In the past year, the aerospace and defense industry globally saw record deliveries, growth, and profitability. The commercial aerospace industry profit pool continued the rebound started in 2016, hitting a record high of $42.9 billion, up 6% over 2017.

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Not all actors in the value chain got the same slice of the pie, however. Recent trends clearly identify who got the biggest pieces.

Aircraft manufacturers made out best

Aircraft original equipment manufacturers (OEMs) are clearly among the winners. In 2018 they got one third of the total profit pool, their first time with the biggest slice. The main driver of their success is increase in deliveries, with many record years in a row, but also cost reduction initiatives (Airbus' SCOPe+ and Boeing's Partnering for Success, for example) are paying off, combined with insourcing, vertical integration, and growth in the highly profitable aftermarket business.

The new paradigm of upgrading existing aircraft models with new engines (such as the A320neo and 737 MAX) after two decades of clean-sheet aircraft developments (Boeing 787 and Airbus A380 and A350), proved to be very beneficial to aircraft OEMs' financials, as they could reduce development costs and focus on cost optimization.

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Engine makers fell back, while lessors surged

Engine OEMs historically had a profit pool share close to that of aircraft OEMs, but in the recent years they lost ground, with their 2018 share limited to 16% of the total. The drivers here are a mix of negative performance for some top players (Rolls Royce, for example, with adjustments to long-term service agreements accounting) and ramp-up and extra costs for the new fuel-efficient engines for narrowbody aircraft.

Lessors, by contrast, increased their profit pool share up to 30% in 2018. Their earning before tax (EBT)—but after interest payments as they represent lessors' operating costs—almost doubled in percentage terms compared to 2013, boosted by a 36% fleet increase in the same period. Their business model proved strongly profitable despite the level of competition, with seven players above $1 billion in annual revenues. However, compared to other actors in the value chain, their business model is the most capital-intensive.

Tier-one equipment suppliers managed to maintain their share in the profit pool at 9%, after being forced to step up the fight to protect their margins against OEMs (especially on aftersales business) and to keep control of core systems. This segment has been the catalyst for several megadeals of the past years: UTC's acquisition of Rockwell Collins for $30 billion in 2018, after the latter's deal with B/E Aerospace in 2017 (and UTC's recently announced merger with Raytheon) and Safran's acquisition of Zodiac Aerospace for $7.7 billion in 2018 (equipment and cabin business).

Meanwhile, cabin suppliers are among the players struggling the most: industrial issues with new products and production ramp-up drove overall segment profitability down close to zero, and therefore garnering them a marginal share of the profit pool.

The maintenance, repair, and overhaul (MRO) segment's profitability remained stable in the last 10 years at 8% to 9%, similar to their share of the industry profit pool. The MRO segment has been a land of conquest for aircraft OEMs and other investors, which have been attracted by strong fundamentals linked to forecasted fleet growth. As an example, Boeing recently completed the acquisition of KLX for $4.3 billion, and The Carlyle Group recently completed the acquisition of StandardAero.

2019 will look very different

The way the 2019 profit pool shakes out will likely be very different, however. After many record years, the crisis with Boeing's 737 MAX will have a significant effect on the overall profit pool. We expect Boeing to narrowly reach a positive EBIT if at all, due to fix development and (re)certification costs for the troubled craft, along with provisions for compensation requests from victims' families and airlines, and fines following investigations.

The very high level of uncertainty around the return of the 737 MAX into service deeply complicates any attempt to forecast overall 2019 profit pool for commercial aerospace. Our analysis suggests a value in the range of $25 billion to $30 billion, representing a drop of one third over 2018—the largest the industry has experienced in more than two decades. In addition to virtually zeroing Boeing's margin, we expect a double-digit impact on the profitability of several other market segments as ripple effects spread through the supply chain due to interrupted production rates and flight hours.

How long the expected slowdown for 2019 continues is similarly difficult to forecast. It could turn around relatively quickly if Boeing's struggles with the 737 MAX resolve in the coming months. Or, if the manufacturer isn't able to restore trust and is forced to launch a clean-sheet narrowbody, the current conditions could become the new normal for several years to come.