2 Contents Summary 1 Commercial aerospace sub-sector outlook 2 Defense sub-sector outlook 6 Regional outlook 16 Major macroeconomic and geo-political 19trends and their potential impact1 Global aerospace and defense sector outlook Stable global gross domestic product(GDP) growth, relatively lower commodityprices including crude oil, strongpassenger travel demand, especially inthe Middle East and Asia Pacifc region,will likely drive the commercial aerospacesub-sector growth. Commercial aircraftbacklog is at an all-time high of ~13,500aircraft units, representing more thannine and a half years of current annualproduction rate.2 Specifcally, strongglobal airline passenger trafc andimproved global airline profts, primarilyon account of lower fuel costs will likelydrive increased large commercial aircraftproduction and in turn commercialaerospace revenues in 2017 and 2018.We expect about 96 more aircraft to beproduced in 2017 as compared to 2016.3 On the defense side, resurgence of globalsecurity threats, expected increases inUS defense budgets, as well as higherdefense spending from other majorregional powers such as Japan and Indiawill likely promote global defense sub- sector revenue growth in the near future.In particular, we see an upside for USdefense expenditure, given the outcomeof the recently concluded US elections.In addition to boosting the number oftroops, the US military will likely addmore aircraft and ships, which will driverevenue growth at large defense primesover the next few years. Summary The global aerospace and defense (A&D) sector is likely to experience strongergrowth in 2017, following multiple years of positive, but a subdued rate ofgrowth. Deloitte forecasts the sector revenues will likely grow by about 2.0percent in 2017.1 2017 Deloitte forecastGlobal A&D sector revenue growth is likely to be around 2.0 percentCommercial aerospace subsector revenues are likely to remain fat,experiencing only a 0.3 percent increase – marginal growth expected asaircraft production recovers in 2017 after a slowdown in 2016Defense subsector revenues are likely to grow at a much faster 3.2 percent in2017 as defense spending in the US has returned to growth, after multi-yeardeclines in defense budgets and future growth may be driven by the newlyelected US administration’s increased focus on strengthening the US militaryOperating earnings for the commercial aerospace subsector are expected togrow 20.6 percent, while defense subsector’s operating earnings will likely rise7.0 percentEuropean A&D sector is expected to record a 2.5 percent YoY increase inrevenue and 9.3 percent growth in operating earnings in 2017For the US A&D sector, revenue is expected to be up 1.7 percent, with a strongspurt of 12.7 percent in operating profts 2 Global aerospace and defense sector outlook 2 Commercial aerospace sub-sector outlook A slight recovery after a slowdown in2016 will primarily be due to aircraftproduction levels resuming growthin 2017, driven by strong demand fornext-generation aircraft and growingpassenger trafc, especially in the Asia- Pacifc and the Middle East regions.Although 96 additional large commercialaircraft are expected to be produced in2017, continued pricing pressure andproduct mix changes by customer airlineswill likely result in only a marginal changein commercial aerospace sub-sectorrevenues. Major aircraft manufacturers,Airbus and Boeing, have indicatedproduction rate increases will occur in2017 and 2018. Airbus’ A320neo is likelyto ramp up production in 2017, whereas,Boeing estimates that the productionrate of its 737 will rise from 42 per monthcurrently to 47 per month in2017 and 52per month in 2018.5Travel demand (revenue passengerkilometers or RPKs) has been increasing ata compounded annual growth rate (CAGR)of 4.7 percent over the last ten years,with passenger enplanements risingfrom slightly over 2.0 billion to more than3.5 billion annually during this period.6Increase in travel demand has beenprimarily driven by global demographicsand wealth creation in Asia and theMiddle East, resulting in a signifcantorder increase for new aircrafts.The global commercial aerospace sub-sector will likely experience a 0.3 percentincrease in revenues in 2017.4 Figure 1:Global airline trafc (1981 to 2016E) Passenger and freight trafc are likely togrow at an average annual growth rate(AAGR) of 4.8 percent and 4.2 percent,respectively, over the next 20 years,7contributing to higher aircraft production.Several years of above average orderintake has resulted in commercial aircraftbacklog at the end of 2015 being at anall-time high of ~13,500 aircraft units,representing more than nine and a halfyears of current annual production.8As illustrated in Figure 1, passenger traveldemand increased more than fve timesfrom 1981 to 2016, while passenger loadfactor (utilization of aircraft) has risen 25.6percent (nominally growing from 63.7percent to 80.0 percent) during the sameSource: Deloitte analysis of the data from International Air Transport Association (IATA), “Fact Sheet,” accessed in November 2016, iata. org/pressroom/facts_fgures/fact_sheets/Documents/fact-sheet-industry-facts.pdf; and Airlines for America, “Annual Results World Airlines,” accessed inNovember 2016, airlines/data/annual-results-world-airlines/ 0%10%20%30%40%50%60%70%80%90%012345671981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 FPa sse ng erlo adfa cto r ( %) Pa sse ng er s ( mi llio n)an d r ev en ue pa sse ng erki lom ete rs(tr illi on ) Passengers (billion) RPKs (trillion) Pax load factor (%) 3 Global aerospace and defense sector outlook period.9 Moreover, the number of peoplefying per year continued to rise, with agreater than four times increase over1981 to 2016, driven by afordable ticketpricing and route availability.10As shownin Figure 2, there has been a 47.0 percentdecrease (consumer price infation or CPI- adjusted) in airfares since 1990, leading toincreased demand for air travel.11 Total global demand for new aircraftproduction over the next 20 years isestimated to be 35,155 aircraft (excludingregional jets).12 Figure 3 illustratessales order and production history ofcommercial aircraft from 1981 through2016, showing a 220.0 percent increase inproduction in that period.13 Figure 2: Real average passenger revenue per passenger kilometer (CPI adjusted, in cents) Source: Deloitte analysis based on data from IATA, Industry Statistics, June 2016 iata/pressroom/facts_fgures/fact_sheets/Documents/fact- sheet-industry-facts.pdf“Increase in travel demandhas been primarily drivenby global demographicsand wealth creation inAsia and the Middle East,resulting in a signifcantorder increase for newaircrafts.“ Using a seven-year moving average,production levels over the last 20 yearshave increased 120.5 percent since 1996.14 Over the next decade, commercialaircraft annual production levels areanticipated to increase an estimated29.3 percent.15With such growthexpected, there are two signifcanttrends and challenges to consider— the attractiveness of this market andthe resulting entrance of new globalcompetitors to the existing duopoly, andthe impact on the supply chain.8.44.4 4.05.06.07.08.09.01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015ERe alav era gepa sse ng errev en uepe rpa sse ng erkil om ete rReal average passenger revenue per passenger kilometer (CPI adjusted, in cents) 。。。。。。