NEW YORK--Link to Fitch Ratings' Report: 2017 Outlook: Global Aerospace & Defense (Sector Growth Offsets Political Risks and Cash Deployment)
With sector growth offsetting political and cash deployment risks for the global aerospace and defense (A&D) sector, Fitch Ratings has changed its sector outlook from stable to positive in 2017. The change reflects a projected 8% increase in large commercial aircraft (LCA) deliveries and 3% forecast growth in relevant defense markets. The ratings outlook remains stable, with the strong sector dynamics mitigated by cash deployment risks.
Fitch believes industry deliveries for commercial aircraft could approach a peak in 2018, and a key question will be whether deliveries will be sustained or start a modest decline after that year. Fitch expects LCA deliveries from Airbus and Boeing to rise to approximately 1,540 aircraft in 2017 (up 8%) and 1,600 aircraft in 2018 (up 4%). Bombardier and Embraer will likely deliver 140-145 aircraft in 2017.
We expect the relevant parts of the addressable global defense market to rise between 3% and 5% over the next three years. Fitch estimates this market in 2016 is approximately $400 billion-$425 billion. The US budget accounts for 45%-50% of the addressable market, but its growth is less than in non-US markets. The results of recent US elections could drive upside.
Revised trade policies emerging from the recent US election could hamper the competitiveness of North American commercial aerospace companies, especially where China is concerned. More restrictive trade policies could also disrupt the global aerospace supply chain. The future of the US Export-Import Bank (Ex-Im) is another development to watch, as shutting the Ex-Im bank could negatively affect the competitiveness of US-based aerospace manufacturers.
Fitch sees little evidence of shareholder-focused capital allocation abating, and 2016 M&A activity exceeded our expectations. Discretionary pension contributions for some US defense companies could rise in the next two to three years. Capital allocation and M&A continue to nullify many benefits of end-market trends.
Cost overruns or delays on new programs are risks to the outlook in both the commercial and defense sectors. The production ramp-up of new engines is essential to the commercial outlook. Fitch believes the development cycle is a more important credit driver than the economic cycle at this time, but the commercial sector is also exposed to exogenous shocks, such as terrorism or disease. The commercial sector also faces some risks from the rise in economic nationalism. On the defense side, risks include the budget cap overhang in the US, additional continuing resolutions and political disruptions.
Additional information is available on www.fitchratings.com.
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