Industry Reports: Automotive, Medical and Aerospace
Chief Economist for Gardner Business Intelligence gives a rundown of status of the automotive, medical and aerospace markets.
The close of 2018 saw the automotive industry extend the strong sales +17 million unit sales volume level reported in past years. Unit sales continue to show a growing preference for SUVs and light-trucks over cars. This trend is not new as unit car sales, which peaked in June of 2014, have experienced an average 7.5 percent rate of annualized contraction in the 17-quarters since then. Truck and SUV sales continue to offset the weakness in car sales which has kept total vehicle sales since mid-2015 at a monthly average of 1.4 million vehicles, or 17.3 million units on an annual basis.
During late 2017 significant flooding in the Southeast U.S. drove a surge of new vehicle purchases leading many to question whether the fourth-quarter sales figures would fall in the following months. Not only did the rate of light-truck and SUV sales not decline in the aftermath but grew 4.4 percent in the 12-month period ending September 2018. Despite the continuing decline in car sales in 2018, preliminary data indicate that 2018 sales volumes were up slightly along with average sales price.
Vehicle financing plays a critical role in this market. Recent years of historically low interest rates and lengthening financing terms -allowing for smaller monthly payments- supported by an improving jobs market have all significantly helped the industry. Between 2009 and 2015 the market experienced a rebound that saw total vehicle sales exceed pre-crisis peak sales rates during late-2015. While unit sales volumes were reaching new highs in 2015, the average vehicle loan balance also began to grow at an accelerating pace. By mid-2018 the average amount financed for a new vehicle stood at $30,262. Adjusting for inflation consumers spent nearly 9 percent more on a new vehicle in mid-2018 than they did in mid-2012; however, most of this increase occurred after reaching the 2015 sales volume peak.
The increased spending on vehicles has been helped since 2014 by lower oil prices which have sent fuel prices lower. . During this time, the national average price for regular conventional retail gasoline fell from $3.60 per gallon to $2.00. According to the Energy Information Administration’s Short-term Energy Outlook, West Texas Intermediate “WTI” oil, prices are projected to remain at their present level of around $70 per barrel, leaving fuel prices through 2019 relatively unchanged all other things remaining constant.
Lastly, technology continues to have a significant and critical impact on manufacturing supply chains in ways that may significantly benefit manufacturers while also giving some pause. The creation and increasing diversity of new engine and drivetrain types has and will continue to create a need for more expansive supply chains and supply networks. At the same time, providing an abundance of such new technological options reduces the total volume which will be demanded for any single product, leaving fewer units of production to cover the fixed-costs of development and production. This in part explains the rising cost of automotive manufacturing which has steadily accelerated since the beginning of 2017. Making the matter more challenging will be the estimated number of new North American launches being released in 2019 (40) and 2020 (38). This will further dilute the ability of firms to cover the high fixed-costs associated with the development and production of each new model.
The result of all these factors in the coming year will put an emphasis on cost controls for manufacturers. Regulatory changes, consumer changes, greater competition among brands and their growing array of models will require supply chains to find ways to further cut costs in order to find profitability without the benefit of higher volumes. For many manufacturers, this may mean that keeping a technological manufacturing advantage over their competition may be one of the best ways to stay competitive and profitable.
An analysis of quarterly data between 4Q2014 and 2Q2018 indicates a statistically significant relationship between revenue change during a given quarter and a subsequent change in capital expenditure change two quarters later. From this simple linear regression analysis -which considers no other factors- and assuming an accurate forecast of revenues based on a composite Wall Street forecast, this model would predict total capital spending growth of 11.3 percent during calendar year 2018 followed by slowing growth of 6.6 percent in 2019.
The aerospace market is and will continue to be a bulwark of the manufacturing space over the coming years with annual growth in the aircraft market from 2018 through 2022 expected to be 5.8 percent. The largest growing segments -in dollars- will include commercial air transportation followed by business jets and military aircraft. Companies which support multiple sub-segments have grown the fastest led by Lockheed Martin, Embraer and Bombardier.
The demand side fundamentals of the market continue to be strong with significant growth in both international passenger and freight demand. The International Air Transport Association (IATA) in October estimated that passenger volumes could double over the next two decades thanks to growing demand from Asian countries including China, India and Indonesia. Concurrently, several of the largest present-day European consumers of air passenger services, including the UK, Spain and Germany, will see their shares fall. The IATA assessment aligns with other industry experts who believe that total air transport production will exceed $150 billion by 2022 as narrow-body and regional jet production supports the majority of expected growth.
Beyond the many long-run positive factors that will expand the demand for air transportation services in the coming years, IATA’s near-term model for passenger growth in a contracting globalization scenario would cut air traveler growth by nearly 30 percent from 8.2 billion to approximately 5.7 billion. The Association’s October survey of airline CEO’s indicates that 60 percent and 52 percent of them expect higher passenger and freight demand respectively over the next 12 months. While these results are good, they are lower than survey results from the prior two quarters. This may suggest that near-term growth may experience headwinds. The report indicated that a significant cause for concern involves the growing trade tensions between the U.S and China.
Outside of commercial markets, the demand for military aerospace products cannot be understated. Military demand is often driven by programs, which in the near future will be robust. The U.S. Air Force’s requested budget for 2019 at $156.3 billion represents a 6.6 percent increase over the prior year. Specific aircraft programs recognized in the latest budget include the procurement of new fighter jets and aerial refueling tankers.
The combined outlook for the industry generally points to long-term growth based on solid fundamentals. Growing global demand for air-transportation services combined with muted expectations of oil price volatility as previously discussed should provide many carriers with the confidence necessary to grow their businesses in the coming years.
 “IATA Forecast Predicts 8.2 billion Air Travelers in 2037” https://www.iata.org/pressroom/pr/Pages/2018-10-24-02.aspx
 According to projections from AeroDynamic Analysis
 AIR FORCE PRESIDENT'S BUDGET FY19 https://www.saffm.hq.af.mil/FM-Resources/Budget/ see sections “FY19 Air Force Procurement Vol I FY19” and “Air Force Procurement Vol II FY 19”.
 All quarterly results are calculated based on the trailing twelve-months. Comparisons between two quarters one year apart represents a 12/12 rate of change.
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