Despite a difficult macroeconomic environment, the aerospace and defense (A&D) industry will continue developing game-changing technologies in 2013. This industry is becoming global as a result of growing travel demands in emerging markets, cut-throat competition and cost-saving opportunities.
The defense segment will continue to see revenue declines due to decreased military spend in the US and Europe. On the other hand, the commercial-aircraft segment will observe an upside due to increased demand for new aircraft, production rates and the introduction of next-generation aircraft.
According to the International Air Transport Association (IATA), global air traffic will increase by 800 million passengers in 2016 — taking the total to 3.6 billion passengers from 2.8 billion in 2011. In contrast, the Air Fleet Recycling Association (AFRA) has revealed that 12,000 aircraft will retire in the next 18 years.
The increase in demand for the new aircraft in the emerging markets and the replacement of older aircraft in the mature markets will result in rising demand for new aircraft.
I have picked two aircraft manufacturers from A&D industry, The Boeing Company (NYSE:BA) and Lockheed Martin Corporation (NYSE:LMT), that are likely to benefit in such a scenario. Let’s discuss them in detail.
Production and order growth
The Boeing Company (NYSE:BA) is increasing its production to 38 airplanes per month and is set to bolster it further it to 42 planes per month by first half of 2014. The company is experiencing increased demand in its 737, 737 Max and 777X models.
Last month, it received an order for 175 The Boeing Company (NYSE:BA) 737-800 jets from Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) worth $15.6 billion. With this order, Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) has kept up its commitment to use only Boeing aircraft, and its management intends to do so in the future. This deal will result in expansion of both the Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) fleet by 30% to more than 400 planes and the passenger capacity by 100 million passengers per year by 2018.
These aircraft are considered fuel efficient, which will help Ryanair to continue with its price advantage over its other European peers. Additionally, Ryanair is also considering providing an order for the 737 Max planes, which are even more fuel efficient.
These orders place Ryanair on the growth track in times when its competitors are reducing their operations. On the other side of the coin, these orders are of high value and are very important for Boeing, as they will help it to fill more assembly lines as 737 Max production starts.
The 737 Max is The Boeing Company (NYSE:BA)’s fuel-efficient aircraft, which is currently under development. This model has so far set a record in terms of getting the highest number of pre-launch orders. The tallies were orders for 914 aircraft in 2012, and additional orders for 121 aircraft in January and February. This continuous increase in the orders and resulting production activity will help in driving the company’s revenue upward in 2013.
The Boeing Company (NYSE:BA) has been waiting for a response on production of the 777X aircraft from its board of directors, which was scheduled for April. If production gets the green light, I think it would be a landmark move for the company and will place it on track for long-term growth. Once approved, it’s expected that this aircraft could gather orders for 200 to 300 units at first take.