IHS Aerospace, Defence & Security. Military Aircraft: 2013 In Review & Forecast Outlook. Mark Bobbi & Charles Hollosi. January

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1 Military Aircraft: 2013 In Review & Forecast Outlook Mark Bobbi & Charles Hollosi January

2 In this report IHS analysts Mark Bobbi and Charles Hollosi review trends and developments in the trillion-dollar worldwide military air vehicles market and provide a look forward to what the developments could mean for global markets over the next ten years. This report is abridged. The full report, including identified market opportunities, is available to subscribers to IHS Jane s DS Forecast. Introduction Despite budgetary pressures in Western Europe and the US, the forecast market for Military Aircraft continues to show surprising strength, and while several sub-segments such as rotorcraft and transports see declines, the total market looks stronger than it did a year ago, driven primarily by the world s growing appetite for modern high-performance combat aircraft. The forecast for military aircraft reflects USD1.53 billion in sales. While that is down USD700 million from the projection, a reassessment of Supplier Logistic Support (SLS) is responsible for the decline. Indeed, taking SLS into account, the IHS forecast is stronger than a year ago and reflective of a number of factors including a gradually improving world fiscal environment, the geopolitical scene, and demographics of the worldwide fleet, all leading to a solid market. 18 Super Hornet/Growler, F-15 Eagle, C-17 Globemaster, and the T-6 trainer. But new aircraft, especially high-value combat aircraft, will see increasing production, including the KAI T-50, Lockheed Martin F-35, Sukhoi/Irkut Su- 34, AVIC J-10 and Su-27 derivatives. And the Sukhoi T-50, Chinese/AVIC J- 20/21, and Saab Gripen NG are close to production. These combat aircraft sales more than offset declines in rotorcraft, transports, and a flat market for special purpose C4ISR aircraft. The IHS forecast CAGR has improved from 1.78% to 2%. The outlook for 2014 is for continued strength in military aircraft, even if in the near term the US share of the market is declining. Included in this strength is the emerging technical prowess of China and the Western response to their impressive advances in aeronautics and weapons. Market View: Suppliers While total sales value for the period is USD1.53 trillion versus USD1.6 trillion, the bulk of the change over the last twelve months comes from a reassessment of the Supplier Logistic Support (SLS) calculations. CAGR is now 2% compared with 1.78% of the prior ten year forecast period. IHS has moved its forecast market peak two years to the right, to 2018 with near peak sales through Granted, many programs are in their last production life cycle, among them F/A- 2

3 Market leadership is nearly unchanged: Boeing and Lockheed Martin are the top two, together commanding almost a quarter of the ten year market. However, Lockheed Martin s CAGR is 8.4% while Boeing s is negative 5%. The company taking the biggest hit is Eurofighter, with a more than 20% negative CAGR. The UAE s decision to suspend talks to buy Typhoon hurts the aircraft s outlook immeasurably despite achieving operational kudos from USAF pilots who flew with Typhoon in exercises. Russia and China are well represented with UAC and AVIC in the top five, along with EADS. The total market value is almost USD1.6 trillion, about USD150 million higher than forecast one year ago. In 2013, defense companies that saw procurement cuts in many countries, especially in the US and Western Europe, began to reduce employee rolls: Lockheed Martin and EADS were among those announcing major personnel reductions with falling Western defense investment accounts. The backlog of funded programs remains substantial, however, and will produce a growing sales market through Last year the IHS forecast showed a more visible decline in sales after the peak 2016, but geopolitical developments have put a floor under aircraft investment especially high-performance combat aircraft and the forecast now shows sales remaining near the 2018 peak through the end of the ten-year forecast period. International programs and expected opportunities continue to drive the overall market, even though the topgrowing program over this period is the 3

