Analysis of Civil Aerospace Market - Case Study Example

Executive Summary The following deliberations dwell on the progress achieved by global aerospace market since the launch of the policy of deregularisation in this sector. On the one hand, deregularisation has lent a sense of impetus, urgency and a strong feeling of commitment and efficiency to this sector. Air travel has ceased to become the hallmark of the rich and privileged, and has reached out to the people, rich or otherwise. But along with this has come a stronger streak of competitiveness, enhanced need for technical competence and embedded service orientations. The market has also become a breeding ground for myriad airline companies, small and big, who had decided to foray into a hitherto exclusive domain of and large established companies. With their small yet attractive packages and discounted offers to the flying clientele, they often beat the larger airliners fare wise, in their own backyards. Paradoxically, decontrol has brought, in its wake greater accountability, territory rights and market shareholdings. It has eased out the large and uncompetitive players and has forced the marginal ones to seek mergers and sellouts to stay in the race, for survival. However, the fact remains that the open skies policy, pursued by many large airlines, has been successful to a large extent and has made air travel more safer, secure and convenient for all. Given the fact that private airliners are regularly adding to their destination networks, and remain committed to offer more destinations and increased number of flights at lower costs, and have instilled a healthy competitive spirit in the industry, it is believed that aerospace would definitely witness a sea change in the years to come. This is welcome, partly because the growth and development of global aerospace would benefit the fliers, the airline company, vendors and all agencies, directly or indirectly connected with this industry, and it would also add to the revenues of the state. Civil Aerospace Market Introduction The Civil Aerospace market could be defined as market relating to the sale of airliners or parts/equipments/accessories to private carriers and organisations, leasing companies, private and public establishments, companies and individuals. Thus it could be said that “the global aerospace and defence market is deemed to be the revenues accrued by manufacturers from civil or military aerospace and defence equipments and parts or products.” (Aerospace & Defence. 2007). It could be commodity business where the costs are fixed, at least in the short run. The simple fact regarding airlines business is that during recessionary times for the airlines industry, it does not invest in new aircrafts. It is only when the demand matches the capacity utilization, and the profit graphs soars upwards, that there are opportunities for airlines to make fresh investments in new aircrafts and set up the necessary infrastructure to go along with it. (Alderman, William H. 2006). When there is unused capacity or lowered demand, the demand does not match up to the capacity and the airlines incur losses. However, they would be in a position to recoup such losses over a period of time, given improvement in overall business climatic conditions and a buoyant economy, and entailing increased air travel. The Study of the Department of Trade and Industry has focused on United Kingdoms as the most competitive global industry for UK a significant factor that has emerged out of the UK airline’s successful forays into the US Markets. However, the industry has seen successive downtrends since it is, to a very large extent, dependent on the global economic conditions, and the economic slowdowns, have contributed in no small measures, for a fall in international business. The terrorist attacks in the US on 9/11/2001 has left deep and indelible scars in aerospace markets and the fall in demand in air passengers travels has severely eroded markets for sale of aircrafts/equipments etc. Further, the escalation of tensions and warfare in Iraq, the outbreak of SARS virus has done little to increase business prospects of aerospace industry. As a result of military build up in the Middle East and Iraq, and to thwart terrorism on its soil, the military and law enforcement authorities have become more active and the civil aerospace has become dependent on the military sector, which has a sizeable budget for defence spending. “The UK is also launching a number of substantial defence programme that will provide guaranteed revenue for aerospace companies for many years to come.” (Aerospace Market. 