SOURCE: AlixPartners


June 15, 2009 08:00 ET

Aerospace Industry Needs Dramatic Actions to Offset Lingering Global Recession, According to New AlixPartners Study

Virtually All Industry Segments Have Been Hit -- Recovery Looks Unlikely Before 2011; Supplier Inventories Are Up More Than 20%, and Debt Loads Are Up 15%; More Airline Bankruptcies Likely in the Next 12-18 Months; Managing Supplier Risk, Fixing Program Management Key for Upper-Tier Companies

PARIS and NEW YORK, NY--(Marketwire - June 15, 2009) - After five years of strong, profitable growth, financials for virtually all segments of the aerospace industry globally are deteriorating rapidly and, given the lingering recession and tight credit markets around the world, the situation is likely to worsen in 2010. That's according to a study released today by AlixPartners, the global business-advisory firm.

The study, the AlixPartners 2009 Global Aerospace & Defense Review(SM), found that inventory levels in the industry have jumped by more than 20% in the past year, due to a high number of aircraft-order cancellations of late, and that debt loads have climbed more than 15% in that time. It also found that program management has been a particular disappointment for the industry, as massive cost overruns and program delays have been more the norm than the exception for many companies, draining much-needed cash which is always needed to survive any recession.

"A year ago, we predicted that the global aerospace industry would most likely be flying into turbulence this year," said Philip Toy, a managing director of AlixPartners and co-leader of the firm's global Aerospace & Defense Practice. "Little did we know that the turbulence would turn out to be a hurricane. As things stand today, it's hard to see a turnaround before 2011 at the earliest, maybe even 2012. Therefore, the issue for virtually all aerospace companies today is, How do we husband enough cash -- from working capital to program operations to managing supplier risk -- to weather this storm? In times like these, cash is king, queen, pilot and co-pilot."

The AlixPartners study investigated virtually all segments of the global aerospace industry, as well as key customers of the industry, such as airlines, and issues affecting the industry. Following are highlights of those findings:


--  Passenger traffic globally is down 7.5% through April on a year-over-
    year basis.
--  Premium/business-class revenues are down more than 20% in that same
--  Air-freight traffic globally has plunged 22% through April.
--  Airlines globally are on track to lose $9 billion in 2009.
--  As a result, commercial-aircraft orders have collapsed this year, and
    cancellations have outpaced new orders.
--  The average debt/capital ratio for North American airlines has jumped
    to above 80% (vs. 42% for European airlines).
--  The possibility of bankruptcy for North American airlines has
    increased, on average, by 20% since last December.

Business Aircraft

--  Business-jet deliveries, which are highly correlated to corporate
    profits, have declined by 30% since the beginning of 2008, raising the
    issue of when that segment will ever again enjoy its past level of sales.
--  The current "politically-incorrect" image of business jets, the recent
    steep declines in the net worth of individual buyers and the current lack
    of credit for purchases are all hurting this segment.
--  Business-aircraft producers need to adjust to this "new normal" level
    of demand.

Defense Products

--  Barring a new major conflict, the announced U.S. Defense Dept. budget
    cuts for 2010 are likely to be just the first installment on much greater
    cuts to come.
--  Execution to contract and controlling "requirements creep" from the
    customer will be critical success factors to come in this environment.
--  European defense spending is expected to experience a slight decline,
    as European governments continue to struggle through recession and budget
--  In Asia, spending could climb as governments react to increased
    Chinese military spending and to the actions of countries such as North
    Korea -- business which perhaps could be available to Western contractors
    as well as to regional firms.

Industry Financials

--  Industry EBITDA margins are down on average more than 20% this year
    vs. 2008.
--  Supplier debt leverage jumped 15% on average between 2Q2008 and
--  Financial-distress indicators for the industry on average have
    deteriorated by 24% since last year.
--  Valuation multiples are down from over 10X EV/EBITDA in 2007 to as low
    as 5X today.
--  Potential buyers (both strategic and financial) have the means to make
    deals, but appear to be waiting on the sidelines expecting multiples to
    continue to decline.

Supply-Chain Risk

--  Across the industry, Tier 1 and 2 suppliers enjoyed better financial
    success than OEMs over the last two years, with EBIT margins exceeding
    their customers' by an average of over 30%.
--  However, as demand slackens, supplier pricing will come under much
    more pressure, as excess capacity chases fewer and smaller orders,
    resulting in lower average supplier margins.

Program Management

--  The major delays and developmental overruns on the A380, B787 and the
    A400M are signs that program-management capabilities have eroded
    dangerously throughout the industry, reflecting a lack of focus and, most
    likely, underinvestment in this critical area.
--  Major causes of program-management problems:  unrealistic initial
    estimates, poor program scheduling and risk management, poor interface
    management and inadequate development processes and tools.

Extracting Cash from Operations a Must

In particular, the study finds that program delays and production-rate reductions are heavily impacting inventory levels all along the value chain, consuming much-needed cash. It states that a relentless focus on extracting cash from operations is an absolute necessity today, and that companies' boards of directors should be reviewing issues such as whether the company has sufficient confidence in, and visibility into, future cash flows; whether the company's existing financing structure is fully adapted to its current strategy and operating model; and whether its cash-control environment is fully in line with its reporting and compliance requirements.

"Ensuring that cash is under control, and that cash generation will provide full potential must be a main priority for most industry executives," said Toy. "If you are cash-rich, you can look at acquisitions opportunities, debt repayment or even stock buybacks, but if you are cash-constrained in this environment, you need to think more about divesting non-core assets or even merging with other companies."

About AlixPartners

AlixPartners is a leading global business-advisory firm offering services across four main disciplines: operational performance improvement and strategic consulting, financial restructuring and bankruptcy reorganization, litigation consulting and financial advisory services. The firm's expertise is in helping clients anticipate, evaluate and successfully resolve urgent, high-impact business challenges in an increasingly complex legal, regulatory and economic landscape. Drawing on the experience of more than 900 employees from 14 offices across North America, Europe and Asia, the firm commits small teams of seasoned professionals to deliver results when it really matters. For more information, visit

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