4 F-35. Stated and Derived Opportunities maintain third place rank among forecast suppliers. More than half of 2013 total market sales were to non-us customers, some USD75 billion. The non-us market shows the importance of non-us indigenous programming and export sales. Fully 63% of total forecast sales are to non-us customers, over USD1 trillion. International customer sales CAGR is 3.9%, nearly double the 2% for the total worldwide market. The top non-us customers are China, Russia, UK, India, Brazil, and Japan. Lockheed Martin shows the strongest growth with CAGR of more than 18% on the strength of F-35 ramp rates approaching 300 by Russia s UAC and China s AVIC are both forecast with negative CAGRs, although at far lower rates than a year ago as IHS pushed out higher rate production for a variety of aircraft both countries tend to overstate their annual production rates and/or ability to ramp rapidly. As IHS forecast a year ago, both companies total sales peak early in the forecast period, after which we do not forecast sales until late in the period for AVIC and not at all for UAC. Over the course of the year, IHS adjusted their new programs to reflect the belief that IOC will come later not sooner, and existing aircraft production programs including Su-30/34/35 will come to an end with a potential gap before the T- 50. China may avoid a gap, although it has a major engine issue with the J-20 and J-31. Looking at the market in major platforms, the top five in total forecast period sales haven t changed from last year s report or indeed the year before: F-35, the Su-27 family, Eurofighter, B737NG-based aircraft, including but not limited to the P-8A/I Poseidon, C-130 Hercules, and A400M. However, the single largest program is Unspecified, which is primarily Derived and Stated opportunities. These generate USD193 billion in total sales through 2022 nearly USD60 billion more than the F-35. Market View: End-User Countries From a size standpoint, the US has been, is, and will continue to be the largest military aircraft market, with more than USD526 billion or 35% of total forecast sales through No other country reaches 10%, with China at 8% of the total market or USD133 billion through 2022, and Russia, the UK, and India round out the top five. On a CAGR basis, market leaders are expected to be Japan, Australia, South Korea/Turkey/Brazil, and Canada with 17%, 12%, 11% and 10% CAGRs respectively. All of these countries, not surprisingly, are in the early stages of complete highperformance combat aircraft recapitalization programs and all but Brazil are customers for the F-35. United States A year ago, the overwhelming issue with respect to military aircraft was the 4

impact of Sequestration. The White House s OMB estimated that defense cuts as a result of sequestration could be about 9.4%. But of all the possible cuts to military aircraft, few actually happened.

5 impact of Sequestration. The White House s OMB estimated that defense cuts as a result of sequestration could be about 9.4%. But of all the possible cuts to military aircraft, few actually happened. The most important programs, F-35 and KC-46A, didn t see any unit cuts although R&D on the tanker was reduced slightly. Indeed, as costs decline with each successive production lot, and technical issues are resolved, the outlook for the F-35 has improved. The program saw two new customers this year, Japan and South Korea, with still more potential international buyers of the stealthy multi role jet expected. There will however be delays or cancellation of new programs: > The US Army s AAS could be terminated outright with the Army considering retiring the OH-58D Kiowa Warrior in lieu of AH-64s in the scout role. > USAF T-X Contractors are lining up for this program which could end up simply being a refresh of the still viable T-38 Talon. > CRH FY2015 money availability is critical to this effort to recapitalize the HH-60H fleet with new Sikorsky/Lockheed Martin Blackhawk M-based systems. One option being considered if the CRH falls away is use of USAF CV-22Bs to provide CSAR. We could also see longer development time frames (i.e., stretchout) for the USAF Long Range Strike Bomber. East Asia China, Japan, South Korea, and Taiwan lead East Asia regional aircraft consumption. The ten-year regional CAGR is 6.6%, three tenths higher than 5

