The bright spot in the commercial segment of the aerospace industry is a record backlog for airplanes––over 17,000 spanning eight years of production, according to an October 11 AMT outlook lecture by Consultant Glenn McDonald, principal at AeroDynamic Advisory. In addition to commercial, he discussed the other two end-user aerospace markets of business aviation and defense/space.  

For the commercial segment, air travel demand is under pressure due to inflation but is holding steady on the domestic side, while international travel is down versus pre-COVID, according to McDonald. The negative spot is aircraft supply, he said, affected in part by Boeing’s strike––which, as of mid-October, was halting new production and will have up to a 10%–15% impact on total aerospace deliveries this year. The market’s other big challenge is its aging workforce and difficulty attracting young talent to replace retiring baby boomers, he said.

Intra-company travel accounted for 30%–40% of total business demand pre-COVID and has since declined. And while leisure travel is growing, it’s at an 11% permanent reduction from pre-COVID, according to McDonald.  
AeroDynamic Advisory’s forecast for the commercial market’s traffic growth rate is 3.4% versus industry forecasters’ pre-COVID expectations of 3.6% for Airbus and Boeing. A factor that’s not helping, McDonald noted, is the beginning of sustainability mandates impacting air travel growth.

“For the first time in Europe, they have a mandate to use what’s called sustainable aviation fuel,” he said. “The price point for that fuel, best case, is 2 times traditional jet fuel. If you’re operating an airline, jet fuel is about 30%–40% of your cost structure––now you’re doubling something that’s already such a large percentage of your cost. That’s going to have to be passed on to the traveling public, and will impact demand.”

His production forecast, from a 2023 base, sees commercial airplane production  growing at a 5.7% CAGR for the next 10 years, with a steep ramp up in the next five years, followed by a production plateau. “These numbers are well below what Airbus and Boeing are telling suppliers and investors,” McDonald said. “We’re heavily discounting their numbers based on the recent history of their failure to deliver on their commitments, and also based on the persistent bottlenecks we see.”

Business Aviation Summary 

The latest trend in this segment is a shift away from privately-owned corporate planes toward fractional ownership of business jets––up 62% versus pre-COVID volumes. 

Large cabin jets like Gulf Streams planes are a big part of this market, McDonald says, and, with the number of global billionaires up 25% in the last four years, sales are strong. 

“One thing we saw in business aviation during COVID is an unprecedented boom in the number of passengers flying business aviation,” McDonald said. “There were a lot of reasons for it, and some were safety concerns. People didn’t want to fly commercial with a lot of people stuck in a small tube. Some of it was also about airlines cutting service to small cities, especially in the U.S., so you had a ramp up in companies like Wheels Up, or NetJets that were able to serve those cities at a fairly effective price point.”

McDonald projects steady growth over the next decades for business aviation, with a largely U.S.-centric supply base. “What we like about business aviation is that OEMs are more concerned with satisfying their end customers and delivering airplanes on time,” he said, “You don’t really see as much pricing pressure here. 

Defense and Space Summary

McDonald anticipates global defense spending rising at about 2% per year over the next decade, without consideration to inflation. The U.S. experienced a bump up in defense spending 2016–2020, but many other countries are catching up now as global conflict and instability increases––the NATO countries are committed to spending 2% of their GDP on defense, he added, with Israel, Poland, as well as many parts of the Middle East increasing their spending. 

“When the defense budget increases, a lot of that initial money goes toward spare parts for aircraft so you can utilize them,” McDonald said. “It goes to munitions and it goes to new equipment purchases, and aircraft are a big portion of this growing defense budget.”

Going forward, he says the U.S. defense budget will be largely flat due to congressional continuing resolutions that have hampered our ability to increase the budget––“the 2024 budget was supposed to be much higher, but we couldn’t come to an agreement on federal spending, so it ended up being lower than forecast,” McDonald said. “But excluding inflation, we’re actually shrinking a little bit versus 2023 levels.

Even so, aircraft production is going to be up significantly this decade, he said. Fighters, such as the Lockheed Martin F35, is growing among U.S. and international customers at 5%––that program alone will be over half the military aircraft production forecast by dollar value. Congress has capped F35 production to 156 per year, but last year only 98 were delivered due to software issues. McDonald calls this the most important program in global defense procurement. 

Commercial and military space––“a really interesting part of the aerospace industry,” according to McDonald––is a growing market valued at about $22 billion today. 

SpaceX has changed the game on pricing: instead of the previous standard of $16,000/kg to put a shuttle into low Earth orbit, Eli Musk has broken the barrier with Falcon Heavy that costs $1,800/kg into orbit. “So, we’re seeing a lot of activity in satellite manufacturing enabled by these lower cost launches,” McDonald said. 

Amazon is trying to replicate this, he added, and three or four Chinese constellations are trying to enter the fray, as well. “Whether or not they are all ultimately successful, there will be a lot of demand for launches of rockets and satellite manufacturing,” McDonald noted.

“It’s worth mentioning that 40% of the market is still dedicated, bespoke government satellites,” he continued. “Although low volume production, some of these satellites can individually be $10 billion-plus spread over multiple years.” 

Supply Chain Thoughts

Apart from labor concerns, other key challenges plaguing aerospace is the tendency of Airbus and Boeing to put pricing pressure on their sub-tier suppliers. McDonald said operating margins for aerostructures in 2023 was negative 5%, and the pressure continues down to machine shops and fabrication houses. “The only solution is to raise pricing from the sub-tiers and pass that on to the airline and ultimately the flying public,” he said. 

His observation of the metalcasting side of aerospace: 

Highly consolidated investment casting supply base + high entry barriers. 
Fragmented sand-casting suppliers––uneven quality. 
Surging aero engine original equipment and aftermarket demand. 
Engine configuration changes increase demand. 

“Castings have been an issue in aerospace for a long time,” McDonald said, “and again, pre-COVID, a lot of this was driven by aero engines. What you have now is a new generation aero engine, the CFM LEAP, that has two times the number of high-pressure turbine blades as an old generation aero engine, the CFM56. Those turbine blades are all nickel superalloy single-crystal investment castings. They could have 80% yields, or maybe 90% yields once they’re down the learning curve, so that we’ve had to more than double our global casting capacity. The supply base doesn’t necessarily believe in the rate projections, so it has been hard to get casting suppliers to invest for the ramp-up. At the same time, demand for spare parts in the aftermarket is up ”