NEW YORK & LONDON -- (BUSINESS WIRE) -- The outlook for the global Aerospace and Defense (A&D) sector is stable for 2013, with the largest parts of the commercial aerospace sector continuing to benefit from strong demand, while global defense budgets remain under pressure, according to Fitch Ratings in its outlook report.
Regionally, Europe could be a key credit focus in 2013, with several large players evaluating strategies and facing other challenges.
The broader story in the A&D sector includes challenges in commercial aerospace and opportunities in defense that temper the respective positive and negative storylines. Poor execution in the commercial segment could weaken the outlook, while cost cutting and international opportunities in defense could fend off credit pressures.
-- Commercial Segments: Supported by strong orders and large backlogs, Fitch expects deliveries from Airbus and Boeing to grow approximately 8% in both 2013 and 2014, but deliveries could plateau in 2014. Key challenges include meeting higher production rates and keeping new programs on track. Aftermarket revenues should grow in the mid-single digits, and business jet and regional aircraft markets are likely to be stable, but at low levels.
-- Aircraft Finance: Fitch does not expect that availability of aircraft financing will be a limit on the commercial aerospace outlook in 2013, despite a likely 10% higher financing requirement. Commercial banks have remained active in the market, while new capital providers have also emerged. Capital markets activity should continue to rise in 2013.
-- U.S Defense: Sequestration is a near-term concern, but Fitch's expectation is that it will be avoided. However, additional defense spending reductions will likely be a part of any deal that avoids the fiscal cliff. While U.S. defense spending is past its peak, opportunities to cut costs and win international contracts should not be ignored. At some companies, cash deployment to offset lower growth rates is a credit risk.
-- European Defense: Fitch believes that defense spending levels in Europe have, for the most part, bottomed out, despite the on-going fiscal challenges facing the continent. Fitch does not expect materially different financial profiles in 2013, save any company specific events such as M&A or key program problems. In the aftermath of the terminated merger, the potential for strategic actions at EADS or BAE Systems is an issue to watch.
Sequestration or a similarly severe spending plan is the nearest term risk to Fitch's outlook, but it would likely not affect all ratings and Outlooks in the U.S. defense sector. In the commercial aerospace sector, cost overruns or material delays on new aircraft programs are the main risk to Fitch's outlook, but failed execution on production rate increases and the ongoing negotiations with Boeing's engineer's union are also key concerns.
A global economic downturn, whether initiated by the fiscal cliff or another cause, would affect the outlook in both commercial aerospace and defense. As always, this industry is highly exposed to exogenous shocks such as disease pandemics, wars, and fuel price spikes. Cash deployment is also a risk to the outlook, as are large M&A transactions.
The full report, '2013 Outlook: Global Aerospace and Defense,' is available at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: 2013 Outlook: Global Aerospace and Defense