6 last year s ten-year forecast. East Asian customers account for USD268 billion in aircraft production, SLS, services, and R&D consumption, up from USD258 billion a year ago, and the top four countries account for almost all of that at USD 231 billion. China is the principal driver based on its aggressive defense spending and combat aircraft development programming. The big spike up in 2022 is a result of an anticipated fourfold increase in production of the J-31 production values and a twofold increase in the J- 21. These developments and Chinese strategic intent have also created a stimulus in neighboring countries. This includes Japan and South Korea with their own major aircraft development and procurement efforts, not the least of which is the F-35. Other East Asian countries could enter the F-35 camp, including Singapore. Europe The mixed fortunes for the F-35 in Europe in 2012 continued into 2013 with firm commitments from some countries offset by reductions in requirements from others driven by funding issues. Norway committed to acquiring six F- 35As in 2017 for USD737 million and will purchase an additional six aircraft every year until 2024 until the country has acquired its planned total of 52 aircraft. Norway s strong commitment to the aircraft has been encouraged by integration of the Kongsberg Joint Strike Missile into the aircraft, which could bring Norway substantial international sales as a result. After political debate which saw the Netherlands two test aircraft put in storage for a time, the Dutch in September slashed its 85 unit buy to 37 (including the test aircraft), funded by a USD6 billion budget. The government said more aircraft could be bought, subject to falling unit cost and financing becoming available, but this is unlikely to bring the final total anywhere near the original 85. The UK confirmed in May that it will buy 48 F-35B version aircraft while declining to commit to the 90 additional aircraft previously proposed. But the government did clarify that a split buy of F-35B short take-off and vertical landing and F-35A conventional take-off aircraft was no longer being considered for the Royal Air Force and Royal Navy. Financial woes continued to have an impact on Spanish military procurement programs with a cut of USD5 billion across the board, although there was some success in damage limitation with regard to aircraft acquisitions. Spain will press ahead with its original order for 24 Eurocopter Tiger attack helicopters, although it will be looking to sell the first six HAP-configured aircraft rather than converting them to the HAD standard. The order for NH90 helicopters was slashed from 45 to 22 aircraft. The cancellation will, however, be offset with a support package for the remaining aircraft, including five years of maintenance. Also, announced plans to sell 13 of the 27 A400Ms on order were reversed by the end of the year with these aircraft 6

7 instead likely to be stored. However, 14 of 87 Eurofighter Typhoons under order will be cancelled. Germany also restructured some of its rotary-wing acquisition programs. The overall buy of Tiger UHT attack helicopters will be reduced from 80 to 57, with 11 aircraft already delivered to be returned to Eurocopter. German army NH90 troop transport helicopter numbers will be reduced from 122 to 82, partially offset by an order of 18 NFH90s for the German navy. There was however firm commitment to buy 15 EC645 T2 Light Utility Helicopters to be used by the Special Forces Command, with a USD249 million contract signed with Eurocopter announced in July. Procurement of the latest generation Gripen E combat aircraft was firmed up with votes in the Swiss and Swedish parliaments. The Swedish Defence Materiel Administration issued Gripen E contracts in February for USD390 million covering development out to 2014 and in March for USD1.7 billion funding follow-on development work out to Assembly of the first Gripen E pre-production test aircraft began in July. These solid commitments have provided credibility to the Gripen NG project that bore fruit for Saab with their wining the Brazilian F-X2 competition at the end of the year. Russia s continued investment in military aircraft in general remained strong in 2013 and progress in combat aircraft programs continued apace throughout the year. Sukhoi completed deliveries of 32 Su-34 strike aircraft ordered under a 2008 contract, with the company scheduled to deliver another 16 in 2014, while seven Su-30SMs for the Russian Air Force had been handed over by November. Two MiG-29K single-seat and two MiG-29KUB twinseat carrier-based fighter aircraft were delivered to the Russian Navy in November, however an expected contract for around 24 MiG-35s failed to materialize. There were reports the Russian defense ministry postponed firm orders until 2016 due to design delays and deferment of funding for the project. A fifth T-50 (PAK-FA) fifth-generation fighter prototype was added to the test program in 2013 and state flight testing is due to start in Full-scale research and development work on the PAK-DA future strategic bomber is also set to begin in In transport aircraft, the Il-476 flight test program is progressing well and the first production aircraft are in build with delivery scheduled for Also, Ukraine and Russia are preparing a joint venture to co-operate on restarting production of the An-124 heavy transport aircraft. Helicopter procurements included maiden flight of the dual-control Mi- 28UB combat training version of the Havoc - up to 60 are planned to be procured by 2020 and a USD383 million contract for 40 Mi-8AMTSh armed utility helicopters with deliveries due to start in The Ka-52K shipborne attack helicopter program failed to live up to expectations, however, as there were none of the production deliveries promised in 2012 and a prototype crashed during testing 7

