The Aerospace & Defense (A&D) sector outlook is improving, as favorable demand dynamics should lead to increasing cash flows and deleveraging capacity beginning in 2023, Fitch Ratings said. It expects generally stable ratings across the sector in 2023 as fundamentals and financial profiles improve, following several positive rating actions and upward Rating Outlook revisions to Stable or Positive.

Fitch Ratings expects new, large commercial aircraft (LCA) deliveries will increase by more than 20 percent versus 2022, leading to higher FCF and financial flexibility for original equipment manufacturers (OEMs). Production rates should remain relatively stable during the first half of 2023 but could increase towards year-end 2023.

Suppliers to OEMs should also benefit from higher production, though there may be a lag between rates increasing and OEMs restocking certain inventory. After-market sales and maintenance, repair and overhaul (MRO) servicing would benefit from its expectation of global air traffic nearing 2019 levels, partially offset by lower maintenance requirements on new aircraft.

The defense sector will also see tailwinds in 2H23 with modest acceleration into 2024 from bolstered government defense spending globally. Although there will be a lag between budgets increasing, orders placed, and contractors benefitting, the industry is well-positioned for long-term growth as the geopolitical backdrop remains tense and defense capabilities are enhanced.

Principal risks to the sector outlook include supply chain stability and financial health of airlines, including the ability to take aircraft deliveries, although this is mitigated by most airlines’ long-term approach to fleet planning. A more severe or prolonged economic downturn could delay the return to 2018 aircraft production levels beyond its 2025 expectation, Fitch Ratings said. While its expectation is for healthy traffic volumes next year, a slowdown in global travel is a risk that bears watching.