AIR is presenting our new year outlook on what we expect to be the most significant issues, positive or negative, impacting the industry in 2019.

Our 2018 outlook predicted significant trade issues, impacts from monetary policies, a year of production surge challenges, and a strong merger and acquisition environment, all of which did materialize. Our forecast for commercial aircraft was suggesting about 790 commercial aircraft produced by Boeing (delivered) and 805 commercial aircraft for Airbus (not delivered). While it will take some time to decipher what rolled out of the FALs in December, it appears that both companies were quite close to their delivery targets.  We were right in anticipating a slower than expected transition from the NG to the MAX, but were wrong on the ability of Airbus to ramp up production and put its GTF problems fully behind.

Macro Environment

We are projecting that exogenous forces will have the most influence on the aerospace sector in 2019.  Unresolved trade disputes will at times appear close to sliding into geopolitical tensions in 2019 as the discourse has increasingly become confrontational. That tone has accelerated since President Trump’s election, to the chagrin of diplomatic corps globally.

Unpredictability remains the word and the current political situation in the United States, Ukraine, and Great Britain with Saudi Arabia, in particular, facing internal volatile conditions. We are concerned about Saudi Arabia, that is a country to monitor, focusing attention for both economic and political considerations in 2019.

Trade protectionism was the dark stain on the global economy in 2018, no less than 7,000 protectionist measures were enacted, impacting approximately $400 billion in trade.  This has had a considerable impact on the supply chain, including aerospace suppliers. The 2019 risk for the supply chain in is continued policy uncertainties and fluctuation of the regulatory environment, neither of which is conducive to stability and long term employment growth.  Furthermore, trade protectionism forces countries to enact policies to support their national supply chain, which further unnecessarily stresses public finance.

On the sanctions issue, the US approach to extra territoriality and the regrettable withdrawal from the Iranian nuclear agreement has had a contributing effect to the deterioration of diplomatic relations with Europe and also reinforced the position of the People’s republic of China and Russia as privileged partners of the Islamic Republic.  This approach further encourages a migration away from trade transactions in USD and will further erode the United States influence in a growing number of countries that are likely to redirect some trade away from the US dollar.  The lobbying from certain groups in Washington DC has therefore had a highly detrimental long-term impact on US influence in the Middle East.


China is on a economic soft landing trajectory that had been forecast for many years, We see no issues and no need for major concerns there yet. However, there are some underlying elements of the Chinese economy that may cause some worries and that are directly related to trade uncertainties such as new orders, which are at their weakest point since 2015.  The PMI should remain below 50 for the first quarter of 2019 and may be into 2Q19. This slowdown should be seen as temporary, unless the political context deteriorates further.  The service PMI is up, which is a positive.  Beijing will be in a wait and see attitude until after the Chinese New Year, at which point we can better gauge of the direction of Chinese market.

United States of Disarray

The US markets are still recovering from black December, the worst month on Wall Street since 1931.  The Federal Reserve is unlikely to revert its policy of rate increases unless the markets further their decline. The plan is for at least two rate increases in 2019. However, the recent comments from the Fed chairman suggesting a pause in rate increase are not an indication of the current state of the economy.  These comments are rather a consequence of the political environment and pressures to encourage a Wall Street turnaround.  This raises some questions about the fed’s outlook and overall independence.

The federal government shutdown is another embarrassing expression of the extreme polarization of the US political landscape and sends mixed signals to the rest of the world. The political battle is highly counterproductive and this negativity further adds to uncertainty.

US economic indicators are currently unreliable because they are clearly influenced by external elements that could either improve, or worsen, near term market or industrial outlooks. The fundamentals of the US economy however remain largely in positive territories at the beginning of the year.  Consumer spending, as well as job creation remain strong despite the overall poor quality (in wage terms) and seasonality of the jobs created. Inflation is on the decline for now, primarily due to energy price falling in the closing months of 2018.  Household purchasing power will get a boost from this, but this decrease is not applied equally, particularly in the United States.

Macro Political and Economic Risks for 2019 and beyond


Britain’s exit from the EU remains a key risk for its economy over the next 2-3 years, with a notable contraction likely. Impacts will be strongest for export-oriented UK firms.  A growing number of over-indebted UK households are also likely to face uncertainties and a contracting job market at the same time.

Saudi Arabia

Instability in Saudi Arabia is a concern. The economic and social reforms implemented over the past few years are not producing intended results and the stagnant economy is driving skepticism.  There are growing concerns about the country’s foreign policy direction that could prove disruptive in years to come, especially with Yemen, Iran and Qatar.

European Anti Establishment Demonstrations

The Italian elections have validated a wave of anti-establishment politics in Europe.  That sentiment has been amplified with the “yellow vests” movement during the last quarter of 2018 in France.  This societal fracture in France is a minor concern at this juncture, but needs to be monitored carefully.  Paris-centric politics and an increasing disconnect between major urban centers and smaller urban areas located in the countryside are evident. This is the net result of a failed vision from the French government that began in the mid 70s, accelerated in the 80s and was unable to adequately restructure the economy for globalization and its impact on French society. The collapse of the economy of proximity, public services reductions, and a rejection of the Anglo-Saxon liberalization model are all elements that will continue to cause tension for years to come and will undoubtedly reshape French politics.