2003). It is widely believed, that one of the main causes for the downtrend of the aerospace industry relates to the deregulation of the industry at the end of the 20th century, as a result of which a large number of small and middle sized players entered the aerospace arena. With lower operating costs and slim profit margins, they offered worthy competition to large and established airliners, in terms of better services at lower costs. Established airline companies with deep-set, heavy and burgeoning overhead costs did not have a policy framework by which fare structures could be regulated or reduced, in order to suit the changed competitive environment ushered in by the competition in a free market. Thus many large airlines like Pan Am, Eastern, Sabena had to liquidate and others had to seek mergers or acquisitions with other airline companies, to seek synergistic advantages and remain competitive in the market place Identification of key competitors: The global aerospace market of civil and military aircraft production is in the hands of a few large players. In the US market, there is Boeing and Lockheed Martin and the United Kingdom and Europe, the main players are EADS and BAE Systems Due to the aspects mentioned above, defence related industry sector has performed well, as compared to civil aerospace which accounts for nearly 86.4% or $ 1152.1 Billion of the total industry’s market value. (Global Aerospace Market Forecast. 2006). There are many factors that impinge on the growth and profitability of this sector and they are summarized as follows: Cyclical nature of demand for aircrafts and equipments/spare parts Strict enforcement of rules and regulations in the transactions governing buying and selling of aircraft and accessories for ensuring fiscal integrity Strict enforcement of certification requirements and endorsements Lengthy and heavy investment requirements Intensive research and development costs Limited customer base and highly competitive environments Highly capital intensive and investment oriented with governmental regulations in force for governmental transations. Company Revenues Boeing 54.8 United Technology Corporation 42.2 EADS 40.2 Lockheed Martin 37.2 Northrop Grumman 30.7 Honeywell 27.6 BAE Systems 26.5 Raytheon Company 21.8 Top Global Aerospace Companies 2005 (Global Aerospace Market Forecast. 2006). Analysis of suppliers According to Rolls Royce, one of the major manufacturers of aircraft engines, “over the next 20 years 132,000 engines worth over $700bn are predicted to be delivered, powering 60,000 commercial aircraft and business jets.” (Outlook. 2004). The following break up of the world traffic distribution by domicile for the next 20 years is envisaged: Country Percentage for 2005 Forecast % for 2025 Increase/decrease North America 33 % 26% Reduced by 7% Europe 29 % 26% Reduced by 3% Asia/Pacific region 24% 33% Increased by 9% Middle East/Africa 6% 7% Increase by 1% Latin America 3% 5% Increase by 2% CIS 3% 3% Status quo (Rolls Royce Market Outlook 2006. 2006). Thus from the above, it can be deduced that Asia Pacific region, including India, Japan, China would have a larger chunk of traffic distribution diverted from North American and Europe markets In the United States, the rising military expenditures have not been able to compensate for the severe decline in the purchase of new commercial aircrafts. However, it is widely believed that in the years to come, with the prospective launches of a new array of aircrafts such as A 380s, A350s& B587s; a healthy growth of private, low cost, no frills airlines, and the prediction of double passenger movements by the year 2020, there are reasons to be moderately optimistic. (Holloway, Simon. 2006). Keeping the view the concept of Strategic Management and the fact that nowadays aerospace companies have to operate under tight budgets and schedules, airline companies need to create awareness and programmes for the implementation and utilisation of Lean Management that could well magnify priority setting and enhance benefits on a long term basis. There is also a need for enhancing the operational abilities by cutting down cycle time, output and overall effectiveness in all major areas of customer servicing and fleet maintenance. Henceforth, companies need to cut back on non-productive procedures and systems and reduce inventory costs by eliminating slow moving and redundant stocks. They also needs to create software support for sustained use of Lean Six Sigma and ISO validations. The four major areas that need to be addressed are: Value Stream Mapping & Analysis (VSM &AD) Project and Programme Management (PPM) Collaborative Electronic Kanban (CEK) Demand Driven Scheduling (DDS) (Holloway, Simon: 2006: Potential of RFID in the Aerospace and Defence Market) There is a distinct propensity for aerospace companies to outsource most of their manufacturing item, often using the Just-in -Time (JIT) principles. This often creates the need for real time clarity, speed, and correctness when processing data transactions, especially when there are fluctuations in demand. This will also help to circumvent supply chain disorders and ease off the pressure being exerted by demanding customers. Therefore, it has become incumbent for the functional heads of aerospace companies to try and streamline processes to induce cost savings. Today, there are a large number of low cost airlines who have trimmed down operating costs, outsourcing expenses and enhanced their overall profits. “Europe accounts for almost one-third of the $36 billion global commercial and regional/business jet MRO market.” (Holloway, Simon. 