THE DIFFERENCE BETWEEN COMMERCIAL AND
DEFENSE AEROSPACE

According to Mordor Intelligence, the aerospace sector stands out as one of the most high-profile markets on both the global trading stage and within the context of the U.S. economy. However, it’s commonly known that the aerospace and defense sector experienced an unprecedented disruption due to the pandemic. And while the sector is projected to recover at some point in the future, industry experts anticipate that the growth will be uneven across commercial aviation and defense.

For instance, the pandemic resulted in a drastic reduction in passenger traffic, which, in turn, has negatively affected aircraft demand. As travel restrictions are lifted, this sector is expected to recover slowly, not making a full recovery until 2024 — provided that the emergence and growth of new variants don’t lead to new restrictions in the future.

In contrast, the defense sector is expected to remain stable and potentially even grow. And thanks, in large part, to the widespread disruption in the supply chain, the aerospace and defense industry is expected to focus on innovation to develop new technologies and solutions, create new markets, and expand growth opportunities.

In this article, we look at some of the recent trends dominating the field and identify the factors that differ between commercial aviation and defense.

DEFENSE AEROSPACE’S UNIQUE ADVANTAGE

The Deloitte report found that the defense industry has been considerably more insulated from the global impact of the pandemic than the commercial aerospace industry, and the ongoing U.S. government support for the National Defense Strategy is likely to keep defense spending stable in 2022. And with the U.S. military gradually shifting its focus away from the Middle East to emerging threats in the Far East, defense companies will likely begin to emphasize building improved capabilities in fighter aircraft, space resilience, shipbuilding, and cybersecurity to drive growth. According to the report, total global military spending was strong — rising to $1.98 trillion in 2020, an increase of 2.6% in real terms from 2019. This has led to an increase in demand for military aircraft worldwide.

An increase in global defense spending could drive additional supply chain challenges for common industry-specified components.

Overall, global defense spending is expected to grow about 2.5% in 2022 as major world powers continue to strengthen their militaries in response to geopolitical tensions. And with it, a growth in the need for new military aircraft.

BACKLOGS PLAGUING COMMERCIAL AEROSPACE

According to the Deloitte report, the pandemic resulted in a substantial drop in aftermarket revenues, and manufacturers are now looking for ways to capture more value as commercial aviation recovers. This is being done in two ways: aftermarket growth and new production.

Commercial air travel, particularly domestic travel, is recovering at a decent rate. The total demand was down 56% in August 2021 (compared to August 2019 levels), which is a significant improvement from August 2020 when RPKs were down 75% (compared to August 2019 levels).

Global air travel is expected to recover between 50% and 55% of 2019 levels in 2021 and 85% and 90% of 2019 levels in 2022 — provided we don’t experience unexpected travel restrictions as a result of new variants of the coronavirus disease.

This new demand should drive an increase in aftermarket activity as higher aircraft utilization typically corresponds with increased maintenance, repair, and overhaul (MRO) work. This means that aircraft original equipment manufacturers (OEMs) are likely to expand their aftermarket service offerings to capture increased demand in this area. Simultaneously, pure-play MRO providers will likely collaborate and partner with smaller, regional competitors to expand their services business. And as travel demand recovers, OEM production rates, in general, are expected to ramp up.

Higher utilization could correspond to an increase in MRO and aftermarket activity, which may impact inventory levels of common components.

These changes could create additional pressure on the inventory of high-demand components that have been depleted during this pandemic.

DIFFERENCES IN THE POTENTIAL FOR INNOVATION

Slower growth notwithstanding, commercial aerospace has one distinct leg up on its aerospace counterpart: commercial aircraft and parts manufacturers can innovate more rapidly than those specifically focused on defense.

In fact, according to the Deloitte report, innovation and growth is largely being driven by Advanced Air Mobility (AAM), which is gaining momentum and gradually becoming mainstream — especially as companies developing electric vertical takeoff and landing (eVTOL) aircraft continue to receive substantial investment from sources ranging from traditional aerospace companies to private equity investors. In fact, according to the Deloitte report, the market for AAM in the United States alone is estimated to reach $115 billion annually by 2035.

A FEW SIMILARITIES

It’s worth noting that commercial and defense aerospace aren’t entirely separate, and not simply because they both create aircraft. Several major trends that Deloitte highlighted are equally beneficial to both segments of the sector. For one, the propulsion segments of aerospace outpaced all other niches by a significant degree, with a 17% operating margin. Also, OEMs played a major role in overall revenue growth throughout the aerospace market, producing significant profit for Lockheed, Raytheon, Rockwell Collins, and others.

All that said, whether we’re talking about commercial or military aircraft, modern-day machines are more complex than ever before. When a single aircraft uses tens of thousands of components, disruptions in the global supply chain can significantly impact the industry as a whole — especially when the industry is poised to take off after a tumultuous couple of years.