Oil rebound

Oil could begin to trend upward, and already has slightly in the final weeks of 2018.  The outlook is generally of concern with higher prices driven in part by the short-term nature of shale oil supplies and its overall lower margin characteristics.  The lack of exploration of more sustainable sources of oil, with longer term price stabilizing attributes could lead to a supply contraction in 3-5 years that could push prices back towards the $100 mark or above.  Added to this geopolitical risks, and oil will likely be characterized by increasing volatility in the next decade. We expect the amplitude of the volatility, however, to dampen somewhat over time.

Commercial Aerospace Markets

Top Aerospace questions for 2019 (click to enlarge)


Boeing is highly likely to make multiple announcements about the NMA, as early as Q1 this year.  The question remains one of the size of the addressable market for an aircraft that is seemingly late to market.  While we do not see Boeing being able to counter the A321 family, we view the “797” as a solid contender in the 240-260 passenger range. If Boeing does indeed target the higher end of the middle-of-the-market, it is in collision course with the weaker version of Airbus NEO, the A330-800.  The NMA production system is an integral initial element of the program and this is what has been contributing to some of the program launch delays.

We view the NMA as a $13B plus program and still have concerns about some elements of the business case beyond 2035 in particular. While services will be a major factor in the revenue modeling of the aircraft, the fragmentation of the competitive environment will be a factor that Boeing will need to take into account.  We also expect as many as three variants of the aircraft to be introduced to market in the first five years, including a cargo version.

At any rate, the victim of the NMA success will likely be the 787-8.  We do not expect 787 rates to be sustainable during the NMA development years, and thus anticipate a continuation of the below 1:1 program book to bill ratio, with a backlog stationary at around 3 years.  NMA will have a direct impact on 787 orders and we expect an acceleration of the slowdown in order for the  -8, already pretty much on life support.  If for no other reason, Boeing stock’s is likely to need the NMA launch this year to provide investors with a longer-term outlook for the company commercial products and services.

Business Aviation

The market is progressively going through the excess inventory resulting from over production in the late 2000s and will now enter a period of stable growth driven by fleet renewal, expansion, and regional market growth. A total of 18,279 business jets and turboprops will be delivered to 2030. Recent financial market turmoil might dampen this recovery for 2019.

Production delays

2018 was a challenging year for both Airbus and Boeing with various delays affecting output of their narrow-body products.  Both companies ended the year tied at 796 commercial aircraft delivered, if we exclude the military tankers manipulated shrewdly by end of the year trophy hunters.  We believe that Airbus has the worse of its GTF issues behind for now and thus should recover fully in 2019.  Boeing is also on a stronger path for 2019. We are however concerned that issues with materials and engines production will continue to affect deliveries somewhat for 2019.  We confidently expect Airbus to meet its targets while we are cautiously optimistic in Boeing’s case. Airbus will lead Boeing comfortably by year-end in terms of production but is likely to marginally trail again with orders.

The book to bill ratio in 2018 was a very healthy 1.0, above our 0.8 expectation of last January.  We however see some increased risk with some of these orders, particularly Jet Airways and Lion Air, both MAX customers.  The financing environment remain strong despite the growing number of tourist investors in 2018, whose exposure is a minor concern due mostly to market uncertainty.  NMA and A33X launches should stimulate orders in 2019.

We anticipate no major issues with 787, A350, A330 and 777 production in 2019.  The recent fire at Premium Aerotech in Augsburg would appear to have a minimal short-term impact on Airbus production.

777X flight testing is unlikely to reveal any major issues with the design, although flight testing is still an area of high risk as demonstrated in the past with the loss of an A330, the near loss of a 787 and the recent issues experienced by the C919 for example.

Mergers and Acquisition Landscape

If the past few years are indicative, 2019 should provide its fair share of transactions.  Boeing is transforming its business model around a new production and systems engineering model, thus taking away more of the suppliers’ engineering & design ownership leverage.  This will progressively transform the supply chain, with criteria for program selection migrating away from the current “legacy” supply chain and to suppliers with the will to accept ever more stringent terms and conditions and with the capacity to execute build to print work.   Just as last year, acquisitions are likely to be focusing more on established programs and aftermarket opportunities, particularly avionics.  It is possible that Boeing may contemplate an acquisition in this domain as well, particularly in the big data, connectivity and data processing domains. In addition to Boeing, we anticipate that Astronics, BAE Systems, Honeywell, Ducommun and Amazon to be some of the companies involved in transactions this year.

How will Airbus respond to NMA?

