How will M&A play out in the aerospace and defense sector in 2023? Will the recovery in commercial air travel continue? Will companies be able to find the resources they need to meet demand efficiently, amid inflation, rising interest rates, and labor shortages? Will an increasingly uncertain outlook dampen appetite for investments in new capacity and innovative technologies.
Aerospace and defense companies have been through a lot: a pandemic, broken supply chains, inflation, Russia’s war against Ukraine. With their planes grounded in 2020, airlines cancelled orders for new aircraft and cut back orders for spares. M&A activity in the sector plunged by almost 20 percent from 2019 to 2020. Following a brief rebound in 2021 and early 2022, M&A activity declined in the second half of 2022, as rising interest rates and economic uncertainty depressed equity markets and deterred deal-making.
These factors continue to impact the M&A outlook in 2023. Although air travel bounced back in 2022 (albeit not fully in long-haul and business), the commercial aircraft sector has shifted from demand-constrained to supply-constrained. The Russia-Ukraine war and rising global tensions have contributed to high energy prices, high inflation, capacity constraints, and retrenchment policies. These factors, plus a super-tight labor market, have contributed to supply bottlenecks. Heightening geopolitical challenges drove a record Department of Defense appropriation in fiscal 2023, benefiting the defense industry. The final bill exceeded $800 billion, an increase of nearly $70 billion over FY22.
But defense companies also faced supply constraints. In 2023, fears of a severe recession as a result of Federal Reserve rate hikes have faded, but the high cost of capital and inflation risk remain headwinds for the sector and continue to impact M&A activity.
In this paper we look at the trends that are shaping the A&D business today and how they will shape M&A activity in 2023.