Overview

Total market size = (total local production + imports) – exports

Aerospace & Defense Market in USD millions (The security market is not reflected in the table but in the written paragraph below.)

U.S. aerospace and defense manufacturers produce the highest trade surplus, year after year, of all manufacturing sectors.  According to TradeStats Express, a U.S. Department of Commerce-furnished database showing the latest global patterns of U.S. merchandise trade, the 2022 U.S. aerospace exports to Germany amounted to USD 8.35 billion.  The trade surplus was USD 5.93 billion, representing an 8.4 percent decrease from 2021 (USD 6.47 billion).  These figures are in stark contrast to the European Union’s statistics stating U.S. aerospace imports worth USD 2.67 billion.  This is due to a different approach in calculating the sale of sub-systems and components.  Aerospace and defense is complemented by safety and security, an industry spanning across 15 vertical markets with a projected global turnover of USD 129.4 billion in 2023 (according to San Francisco-based Grand View Research, Inc.). Both industries are faring rather well against the backdrop of the multiple crises of war, stagflation, refugee and migration influx, and high energy costs faced by Germany and the European Union (EU).  Building on a strong performance in 2021, some of the German safety and security companies had their best year in 2022.  In the aerospace segment, the rebound after the coronavirus pandemic finally took shape. Perhaps no other industry has been harder hit overall than aviation, particularly the airline industry.  In April 2023, German air traffic was down by 24.6 percent compared to April 2019 and up 17.5 percent compared to April 2022. The increase between April 2021 and April 2022 was 499.1 percent.  Domestic air traffic was down 53.3 percent from 2019 and up 11.5 percent from 2022 (April 2021-22: +372.7 percent); European traffic was down 18.6 percent from 2019 and up 14.2 percent from 2022 (April 2021-22: +555.3 percent); intercontinental traffic was down 16.2 percent from 2019 and up 35.9 percent from 2022 (April 2021-22: +423.7 percent).  Due to the long order cycles and a significant backlog in aircraft production, aerospace manufacturing suffered less than aviation.

Let’s take a look at the development on the manufacturing side over the last three years.  In April 2021, the German Aerospace Industries Association (BDLI) reported that revenues declined by 24.4 percent, from EUR 41 billion (USD 45,900 billion) in 2019 to EUR 31 billion (USD 35.4 billion) in 2020.  In the first half of 2021, we saw a promising take off and expected a year-on-year growth of approximately 15 percent.  It’s noteworthy, however, that some 8,200 aerospace manufacturing jobs were lost until April 2021 as a consequence of COVID-19. In the second half of 2021, the industry was able to initiate a trend reversal and even started to hire again. However, the impact of the coronavirus pandemic persisted.  In July 2022, BDLI reported that the “aerospace industry in Germany again suffered the consequences of the coronavirus crisis in 2021.  With sales of EUR 31.4 billion (USD 37.1 billion) in the past year, the industry remained at the previous year’s low level.”  In May 2023, the association announced that the German aerospace industry is on the road to recovery, with sales of EUR 39 billion (USD 41.1 billion) in 2022, representing a growth of 14.4 percent over the previous year.  BDLI added that “this positive development is only partly attributable to increased deliveries of the Airbus aircraft family. The effect of an approximately 12 percent more favorable USD/EUR exchange rate was also significant.”  Stipulated by the climate targets put forward by the German government, BDLI puts a strong focus on the environmental impact of civil aviation, stressing that the current conditions create a unique opportunity to advance climate-neutral flying.  U.S. manufacturers should be well-positioned to benefit from the trend towards more sustainable aviation and gradual market growth in Western Europe, especially Germany.

A good way of getting market exposure in Germany—and beyond—is through trade show participation.  Trade shows are significant for making first inroads into any market and Germany has plenty of them.  It hosts the world’s third-largest trade show for aerospace and defense (ILA Berlin), the world’s largest trade show for aircraft cabin interiors (Aircraft Interiors Expo), and Europe’s largest trade show for general aviation (AERO).  The major safety and security shows that are relevant for the German market are held in Essen (Security Essen) and Düsseldorf (A+A), but also in London (DSEI) and Paris (Milipol).  All of the above-mentioned events are ideal platforms for U.S. companies to meet with potential buyers and partners, either virtually or in person.

