The sector’s main growth driver remains the necessary replacement of ageing platforms, with up to 90% of future global defence procurement platform-related. This is increasingly spurring long-term growth for support aircraft (tankers and transport), mission aircraft including Unmanned Aerial Vehicles (UAVs), helicopters, combat ships and light armoured vehicles (incorporating complex electronic mission equipment). At the same time, as forces undergo transformation they are demanding new capability-based interoperable solutions for joint missions. The changing nature of threats, in particular from rogue states and terrorists, is also creating demand for specific types of military and security equipment.

An expanding proportion of procurement will be acquired through new methods. Globally, governments are increasingly interested in buying services from the private sector. To fulfill these requirements, defence contractors have to offer not only high-performance services, but also innovative contract schemes.

Buying integrated systems is another procurement trend. Certain customers want the industry to deliver complete interoperable systems with command and control decisions based on a common operational picture. Only large defence and security contractors have the range of capabilities to act as prime contractors for such complex integrated systems.

Defence procurement in the US (US$147 billion in 2005) and Europe (€55 billion in 2005) will continue to grow at ~1% per year over the long run. In emerging Asia, budgets are rapidly increasing. EADS estimates that spending was close to US$100 billion in 2005, and will grow more than 2% per year over the long run. However, the larger part of Asian budgets is only accessible for local players. Middle Eastern equipment imports remain stable at a high level.

Global security offers a new opportunity for most defence contractors, as governments increasingly prioritise building national security infrastructures following 9/11. EADS estimates the size of this market was more than €35 billion in 2005, and will expand at a rate of more than 10% per year outside the United States.

Helicopters is one of the fastest-growing defence sectors. Demand from Europe and the United States for transport and attack helicopters is fuelling this in the short term, but Asia will provide the most significant growth in the medium term. Out of total estimated sales of 7,200 military helicopters until year 2020, a clear majority will be sold outside the US market. Additionally, security forces, such as border patrols and the police, need increasing numbers of helicopters. Commercial helicopters will tend to be adapted for these specific security needs.

In combat aircraft, there is a need to replace ageing fleets (40% of the 7,000-strong world fleet is more than 25 years old). The future is dominated by major programmes under development coming into production. Europe’s Gripen, Rafale and Eurofighter aircraft have all entered production, while the new US F35 is still in development. Russian alternatives are successful in markets with lower requirements. While these replacement needs are likely to materialise before Unmanned Combat Aerial Vehicles (UCAVs) are fully introduced, the first UAV programmes are already being developed for surveillance and reconnaissance.

Airbus and Boeing are both addressing the worldwide need to replace refuelling aircraft. Meanwhile, the candidates to replace large and medium transport aircraft are the very large C−17 from Boeing, the C−130 from Lockheed Martin and EADS’ new challenger, the A400M. In the smaller transport aircraft segment, Finmeccanica and EADS are the global competitors.

In the missile sector, the greatest growth is expected from Asia-Pacific, although the Middle East will continue to be a major destination for US and European export campaigns. A significant factor in winning such opportunities is co-operation with platform providers for air and naval solutions. The United States accounts for half of the world market, while Europe and the rest of the world each share one quarter.

Industry consolidation is likely to continue, as defence companies look for opportunities to build and infill their portfolios as well as to buy into new regional markets. In 2005, BAE Systems acquired United Defence Industries, the US land systems company, while EADS and ThyssenKrupp Technologies jointly acquired Atlas Elektronik, the German naval electronics company.

Commentators in the investment community have noted these healthy long-term growth trends for contractors with the appropriate mix of equipment and services. At the time of publishing an extensive research study in September 2005, Goldman Sachs Group, Inc. raised its view of Europe’s aerospace and defence industry from neutral to attractive.