Ongoing economic slowdown and volatility in fuel costs have negatively impacted the demand for air travel, a key driver for the aerospace industry. At the same time, budget cuts have translated into limited spending on defense equipment. In this scenario, it is critical that companies achieve excellence in financial and risk management to outperform the competitors and offer value to shareholders.
New analysis from Frost & Sullivan (financialservices.frost.com), Financial Assessment of the Global Aerospace & Defense, Airlines and Airport Services Industries, finds that investors are increasingly cautious and risk averse about their portfolio investments. This is negatively affecting the capital intensive aerospace and defense industry. Investors are unwilling to commit huge amounts of money to an industry that has a longer gestation period than most others.
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"With governments cutting down on defense budgets, the aerospace and defense industry is taking a hit as demand is slowing down," noted Frost & Sullivan Financial Analyst Bharath M. "For instance, in 2011, the sales of Britain’s largest defense equipment manufacturing employer, BAE Systems, dipped by 14 percent due to continuous cuts in military spending in the United States."
Budget cuts also increase competition among the existing participants and heat up the battle for the available amount, thereby increasing the need to maintain excellent financial and risk management practises.
Though interest rates are currently low, economic conditions in the Eurozone and other developed countries makes it difficult for participants to raise capital, especially in an industry that is characterized by high capital requirements and lengthy pay back periods. Some of the banks that have financed the aerospace and defense industry earlier are more reluctant to do so now.
"Borrowing from different sources instead of depending on a single source is slowly gaining momentum," remarked Bharath. "This strategy increases the interest rate risk and the responsibility is on CFOs to adopt appropriate risk management and mitigation practices, such as interest rate swaps and forward rate agreements."
Also, other risks involved with regular operations such as credit risk, liquidity risk, foreign exchange risk and interest rate risk need to be addressed using suitable risk management practices, such as bank guarantees and interest rate swaps.
"Maintenance of fixed assets, including land, buildings, civil works and other infrastructure facilities also play a key role in ensuring smooth operations, which in turn directly impacts profitability," concluded Bharath. "Effective cash flow management and a strong focus on free cash flow generation are critical to achieving excellence in financial and risk management."
Financial Assessment of the Global Aerospace & Defense, Airlines and Airport Services Industries is part of the Business and Financial Services subscription. Frost & Sullivan’s related research services include: Financial Assessment of Global Packaged Food Industry, Financial Assessment of Global Communications Industry, Financial Assessment of Global Banking Industry, Financial Assessment of Global Insurance Industry. All research services included in subscriptions provide detailed market opportunities and industry trends evaluated following extensive interviews with market participants.
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Financial Assessment of the Global Aerospace & Defense, Airlines and Airport Services Industries / NB3C-F1