The summer of hate
The impact of terrorism on the Aerospace & Defence sector
An article in the press today described the summer of 2016 as the “summer of hate”. The relentless pace of the attacks has invoked terror into the minds of ordinary people and politicians have been forced to make frequent declarations of their determination to protect their citizens. It therefore seems logical to me that the summer of 2016 will be one which shapes the near term future for Aerospace and Defence companies.
At times of global instability, the two sides of the sector often diverge. Wars and terrorism are generally bad for civil aerospace, but good for defence. The starkest divergence in recent memory was after 9/11. Whilst this was very specifically a terrorist attack using aeroplanes, and therefore the impact on aerospace was magnified, the premise holds true.
A politician’s appetite to spend on defence is driven at the most fundamental level by how threatened they feel. It is then influenced by the health of the national economy and the nature of the threat. Events of the past few months are likely to have left politicians feeling under siege. Not just from the terrorists themselves, but from social media and the press. The Internet has opened up a new front in the war on terror; one which sadly aids the terrorists by giving them publicity, and is likely to force politicians to take action
In 2015, defence spending in North America and Western Europe fell again, but at a slower pace that in previous years according to SIPRI data. The three biggest spenders in Europe – the UK, France and Germany – have all signalled a growth in spending in coming years. Public support for increased defence spending has been very low though since the Afghanistan and Iraq wars. However, recent events are likely to change this and make the public more supportive, which therefore make the spending more likely to come to come to fruition.
Changes in military expenditure by region 2014-15 (SIPRI)
We are also likely to see a shift in where the money is being spent. Whilst the rhetoric from the defence companies and Governments has been an increasing focus on surveillance, intelligence, cyber warfare etc. the budgets in the UK and US continue to tell a different story, with the bulk of the budget being spend on conventional military equipment as shown by the chart below. Intelligence, Surveillance, Target acquisition and Reconnaissance (ISTAR) is currently forecast to decrease (see chart below). This feels wrong in the current climate. The forecast should shift to new technologies that can help to pre-empt terror attacks and enable better intelligence sharing. This should see companies such as Qinetiq, Ultra Electronics, Cobham and BAE Systems. However, smaller companies are also likely to become more important to Governments, and they will be attractive acquisitions for the major listed players.
2015 UK Defence Equipment Plan by Operating Centre (UK MOD)
In aerospace, global instability and the threat of terror attacks are likely to have a negative impact on passenger traffic volumes. IATA data shows that annual revenue passenger kilometres (RPKs) growth remained unchanged at 4.6% in May – their slowest pace since January 2015.
Air passenger volume growth and global business confidence (IATA May 2016)
IATA’s report attributed this slowdown partly to the “Brussels terrorist attacks, which affected the large international European market in April and May”. The report written in early June said it expected the “impact to be only transitory in nature”. We await June and July’s data with interest. Admittedly monthly passenger numbers are unlikely to impact the aircraft and equipment manufacturers in the short term as airlines make capacity decisions based on long term projections. However, there is a genuine possibility that this new generation of terrorism may lower our propensity to travel by air and therefore encourage more people to holiday closer to home. If this turns out to be the case, then the summer of 2016 may well be a defining moment for the aerospace industry.
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