Leading Sub-Sectors

Aerospace and Defense Market

Germany has the third-largest aerospace and defense market in Europe, with 2022 revenues at EUR 39 billion or USD 41.1 billion, following the UK at GBP 82 billion or USD 101.4 billion (including land defense systems) and France at EUR 62.7 billion or USD 66 billion.  Some three quarters or USD 30 billion of the German production are exported.  France received an eighth of the exports with USD 3.7 billion.  To a large degree, these exports are attributable to Airbus intra-company trade as part of their geographically dispersed production model with several major sites in Germany and France.  Regarding the overall development, BDLI president Dr. Schöllhorn pointed out that “aerospace is among the few industries in which Germany and Europe currently are world leaders and primed for the future.  We intend to further strengthen this innovative capacity with the help of technological quantum leaps such as the planned ZEROe aircraft and the Future Combat Air System (FCAS), but also the European Service Module (ESM) as a core element of the Artemis mission, which is taking mankind to the moon again after many years—this time to stay.”  The 2022 revenues were distributed as follows: civil aviation, EUR 28 billion or USD 29.5 billion vs. EUR 22 billion in 2021; military aviation, EUR 8.4 billion or USD 8.8 billion vs. EUR 7 billion in 2021; space systems, EUR 2.6 billion or USD 2.7 billion vs. EUR 2.4 billion in 2021.

Security Market

Let’s take a look at the security market.  According to the Federal Association of the German Security Industry (BDSW) in Bad Homburg and the Federal Association for Security Technology (BHE) in Brücken, the German safety and security market amounted to EUR 17.8 billion or USD 18.8 billion in 2022, for the first time exceeding the EUR 17.2 billion reported for 2017. The latter figure was published at the “Security Essen” trade show in August 2018.  The five-year rebound seems rather significant considering the strong revenue development in some of the sub-markets since the onset of the coronavirus pandemic in early 2020.  It is safe to assume that the industry saw modest but steady growth until then, mostly due to ongoing upgrades of the German internal security and migration enforcement infrastructure and an increased need for security services. Last year, the security services market made up more than half of the overall market and grew by 7.8 percent to EUR 11.1 billion or USD 11.7 billion from EUR 10.3 or USD 12.2 billion in 2021.

Policy Objectives and Challenges

Let’s also take a look at the strategic considerations of the German government.  Aerospace stands out in this aspect.  The Federal Ministry of Economic Affairs and Climate Action (BMWK) lists aerospace as a key industry with high growth rates and a strong industrial core in Germany. The revised and updated “2020 Technology Strategy of the German Aerospace Industry” builds on BMWK’s earlier “Aerospace Strategy”, underlining the particular importance of the aerospace sector for Germany as an industrial country both technologically and economically. It was adopted by Germany’s new three-party coalition government of the Social Democrats, the Greens, and the Free Democrats in December 2021.  Besides aiming at increased competitiveness, the aerospace sector promises to make significant contributions to overarching societal goals, mainly with regards to the aspirational target of achieving climate neutrality by 2050, developing sustainable aviation fuels (SAFs), reducing the noise footprint, and improving the environmental record of aircraft. Moreover, the BMWK has updated the Aerospace Research Program (LuFo) - a grant program for aerospace research and technology projects—and issued another call for applications in April 2022. LuFo is currently in its sixth phase which ends next year (LuFo VI, 2020-2024).  In the future, there will be an even bigger emphasis on climate-neutral aviation.

This is laid out in a joint paper on “Climate-neutral Aviation” that was published by German government in June 2022, stating that Germany “aims to be CO2-neutral by 2045” and defining that the “aerospace industry must contribute to reducing CO2 emissions and to enabling climate-neutral flying.” Federal Minister for Economic Affairs Robert Habeck commented: “We must set the course for climate neutrality in aviation now.  Development cycles in aviation are long.  That’s why we must switch gear now.  We are therefore deliberately accelerating the ramp-up of sustainable aviation fuels and directing the aviation research program more strongly towards the target of climate-neutral flying.  Overall, it is clear that climate-neutral aviation is a difficult task, and we can only make progress together.”  It remains to be seen to what extent these goals can be achieved or reconciled with the economic and technological realities of commercial aviation.

