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May 2011

Growth Prospects in Commercial Avionics Markets

By Diogenis Papiomytis, Principal Consultant - Aerospace, Defence & Security


Commercial Avionics markets are beginning to bounce back from a prolonged economic crisis that
saw airlines, the ultimate end-users, consolidate their operations and restructure their business.
Aircraft deliveries are now on the up, with both Airbus and Boeing seemingly optimistic about the
next couple of years. New aircraft programmes, from the long anticipated B787 to the Chinese
C919, are gaining momentum and expected to have an overwhelming impact in air transport. Parked
aircraft are also returning from a period of inactivity and are in need of reconditioning, positively
affecting avionics retrofit markets. Finally, initiatives in Western Europe and North America with the
implementation of requirement-driven programmes such as RNP approaches and ADS-B, are going
to push avionics spending further; irrespective of whether funding is provided by Governments or
the end-users.

In light of all of these drivers, we should expect a substantial increase in avionics spending for years
to come. However, with the economy still at a fragile state, with oil prices pushing through the
$110/barrel barrier and airlines announcing further capacity cuts to cope with fuel prices and new
aviation taxes, there is great uncertainty among industry stakeholders. At Frost & Sullivan we
expect drivers and restraints to balance out in the short-term, with modest growth rates for the
avionics industry as a whole; underlying growth will be uneven across market segments.
Growth Prospects in Commercial Avionics Markets

Market Drivers: Market Restraints:

- Evidence of economic recovery - Unstable economic environment

- Ageing aircraft (for retrofit) - Mandatory upgrades impact on


other avionics modernisation
- Evolution of “Glass Cockpits” programmes

- Requirement-driven navigation - Gradual implementation of new


programmes navigation programmes

- New generation aircraft


Market Insight

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Average growth is forecasted at 5.2%, with most spending taking place in the period 2014-2020, as
the B787 reaches full production levels and the A350 and C919 are being introduced. A depressed
retrofit market will outperform new sales and parts & services, owing its growth to major retrofit
programmes in Europe and the US.

Figure 1: Global Commercial Avionics Forecast (2009-2020)

12, 000

10, 000

8, 000

6, 000
Growth Prospects in Commercial Avionics Markets

4, 000

2, 000

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Forward Fit Parts & Service Retro Fit


Source: Frost & Sullivan

Communication: A Fragmented Yet Attractive Market

A key focus for incumbents is the interoperability and integration of communication systems and
components. New developments, with improvements across air traffic control ground stations,
include Eurocontrol’s implementation of Controller-Pilot Data-Link Communications (CPDLC)
and ADS-B. An increasing number of airlines are signing up to these programmes, in the promise
of substantial efficiencies from better airspace utilisation. Satellite communications, both for
passenger and cockpit operations, are expected to drive spending in the medium- to long-term.
Increased spending, relatively low barriers to entry and a lack of market concentration will attract
new players and eventually lead to market consolidation. Frost & Sullivan expects substantial M&A
Market Insight

activity in this market segment, during the forecast period.

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Navigation: In Need of Modernisation

Navigation is the most competitive segment in Avionics, with a heavy concentration of large
suppliers racing to bring the newest technologies in the market. There is a recognised need for
modernisation, both on the ground and in the air. The eventual decommissioning of outdated
ground navaids (long-term) and increasing reliance on Global Navigation Satellite Systems
(medium-term) will drive the retrofit market going forward. In addition, universal adoption of
Flight Management Systems (FMS) in business aviation, GPS and Multi-Mode Receivers (MMR) drive
spending in the short-term. The increasing sophistication of existing components (e.g. Antennae)
equally contributes towards higher spending levels. Incumbents are better positioned to serve
market needs, while further consolidation is expected; niche technology suppliers will be absorbed
by cash-rich organisations, such as Honeywell, Thales and Rockwell Collins.