8 in October, likely to retard the project further. Middle East Strong spending on military aircraft by Saudi Arabia continued in 2013 with firm contracts announced for AH-64E attack helicopters and commitment of USD181 million for the first two of five KC-130J tanker aircraft. As part of its USD2.5 billion aircrew training contract signed in 2012, BAE Systems awarded a contract to Cirrus Aircraft to supply the Saudi Air Force with SR22 primary trainer aircraft. Qatar maintained momentum in aircraft acquisitions, with no sign that this will slow down going forward. Boeing revealed that it had been in discussions for procurement of eight CH-47Fs in the same configuration as aircraft being procured by Canada, with a contract expected in late 2014/early Meanwhile, requests for proposal were issued to Dassault, Eurofighter and Lockheed Martin for its Mirage replacement program. The US government requested an extension to submit responses allowing Boeing to offer the F-15 Strike Eagle and F/A-18 Super Hornet. Qatar is looking to significantly expand its current 12 aircraft fighter fleet with an initial buy of 36 likely in Oman s acquisition of 12 Eurofighter Typhoons was confirmed at the end of 2012 with signing of a USD4 billion contract with BAE Systems which also included eight Hawk Mk 128 Advanced Jet Trainers. Deliveries of nine singleseat and three twin-seat Typhoon Tranche 3 aircraft will begin in Iraq sprang a number of procurement surprises toward the end of the year. Although it had signed a contract in 2012 for 30 Mi-28 attack helicopters, reports emerged in November that four Mi-35 aircraft had been delivered with another eight expected by year end. It now appears that a total of 40 attack helicopters are being acquired from Russia, with the Hinds in addition to 28 Havocs, the first 10 of which arrived in country in October. Details also emerged about a deal for 24 FA-50s (to be designated T-50IQ in Iraqi service), valued at USD1.1 billion for the aircraft, to take on a ground attack/light fighter role as well as their primary one as a lead-in-fighter trainer. The year also saw the first signs of Libya beginning to recapitalize its inventory with reports in September that the country is looking to acquire six ex- US Army CH-47Ds, while a DSCA request went out in June for two C- 130J-30s. In Egypt, repercussions from the military s removal of the Morsi government rippled through procurement. The US suspended F- 16C/D Block 50/52 deliveries after eight of 20 aircraft were handed over, and provision of additional AH-64D attack helicopters was on hold. Spain also decided to temporarily freeze delivery of six C295 transports. Although it is too early to tell how the political situation will develop, this could signal Egypt turning away from the US as its established provider of military equipment. US Secretary of Defense Hagel confirmed in October that Israel will 8

9 receive six V-22 tilt-rotor aircraft taken from the next order to go on the assembly line, likely in The move represents an acceleration of the program to acquire the aircraft for a combat search and rescue and special forces support requirement. Hagel had earlier announced, during a regional tour in April, that the UAE is to acquire an additional 25 F-16 Block 60s with an expected value of just under USD5 billion. This, coupled with news in late 2012 that the UK and UAE would establish a defense industrial partnership involving close collaboration around the Typhoon, cast further doubt on Dassault s ability to close a deal to replace the country s Mirage fleet. response to their impressive advances in aeronautics and weapons. A new technology competition between China (and Russia) and the ROW has begun, as IHS analysts suggested a year ago, which could result in development of aircraft with performance we can only imagine. Outlook 2014 is expected to continue the massive combat aircraft recapitalization that began several years ago. The IHS forecast market otherwise includes 66 opportunities, from light attack/trainers to next-generation bombers. These represent more than USD50 billion in total sales. Overall, the IHS Military Aircraft Forecast sees the market continuing to expand while the US percentage of that market declines, albeit slowly. US emergence from a decade of war in Iraq and Afghanistan and public fatigue from those conflicts has resulted in spending declines over the past several years. Against this backdrop of US defense cuts is the emerging technical prowess of China and the Western 9

10 About IHS IHS (NYSE: IHS) is a leading source of information and insight in pivotal areas that shape today s business landscape: energy, economics, geopolitical risk, sustainability and supply chain management. Businesses and governments around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in Headquartered in Englewood, Colorado, USA, IHS employs more than 8,000 people in more than 31 countries around the world. ihs.com About IHS Aerospace, Defence & Security With a legacy of over 100 years as Jane s, IHS is the most trusted and respected public source of defence and security information in the world. With a reputation built on products such as IHS Jane s Fighting Ships, IHS Jane s All the World s Aircraft and IHS Jane s Defence Weekly, IHS delivers comprehensive, credible and reliable news, insight and analysis across all key defence and security subject areas, and in support of critical military and security processes. IHS defence and security products and services represent invaluable opensource news, information and intelligence assets for businesses, defence organisations and armed forces. ihs.com/jdsf 10

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