With regards to airline subsidies, it’s noteworthy that German flag carrier Lufthansa fully paid back the EUR 9 billion (USD 10.3 billion) in loans and silent participations it received in June 2020 through the German government’s Economic Stabilization Fund (ESF).  In September 2021, the German government informed Lufthansa that ESF’s remaining interest in the company had been sold.  In November 2021, ESF’s Silent Participation II of EUR 1.0 billion was repaid and the undrawn remaining part of Silent Participation I of EUR 3 billion was terminated.  Similar measures were taken in France (Air France, KLM), Ireland, Spain, and the UK (IAG: Aer Lingus, British Airways, Iberia, Level, Vueling).  These measures mainly helped to stabilize the European air transport industry.  While European aviation has been especially hard hit by the coronavirus pandemic in 2020 and 2021, it is demonstrating impressive resilience since 2022. According to CAPA, “the continent’s capacity recovery has more or less absorbed both the Omicron variant and the war in Ukraine.”  So far, the impact on aviation could be contained because the wide majority of European economies are not significantly exposed to Russia and Ukraine.  IATA reported in March 2022, that the closure of Ukrainian airspace has put a halt to the “movements by air of roughly 3.3 percent of total air passenger traffic in Europe, and to 0.8 percent of total traffic globally, as per 2021.”  In December 2022, IATA elaborated in its “Global Outlook for Air Transport” that despite the strong headwinds “2022 testified to the resilience of the air transport industry.  After the largest shock in aviation’s history, recovery is well underway. Traffic is forecasted to grow at a record rate in 2022 and will continue to grow at a slower pace in 2023 and beyond.”

As mentioned above, aerospace manufacturing is less affected by health and humanitarian crises than aviation and continues to adapt to the compounded challenges quite well, but ultimately it relies on the return of global air transport industry to stable levels.  In May 2023, Lufthansa reported strong bookings for the first quarter of 2023 and predicted another travel boom in the summer. Group revenue increased by 40 percent to EUR 7 billion or USD 7.6 billion.  The number of passengers increased significantly to 22 million. The average yield was 19 percent above the 2019 level.  Lufthansa’s Q2 result is expected to exceed the 2019 level.  The outlook for the full year was confirmed.  For the full year, Lufthansa expects an average passenger airline capacity of 85 to 90 percent compared to 2019.  Lufthansa’s CEO Carsten Spohr commented that “Lufthansa Group is well positioned to further strengthen its position among the top five airline groups in global competition.”

Best prospects for U.S. aerospace and defense manufacturers with interest in the German market exist in the following segments: commercial aircraft, business jets, turboprops, helicopters, UAVs, structures, propulsion systems, subsystems for aerospace vehicles; military aircraft, air defense systems; spacecraft, launch systems, communications systems; access control, identity management, integrated systems, security services.  The main vertical markets for safety and security are airport security, smart borders, telecommunications and critical infrastructure, and police modernization.

U.S. companies should be aware of the EAR and ITAR regulatory provisions and the respective provisions on the European side, both on the EU and on the national level.  The U.S. Commercial Service closely monitors any regulatory changes and supports U.S. companies by conducting frequent and active outreach to the relevant authorities in Germany, such as the Federal Office of Bundeswehr Equipment, Information Technology and In-Service Support (BAAINBw) in Koblenz, Rhineland-Palatinate. We also follow the latest aerospace, defense and security-related policy developments and discussions in Germany. On an international level, we gain insights from organizations like the Aerospace, Security and Defence Industries Association of Europe (ASD), the Aerospace Industries Association (AIA), and Homeland Security Research (HSR) to understand their positions on transatlantic trade issues and communicate U.S. objectives.

In a number of tenders before 2022, the Bundeswehr and several state police forces imposed non-ITAR/EAR/PESCO clauses on prospective bidders, asking them to attest that their products do not fall under the respective regimes.  This excluded many U.S.-designed and U.S.-made defense goods but hasn’t happened lately.

Another factor that has an impact on domestic and foreign firms in almost every sector is Germany’s delayed economic recovery.  The German economy stagnated in the second quarter of 2023 due to a cocktail of weak purchasing power, high energy costs, rising ECB interest rates, low order books, and a lagging rebound of the key trading partner China.  The Federal Statistical Office reported flat economic output from April to June, following a decline of 0.1 percent from January to March and 0.4 percent in the last three months of 2022.  A detailed analysis of the underlying reasons would exceed the scope of this report. Fundamental adjustments to Germany’s basic economic model are required to put the economy back on track.

