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Economic Uncertainty Continues to Impact Aerospace & Defense

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Aerospace Industry Update

Aerospace companies are entering an unprecedented downturn. There has been a 95% decline in total traveler throughput year over year. Expected total loss in global airline revenue for 2020 is $314B. Demand for oil has been greatly reduced in part due to the decrease in travel. This along with a shortage of storage capacity has caused decade low oil prices.

Aerospace Corporate Action in Response to COVID-19

Depressed share prices and an expected fall in earnings has caused corporates to postpone strategic M&A and to issue capital to shore up liquidity. Some activity of note:

  • April 14 Spirit raises $1.2B of 7.5% Senior Secured Notes to shore up liquidity
  • April 23 Spirit announces adoption of a limited duration shareholder rights plan
  • April 25 Boeing terminates $4.2B JV with Embraer
  • April 27 Airbus informs employees of potentially deeper job cuts
  • April 27 Boeing CEO tells shareholders that the company expects it will take two or three years for air travel demand to return to 2019 levels
  • April 30 Boeing announces a seven-part bond offering totaling $25B avoiding immediate need for federal funding

Defense Outlook Remains Strong

Despite COVID-19 related uncertainty, defense companies are expected to report solid Q1’20 earnings although forward numbers remain a key issue. Companies across the defense ecosystem, particularly in services, have outperformed the S&P in the first quarter of 2020.

Defense Security Cooperation Agency notifications through March were $24.6B, up 21% year over year. 

The UTX and Raytheon merger was completed. ~67% of combined company revenue will be defense related. The US Air Force selected the combined company to develop and build its next-gen long-range nuclear missile. Total development costs are projected to be $4.5B.  

The DoD is expected to receive ~$10B from the CARES Act to help combat the COVID-19 pandemic.  Funds are being used to construct military hospitals, deploy the National Guard and increase DoD medical supply production.

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