As we embark on a new year, our Industry Group leaders reflect on the changes spurred by 2020 — stories of novel products and services, shifting market trends, and new M&A strategies — and consider the implications for 2021. Access more industry perspectives in our related insights tab.
The defense and government services sectors performed well throughout 2020. National security remained well-funded, and the U.S. government took special initiatives, such as accelerating vendor payment schedules, to address the challenges and disruptions brought on by the pandemic. These dynamics had the effect of boosting investor interest in the sector, and the second half of the year saw high levels of M&A activity from both strategic buyers and private equity groups.
In contrast, the impact of COVID-19 on commercial aerospace was unprecedented. Dedicated air freighter activity was one of the few bright spots, driven by growing e-commerce, reductions in airline belly capacity, and anticipation of vaccine distribution. Likewise, business aviation was more resilient than anticipated, a trend which is expected to continue.
Looking forward, air travel will soon be on the rise again. Not dissimilar to what we saw post-9/11, the future passenger experience will likely look a bit different, but the long-term macro trends that drive the sector – globalization, trade, and rising discretionary incomes – remain largely positive. And the changes brought on by the pandemic will create new opportunities. As an example, COVID-19 has accelerated major demographic changes within the global aircraft fleet – as older platforms are retired faster than planned, airlines are prioritizing newer, smaller, and more fuel-efficient models, and route networks are being redesigned. This will have significant implications for OEMs, supply chains, MROs, and service providers. And where there is change and uncertainty, there will be long-term opportunities.
In terms of the U.S. presidential election, we don’t think Biden’s win will dramatically change the outlook for our sectors. Defense priorities remain largely the same, staying focused on the peer threat from China and from near-peers like Russia and others. This will translate into a continued emphasis on naval readiness, missile defense, hypersonics, space superiority, artificial intelligence, and cybersecurity. Cybersecurity, in particular, has become even more top-of-mind for many during this past year due to the number of people working from home. We expect this dynamic to persist as more organizations – both commercial and governmental – extend the use of virtual collaboration and remote work.
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