Opportunities

Opportunities include medium transport helicopters for the German Federal Police (currently there is only one bidder, Airbus Helicopters offering the H225); attack helicopters for the German Air Force; ISR pods for Eurofighter/Typhoons;  future maritime mine countermeasures for the German Navy; the Tactical Edge Networking (TEN) / Digitization of Land-based Operations (D-LBO) radio program for the German MOD;  Explosives Trace Detectors (ETDs) for the German Federal Police (BPOL).  The biggest opportunity is the EUR 100 billion (USD 111 billion) Bundeswehr special fund, announced by Chancellor Scholz in February 22 and approved by the German parliament in June 2022.

The announcement was triggered by Russia’s invasion of Ukraine, which led Germany to reassess the state of its armed forces.  It comes on top of record defense budgets of EUR 50.4 billion (USD 55.9 billion) in 2022 and EUR 50.1 billion (USD 54.3 billion) in 2023, and will be spent until 2026, bringing Germany closer to NATO’s 2 percent GDP spending target.  The lion’s share is designated for air force procurements, summarized under the term “Dimension Air”, with approximately EUR 33.4 billion (USD 36.2 billion) slated for the procurement of H-47 Chinook heavy transport helicopters, jointly offered by Boeing and Airbus Helicopters, and F-35 Lightning II fighter jets offered by Lockheed Martin.  The F-35s will allow Germany to continue in the NATO nuclear deterrence mission without a gap when the Tornados reach the end of their service life in 2030.  They are already in service with the UK, the Netherlands, Italy, and others, and thus provide unique potential for cooperation with NATO allies.  The German MOD plans to develop a Eurofighter variant to fulfill the electronic warfare role. The Future Combat Air System (FCAS), jointly developed by France, Germany and Spain, will replace the Eurofighter from 2040.  The second-largest position, some EUR 20.7 billion (USD 22.4 billion) are earmarked for investments in the “Dimension Command Capability and Digitalization”; followed by EUR 16.6 billion (USD 18 billion) for land defense systems or “Dimension Land”, e.g., the Puma infantry fighting vehicle (IFV); followed by EUR 8.8 billion (USD 9.5 billion) for naval systems or “Dimension Sea”, e.g., K130 corvettes, F126 frigates, and HDW Class 212CD submarines.

Despite the seemingly large amount, it is already being debated if EUR 100 billion will suffice to upgrade the German armed forces or if additional funding is needed to ensure long-term readiness and fulfill assigned missions and tasks.  In April 2022, Munich-based ifo researcher Florian Dorn argued that “this one-time special fund will by no means be sufficient to completely make up for the funding shortfall of recent years, to eliminate all deficiencies in the short term, and to sustainably reorganize the Bundeswehr.  In addition, more efficient structures would have to be put in place for using those funds.”  Before the 2023 NATO Summit in Vilnius, Lithuania, he added that only little more than half of the special fund can be used for buying new equipment, while 33 percent compensate for savings in the core defense budget, and 8 percent are spent on interest.  This assessment may seem exaggerated, but it is accurate.  After deducting inflation, the German defense budget has decreased in 2022 and it will do so again in 2023.  Without raising defense spending to adequate levels—between EUR 60 and 70 billion annually—Germany risks putting the 2 percent target in jeopardy. Initially, the special fund received scrutiny from members of the Social Democratic Party (SPD), who argued that some of the money should be used on civil projects, reviving the idea of a “peace dividend”.  In light of the ongoing war in Ukraine, such criticism has subsided quickly, but it may resume in the future.

Resources

Trade 

Trade Events

• Aviation Forum – general aviation industry, Munich, December 5-6, 2022
• Security Essen – security industry, Essen, September 20-23, 2022
• AERO – general aviation, Friedrichshafen, April 19-22, 2023
• Aircraft Interiors Expo – airline interior cabins, Hamburg, June 6-8, 2023
• DSEI – defense and security, London, September 12-15, 2023
• inter airport Europe – airport equipment, technology, design and services, Munich, October 10-13, 2023
• A+A – safety and security solutions, Düsseldorf, October 24-27, 2023
• ILA Berlin, – aerospace, Berlin, June 2024 (exact dates will be announced in Q3 2022)

Other Web Resources

German Aerospace Industries Association (BDLI)

German Airport Technology & Equipment (GATE Alliance)

HANSE-AEROSPACE e.V. (Largest independent association of aerospace suppliers and service providers in Germany)

ALROUND (Association of aerospace-oriented SMEs in Germany); http://www.asdsource.com/source_detail/8304/alround_ev,_association_of_aerospace_oriented_sme_in_germany.htm

German Helicopter Association (DHV) at http://www.dhv-org.de/

Federal Association of the Security Industry (BDSW)