Emerging markets offer big rewards – and risks – for aerospace companies.
The commercial aerospace industry is getting more global each year as demand for new aircraft grows in emerging markets around the world. This heightened demand presents phenomenal opportunities as well as formidable challenges for plane-makers and their suppliers.
“Aerospace companies that are ill-prepared to navigate cross-border commerce face a bumpy ride to prosperity. ”
There is significant risk, for example, in doing business in emerging economies that are more vulnerable than mature economies to external shocks like geopolitical conflict or volatile oil prices. Having a customer base that is geographically diverse can mitigate this risk.
Other challenges can be found in supply chains, which are increasingly complex. Consulting company Strategy& (formerly Booz & Company) noted in a report this year that the real difficulty will be in “successfully managing the surge of orders and the associated production challenge.”
The higher production rates needed to meet demand will put new pressure on all parts of the supply chain. Some suppliers could become overextended, leading to parts shortages, errors or other problems.
Effective supply chain management, however, can help manufacturers cut costs, improve efficiency, drive repeat sales and even help aerospace companies penetrate new international markets.
Clearly, the aerospace industry offers a world of possibility, but it also is fraught with hazards. For companies that are prepared take part in this historic industry growth spurt, the payoff will be tremendous.
Where is the growth?
Boeing and Airbus, the world’s two largest plane-makers, already have an order backlog of more than 10,000 commercial airplanes. Just last year, Boeing delivered a record 723 commercial airplanes and booked a record 1,432 net orders valued at $232.7 billion.
“ Over the next 20 years, passenger volume is expected to increase by an average of 4.1 percent a year.”
Over the next 20 years, passenger volume is expected to increase by an average of 4.1 percent a year, more than doubling the 3.3 billion passengers in 2014, according to a forecast from the International Air Transport Association (IATA).
Nearly half of the world’s air traffic growth is being driven by travel to the Asia/Pacific (APAC) region, which will see 7 percent growth annually over the next 20 years. APAC operators will receive nearly twice the aircraft as North America and Europe combined and grow fleets from 5,470 planes in 2013 to 15,220 planes in 2033.
China alone will account for 1.3 billion passengers and overtake the United States as the world’s largest passenger market. China is aggressively growing its air traffic network, and that market is expected to see growth averaging 5.6 percent per year until 2034, IATA says. In fact, China is likely to become the largest aircraft market by the end of the decade, says IDC Manufacturing Insights.
The Indian and Brazilian domestic markets will grow at 6.9 percent and 5.4 percent per year respectively, while Indonesia will grow at 6.4 percent per year, according to IATA. Other top domestic markets include Turkey, the Philippines, Mexico, Colombia and Vietnam.
So what drives growth?
Boeing’s Current Market Outlook, which forecasts commercial aerospace trends, predicts that the world’s airlines will need 36,800 new airplanes valued at $5.2 trillion over the next two decades. This demand hinges on global economic advancement, especially in emerging markets.
“It is quite clear that the commercial aerospace industry has a rich future. ”
Additionally, air fares have been in sharp decline since the 1950s. This puts air travel within reach of more people. Finally, nations with growing populations have more people of working age who are more likely to fly than those over age 65.
While no one can say with 100 percent certainty how long growth in any particular region will persist, it is quite clear that the commercial aerospace industry has a rich future, packed with strong business opportunities for companies that make airplanes and airplane parts.