A321 continues to perform strongly, Airbus rolled out more than 200 of the larger A320 family variant from its FALs in 2018.  As outlined above, we believe that Boeing is targeting the upper range of the middle of the market and thus would most probably lead to Airbus responding with a derivative A330, (A350 is too expensive).  Airbus could reduce the weight of the aircraft significantly, optimize range and especially work at optimizing engine and airframe maintenance intervals to compete more effectively with NMA.  We expect a revised NEO to be extremely competitive price-wise with NMA.


Embraer and Boeing will most likely go ahead with their “Newco”.  The election to the presidency of Mr. Bolsonaro has likely removed a serious obstacle to the Boeing-Embraer tie up.  While not a done deal, we expect that the Embraer company will receive a greater share of engineering work from Boeing and possibly play a key role in the manufacturing of aerostructures work for current and future Boeing commercial and military programs.  A derivative KC-390 could realistically compete for US DoD contracts sometime in the next decade.

The likely migration of Boeing work is very bad news for the Puget Sound area and possibly also Southern California.  We would expect engineering job losses there to continue in 2019 either through retirements and migration to lower cost areas in the South East.

China continues to rise, slowly, but this will accelerate

The C929 development program is continuing apace with the addition of a 3rd test aircraft to the fleet.  Certification and EIS by 2021 is likely but initial production and introduction to airlines will be very slow.  We do not anticipate rates above 5/month until 2024-2025.

The CR929 development appears to be on a more rapid path than its predecessor, which is to be expected.  Production decisions are likely to be made in 2019-2020 and the supply chain likely assembled around these decisions.  With JV not being a requirement for suppliers, it means that we view the 2027 EIS as a distinct possibility if certification and trade do not get in the way of the program. Western suppliers should be aware that the rise of the Chinese supply chain will lead to fewer opportunities in the future and evolving relationships.  We believe that Rolls Royce is strongly positioned for the CR929 contract as one of two engine suppliers.

Defense Markets

Boeing impressed us last year with three substantial wins for the US DoD.  Although the analyst community has generally questioned the T-X bid on price, we view this win as the manifestation of a significant industrial and engineering rethinking within the enterprise, the expression of Dennis Muilenburg’s vision of a one Boeing:  more integrated and able to leverage resources more efficiently.

F-35 continues its operational introduction into US and NATO partner forces.  The Japan order late into 2018 is a vote of confidence for the air system but also a realistic conclusion that in light of the rise of China’s deep strike capabilities, modernization was needed sooner rather than later, taking into account the slow development and maturation of the domestic F-3 program, likely to extend well into the 2020s.

India remains a very active market for TACAIR procurement programs in particular.  Rafale F3Rs will be delivered to both Qatar and India this year with the aircraft generally seen as the favorite to win at least the competition for 57 aircraft to the Indian Navy.  The rationalization effort in progress with the Indian MoD is a welcome development that will enhance the country’s operational capabilities.

The US budget environment is unlikely to be affected in 2019-2020 for now.  Acting Secretary of Defense Patrick Shanahan will focus its effort of rationalization and operational improvements within the Pentagon. We believe that a softening of the budget should not be viewed as a contraction of opportunities. In that regard the do-more-for-less and do-it-better approach may have found its best advocate and implementer with Shanahan. While growth in defense spending will look as if it is on a downward path, let us not forget that the budget is already at a very high level to begin with.

Finally, we are observing with interest the continuing emergence of defense services.  The US and NATO are increasingly reaching out to companies such as Top Aces, ATAC or Draken for services supporting services operational readiness.  The market has reached a substantial critical mass in terms of hours and revenues to perhaps attract the attention of a major player.  It will also be of particular interest to see how the relationship between Airbus and Lockheed Martin develops and if it can expand beyond the tanker services initiative.  We view the eventual E-3A recapitalization as the possible next step in that regard.

Conclusion:  keep your seatbelts on, but be prepared to (perhaps) be pleasantly surprised

We are going to attempt to strike a positive tone to end this 2019 outlook.  Yes, 2018 was a fairly tumultuous year, because in essence, it was a year of profound recalibration at many levels, geopolitical, industrial and financial, all affecting the aerospace and defense industry. Unpredictability was rampant and it hopefully will soften in 2019, or will it?

While we are hoping for a positive resolution of the current trade spat between the United States and China, nothing is certain.  There is not much that could prevent the US president from turning its attention towards the EU in 2019 and exploit the many divisions of the European block.  This divide and conquer approach is risky and could further polarize countries such as France and Germany, and drive some contingents of the EU towards China.  If the US is looking to reengage EU partners, a return to normal trade relationship would go a long way to achieve the US strategic objectives with China.

Brexit is as stated above a major element of concern that looks on a dangerous “hard Brexit” path that we feared in a note back in July. Will disruption come from somewhere else, Nigeria, Saudi Arabia, Venezuela?  Uncertainty will remain the order of the day.

Commercial aviation will likely witness deliveries of 2,100 commercial & regional aircraft, 1,120 jet and turboprop business aircraft, 705 military aircraft (TACAIR, trainer and transport) and around 750 turbine commercial and military rotorcraft.  These and other systems markets will be revisited by our team in a series of new and updated reports throughout the year.

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