Boeing's estimates), most suppliers we know are concerned about their operational and financial ability to support this surge.
Furthermore, this industry is clearly exposed to the effects of highly-disruptive macro events, either regional war or natural disasters. While the globalization of the aerospace industry has benefited sales and dampened market cyclicality, it has also created global challenges, which in turn have increased industry exposure. How to best manage this exposure is a complicated question that will be debated at the show.
The Airbus announcement concerning its A320 production facility in Mobile, Alabama further validates efforts of Southern U.S. states to create a business-friendly climate designed to attract majors such as Airbus, Eurocopter and yes, Boeing. The Airbus move is a warning directed at Paris and traditional U.S. aerospace clusters such as the Pacific Northwest and Southern California.
Indeed, the State of Washington need only to look to California as a warning about what not to do if one wants to retain a crown jewel in the state’s economy for nearly a century. In addition, Airbus’s decision creates further challenges for suppliers in the form of pressure to locate in the American Southeast, as this new cluster will require a local presence.
Defense will also figure very high on the Farnborough agenda. The European aerospace and defense industry is under significant pressure from shrinking defense budgets. Programs such as Eurofighter Typhoon, Saab Gripen or BAE -Dassault Telemos are exposed to budget reductions in the UK, France, Italy and Sweden.
For Dassault, the outlook for its Rafale fighter has improved since its selection by India, which opens the door to opportunities in Brazil, Malaysia and Kuwait. Rafale’s success will depend in part on consistent and ongoing investment and evolution. Gripen remains vulnerable, but the Swiss selection is the first of several surprises Saab hopes to announce.
Another issue to watch for in Farnborough is China’s global rise as a defense supplier. Chinese military hardware still lags behind technologically, but it is certainly more affordable and does not come with Foggy Bottom red tape attached.
EU defense industry needs further consolidation if it is to compete efficiently. Of particular interest is the Safran -Thales rumored merger, which would create efficiencies and competencies of importance for OEM programs. Brazil’s Embraer will hopefully provide more clarity about the expected upgrade of its ERJ line of jets, and an indication of where its future lies. Partnership with Boeing, EADS, Saab or Dassault could help move the company toward greater things.
The U.S. Department of Defense prime contractors and their suppliers are faced with budget contraction, stagnation and perhaps sequestration. Failures to diversify and anticipate this turn of events has forced the industry to reprioritize efforts towards international opportunities. U.S. primary contractors and tier 1 suppliers had little bandwidth to seed international markets from 2001-2011 because the Defense Department's demand was all-consuming. Farnborough will hopefully provide some indication and pathways, but Northrop Grumman’s notable absence this year is perhaps a sign that U.S. companies will continue to have difficulties converting opportunities beyond established markets.
Farnborough 2012 will be about a need for direction. Market uncertainty and geopolitical issues will sober up an otherwise optimistic outlook. How stable is the supply chain? How will consolidation further impact it? Can defense contractors in the U.S. and EU support research and development as budget downturns shrink opportunities? These are some of the major questions pivotal to the stability and success of the industry.