2006). Performance indicators in the global aerospace markets The global aerospace markets have done creditably well in recent years considering the global meltdown following political developments in Iraq, Middle East and other regions. Large defence budgets in UK, following the gulf developments and the US led coalition military action in Iraq, and conspicuous increases in defence spending have augured well for the aerospace markets. In the year 2005, global aerospace industry reached a new high turnover of US $ 1329 Billions at a CAGR of 4.3%. The future major drivers of this market would be the emerging Asian markets like India, Japan, and China who have registered significant growth rates in the aerospace industry. (Global Aerospace Market Forecast. 2006). Industry performance: In the year 2004, the US aerospace is the dominant player in the global market place with a turnover of US $ 170Billion. European markets hold the second position with a total turnover of € 208 Billion. The UK, France, Germany and Italy are the major European players in that order. Asia is dominated by Japan who has registered a turnover of ¥ 190 Billion. Trend Analysis of the Aerospace market: The United States remains the largest aerospace manufacturing market in the 2006 by registering a growth rate of 8% and it is believed that this trend would continue in the year to come when this market is expected to grow by 5.98%. (Global Aerospace Market Analysis. 2007). The Asia-Pacific is expected to emerge in a leadership position in the increasing trends of global aerospace markets largely because of the burgeoning market economies witnessed in India and China. The growing economic contribution of these countries would result in increased demand on air traffic originating in these countries as a result of large scale growth in civil aircraft sectors. The onus would be on made to order and tailored products, equipments and services to cater to the specialized requirements of the emerging players of aerospace industry It is widely believed that the demands and needs of aerospace technology differ from country to country, and even within countries, from sector to sector. For illustration, in Brazil, the enhanced use of helicopters and two-seaters are envisaged for agriculture mobility and executive travel, whereas in India and China, it would shift to civil air crafts, since the average India executive nowadays prefers flying to other slower and inconvenient modes of travel. “The aerospace industry of US has been one of the most flourishing industries. But now, some challenges have cropped up for the industry. The three main issues that the aerospace industry is facing are – rising competition at international level, continuing reductions in defence budget, and a poor worldwide economy. Historically, around half of the revenues of the aerospace industry were generated from the military sector. Reductions in defence budgets for aerospace industry, both in US and other nations of the developed world, have decreased the needs for missiles, military aircrafts, and other related machinery from US suppliers.” (US Aerospace industry- Moved but still growing strong. 2007). References Aerospace & Defence. (2007). Bharat Book Bureau. Global Industry Guide. Retrieved October 16, 2007, from http://www.bharatbook.com/detail.asp?id=12647 Alderman, William H. (2006). Business & Investor Outlook in the Aerospace and Defence Industry. Retrieved October 16, 2007, from http://www.aldermanco.com/firmnews/Alderman%2045th%20AIAC%20Annual%20General%20Meeting.pdf Aerospace Market. (2003). Research hand marks. Retrieved October 16, 2007, from http://www.researchandmarkets.com/reports/34762/aerospace_market_report_2003.pdf. Global Aerospace Market Forecast. (2006). Global aerospace industry. Retrieved October 16, 2007, from http://www.the-infoshop.com/pdf/rnc42975.pdf Outlook. (2004). Civil aerospace. Rolls Royce. Retrieved October 16, 2007, from http://www.rolls-royce.com/civil_aerospace/overview/market/outlook/default.jsp Holloway, Simon. (2006). Potential of RFID in the Aerospace and Defence Market. Retrieved October 16, 2007, from http://msdn2.microsoft.com/en-us/library/aa479351.aspx Rolls Royce Market Outlook 2006. (2006). Civil aerospace. Retrieved October 16, 2007, from http://www.rollsroyce.com/civil_aerospace/overview/market/outlook/downloads/outlook2006.pdf Global Aerospace Market Analysis. (2007). Executive summary. Bharat book bureau. Retrieved October 16, 2007, from http://www.bharatbook.com/detail.asp?id=51270 US Aerospace industry-Moved but still growing strong. (2007). Newswire Today. Retrieved October 16, 2007, from http://www.newswiretoday.com/editor.php?action=new Read More