The research division of investment firm Morgan Stanley summarized its recent conference of notable aerospace and defense (A&D) suppliers with an optimistic “Steady as we go.”
The firm’s 2021 Virtual Laguna Conference featured meetings with management teams from Raytheon Technologies, Textron, Heico, Curtiss-Wright, Crane, Allegheny Technologies, Joby Aviation, and MDA. Talks focused on the aftermarket, where maintenance, repair, and overhaul (MRO) drives demand, but also touched on other aerospace topics.
Morgan Stanley analysts Kristine T. Liwag, Matthew Sharpe, and Jason T. Holcomb reported, “We were positively surprised that aero aftermarket recovery forecasts remain unchanged despite the COVID-19 Delta variant. Strong business jet demand continues to stand out. Supply chain disruption remains a watch item.”
The wide-ranging discussions generated these key takeaways:
- Commercial aerospace aftermarket recovery remains on track
- Business jet demand continues to heat up
- Space is a secular growth story
- Supply chain disruption remains a watch item
- Virtual-meeting fatigue is real and pent-up demand for in-person interactions could boost business travel in 2022
Raytheon executives noted Available Seat Miles are growing, which is driving the aftermarket business for its Collins Aerospace and Pratt & Whitney (P&W) divisions. They expect Collins’ aftermarket to grow 5% and the spare parts market at P&W to grow 25%.
Heico executives noted strong demand persists for parts manufacturer approvals (PMAs). The Federal Aviation Administration (FAA) grants PMAs to allow companies other than the original equipment manufacturer (OEM) to produce approved modification and replacement aircraft parts. Airlines see PMAs as part of the solution to remove costs. Crane officials said their aftermarket business continues to improve.
Textron CFO Frank Connor told analysts that strong business demand could provide upside to business jet production and margins in 2022. Business jet takeoffs and landings are at historical highs, exceeding pre-COVID-19 and pre-Financial Crisis (2009) levels. Morgan Stanley’s experts say the demand is driven by consumer focus on safety, convenience of private aviation relative to commercial travel during COVID-19, and wealth creation, with the uptick attributable partly to new private aviation users.
Multiple companies highlighted supply chain constraints and labor market issues, which add risks to expected production ramps for aerospace OEMs. Textron and Curtiss-Wright officials acknowledged the global chip shortage’s impact on avionics and electronics. Raytheon, with 41,000 suppliers around the world, reports it’s actively managing supplier readiness.
Management teams at the conference suggested a stable outlook for defense, citing key awards of more than $3 billion for the Long-Range Standoff Weapon System and Next Generation Interceptor.
Lofty mergers and acquisition (M&A) valuations suggest to conference participants that the market is betting on the commercial aerospace rebound. Despite Raytheon’s focus on divestitures as it fine-tunes its portfolio, company officials said they continue to look for acquisition opportunities in the commercial aftermarket and space. – Eric