Aerospace: Conquering the Skies

Flying like birds and ruling the skies has been humanity’s dream from time immemorial. Mythologies from the oldest civilizations abound with tales of airborne machines. Flying became a reality with the Wright brother’s invention in the early twentieth century. Early airplanes were predominantly military machines, with the two world wars playing a significant role in developing and advancing technologies. Passenger flights were not widespread until the ’50s, when jet engines and pressurized cabins made them comfortable for long flights. From then on, the industry saw steady growth in both commercial and military applications. The global defence budget is expected to cross $2.0 trillion by 2022, and a significant portion of it would be spent in the aerospace area. Space exploration, leisure, and satellite are other areas that are seeing fast growth. 

Moving parts:

The industry comprises aircraft manufacturers, parts manufacturers, and airlines. The sector can also be classified as commercial and military, based on the end-use. Aircraft manufacture is a highly complex business with an astonishing number of parts involved. A Boeing 747-8 is composed of almost 6 million components. The industry also requires precision and high-quality control in the manufacturing setup. Hence, there are considerable barriers to entry into the aircraft manufacturing space. Aircraft engines are also complex machines, and just a handful of companies make most of the aircraft engines. At the other end, aircraft leasing and airlines are easier to disrupt, and history is filled with upstarts that have toppled large airlines. The US is by far the most significant player in the aerospace market. Below is the breakdown of US aerospace and defense exports in the year 2020.

Source: Aerospace Industries Association

Consolidation:

The aircraft industry has seen an almost continuous phase of consolidation. With the increased sophistication and the ever-growing list of parts, it became more convenient to have a smaller number of sources to procure from and make the supply chain more efficient. The complexity led to the parts makers acquiring their peers and even some prominent manufacturers integrating the parts businesses. The commercial aircraft business has whittled down to just two major players, Boeing and Airbus, dominating the global market share. While Boeing has always been a fully independent player, Airbus was initially set up by a European country consortium and benefited from subsidies.

Nonetheless, both these mega-firms have had the supports of their respective governments. The government support has led eventually to the trade wars between Europe and the US and tariffs across the board. Let’s take a deeper look into these two players:

Established in 1916, Boeing designs, manufactures and sells airplanes, missiles, and other aerospace equipment. It is also one of the largest defense contractors in the US. Boeing makes both wide-body and narrow-body aircraft in the commercial airplane market and sells to both long-haul and short-distance operators. However, the firm has seen a recent spurt of accidents involving its 737 MAX aircraft and was forced to ground all that model aircraft. The firm took remedial measures, and the FAA has allowed the return of 737 Max to various fleets. Its wide-body aircraft also suffered cancelled and delayed orders because of the Covid-19 pandemic, which halted almost all international flying. Nevertheless, the return to normalcy is likely to help the firm come back on track.

Formed by the merger of various European aerospace companies, some of them state-owned, Airbus is a maker of both wide-bodied and narrow-bodied aircrafts. It also supplies to the military of the European Union countries. While Airbus does not trade in the US exchanges, it is often traded over the counter. It is also a top holding in ETFs that track the European markets.

Other major players:

Airbus and Boeing are not just large companies but are also well known across the world thanks to their dominance of the commercial aircraft market. However, there are several other major firms that operate in the aerospace market and play a key role in the overall supply chain. Some of them are:

One of the major players in the military aircraft market, Lockheed Martin is well known for if F series fighters, including the F-16, F-22 and the F-35. It is one of the largest defense contractors in the world. In addition to military aircrafts, the firm also designs and manufactures missiles including the Hellfire and Javelin tactical missiles and the JASSM strike weapon. It also produces air and missile defense systems. It also makes the Black Hawk Choppers through its Sikorsky division.

Another major defense contractor, Northrop Grumman is an American company known for its bombers. This is the firm behind the stealth bomber and propulsion systems for ballistic missiles. It also makes spacecrafts and autonomous flying machines.

Raytheon is also a major defense contractor and a key player in the commercial aircraft supply chain. It makes aircraft engines, missile systems, radar systems, and other avionics products. The engines it makes under the Pratt & Whitney division is part of the big three aircraft engine manufacturers along with GE and Rolls-Royce.

Other players include TransDigm Group Inc, Elbit Systems, Spirit AeroSystems, and General Dynamics.

The commercial aircraft market is dominated by Boeing and Airbus, but there are a few niche players in this market. Examples include:

Based in Brazil, Embraer is a top player in the private jet and business jet market. it also supplies some military equipment to Brazil and other countries in the region.

Source: Morningstar

Virgin Galactic caters to the nascent space flight market and aims to commercialize space tourism. It was founded by the flamboyant businessman Richard Branson.

Commercial Airlines: Covid and the way ahead

Commercial airlines are one of the most competitive industries in the world. It has historically been a complicated business to operate with small margins, large overheads, and a push for optimization and efficiency. Many prominent global players continue to benefit from local government support. The covid pandemic and the associated disruption to flying have impacted this business to a great extent. With the prevalence of work-from-home, it is expected that at least a part of the business-related travel market would take a long time to return to normalcy. On the other hand, tourism-related travel could, in fact, see a resurgence sooner. The impact in the US has been larger than in other parts of the world due to the size of the country and the large market for domestic flights.

Some of the top US carriers include:

Based out of Dallas, Texas, Southwest is a low-cot carrier known for efficiency and punctuality. It uses a combination of a rolling hub and a point-to-point network.

Based out of Georgia, Atlanta, Delta operates over 5,000 daily flights and serves over 50 countries. It operates both domestic and international routes.

Based out of Chicago, United is one of the largest airlines in the world. It operates both domestic and international routes.

Other major US and non-US airlines include American Airlines, Alaska Air, JetBlue Airways, and Ryanair.

Source: Morningstar

Investment options:

Investors wishing to gain exposure to Aerospace and airlines could do so by directly buying the stocks. There are ETFs also available that provide exposure to a basket of stocks in the industry. The Aerospace ETFs include iShares US Aerospace & Defense ETF (ITA) and SPDR Aerospace & Defense ETF (XAR). The US Global Jets ETF (JETS) primarily holds airline stocks.

Source: Morningstar