Surveillance: High Potential

For every dollar spent on avionics, over the period 2010-2020, surveillance will account for half of
that; this is the potential attributed to this segment and recognised by suppliers in the industry.
Growth Prospects in Commercial Avionics Markets

With the replacement of “steam gauge” equipment, global adoption of “glass cockpits” and
introduction of military efficiencies (i.e. Heads-Up Displays), surveillance is driving both the
forward and retrofit avionics markets. Operator requirements for commonality across supplier
systems will push suppliers to create global industry standards, particularly in regards to central
display controllers. As with all other segments, standardisation will come through the co-operation
of end-users and suppliers, rather than regulatory authorities.

Integrated Avionics: The “Plug-and-Play” Environment

Federated architectures, whereby individual components were integrated but not designed to
work together, are becoming the exception in new aircraft that feature open architectures.
Integrated Modular Avionics (IMA) are being adopted widely, as operators and aircraft integrators
require avionics suppliers to use standard architectures and data formats on new designs . Both
federated and IMA systems offer significant opportunities for software upgrades. As a result, Frost
& Sullivan expects all major OEMs to further develop their capabilities in the aftermarket, in
particularly software.
Market Insight

© 2011 Frost & Sullivan Page 4


Figure 2: Evolution of Avionics Segments
Growth Prospects in Commercial Avionics Markets

Source: Frost & Sullivan

Competitive Overview

The Big Three global avionics suppliers (Honeywell, Rockwell Collins, Thales) are still the industry’s
dominant forces, though their leadership will be challenged by a number of companies emerging
from niche segments (e.g. Esterline), Business Avionics (e.g. Garmin) and Military Avionics (e.g.
Elbit Systems).

Honeywell is still the market leader in air transport, due to its presence in the B737/B777 platforms
and preferred supplier status with Embraer. Their position is at risk, pending Boeing’s decision over
the future of the B737 (re-engine vs. New airframe) and the overall success of that platform. In
business aviation, the Bendix King series is still the most recognised avionics brand, though it is
losing share to Garmin.

Rockwell Collins is the OEM of choice in over 60% of business jets and 40% of business turboprops,
while it maintains a strong presence in Airbus/Boeing BFE markets and is the preferred supplier
for Bombardier. The company has made substantial gains in market share over the last few years
Market Insight

and is expected to further reinforce its position on the back of strong business aviation growth.

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Thales, as the main avionics integrator for Airbus, has seen its market share increase, in tandem
with the success of the aircraft integrator. It is also the preferred supplier for ATR, through its
strong relationship with EADS. We expect their presence in air transport avionics to grow further,
especially following the introduction of the A350 and A320neo.

Garmin dominates the General Aviation market, with over 60% market share for all new deliveries.
Nonetheless, the company is well positioned to grow further, following the introduction of the
G5000 avionics suite specifically for business aircraft. We expect them to make inroads in the
medium and large business jet market within the next decade.

Figure 3: Global Avionics Competitive Landscape


Growth Prospects in Commercial Avionics Markets

Source: Frost & Sullivan


Market Insight

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Conclusion

The Global Commercial Avionics market has, without doubt, been negatively affected by the air
transport industry downturn. Uncertainties over the future, especially concerning fuel prices
and new aviation taxes, may also impact much needed modernisation programmes for airlines
and commercial operators. Yet the market is also entering a new development phase, as
regulatory authorities in the US and Europe strive to create efficiencies in the skies and on the
ground. The full implementation of SESAR and NextGen programmes and the availability of state
funding for operators will drive avionics spending in the medium- to long-term. Yet the lack of
global standards and the prioritisation of implementation, over harmonisation, pose significant
challenges for operators and may restrict market growth. Frost & Sullivan expects
harmonisation to come as a result of OEM-Operator partnerships, rather than through
regulatory authorities. In the meantime, market consolidation will put pressure on smaller
market participants to either partner for market share or further evolve in their niche
segments. M&A activity will intensify, with the Big Three using their cash positions to acquire
new technologies and innovative products.

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Growth Prospects in Commercial Avionics Markets

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