It’s empirically disproven---thumped countless times.

There is significant risk, says the study, that commercial-sector suppliers will not be able to keep up with aggressive new manufacturing demands and will be challenged by: capacity constraints of their own (Tier-2 and Tier-3) suppliers that have under-invested in capability development; specialty raw-materials shortages (e.g., carbon fiber and titanium fasteners); and ongoing supply-chain delays and shortages resulting from the disaster in Japan.

"The aerospace supply chain was basically decimated by the economic downturn, as even sold orders were put on hold or otherwise put in a lumpy, stop-and-go mode," said David Wireman, director in AlixPartners' Aerospace and Defense Practice. "From all indications, that supply chain is not at all prepared for steep commercial ramp-up curve that lies ahead, and production constraints are a very real possibility." Defense Sector But while demand on the commercial-aircraft side looks strong, defense, globally, looks to be weakening. According to the study, U.S. defense spending is expected to decrease by at least 12.2% by 2013 and by 6.5% by 2016, while defense spending in Europe, already down 2.8% in 2010, is expected to continue to drop sharply in the coming years, led by the U.K.'s recent announcement of an 8% cut by 2015 and promised drops of up to 25% in smaller European nations.

As a result of these expected widespread cuts, says the study, defense priorities will shift toward extending the life of existing equipment, improving communication networks and investing more in weapons systems targeted at supporting today's more asymmetric warfare. However, says the study, the scale of these new investmentswill not be enough to make up for cutbacks in major-platform investments such as the F-35 fighter aircraft series built jointly by Lockheed Martin Corp., BAE Systems PLC and Northrop Grumman Corp., which has already experienced significant cuts in planned production numbers. In response to these kinds of cutbacks, the larger defense companies will need to pursue a more diverse business mix that will lead to partnerships, M&A and consolidation among smaller players as larger companies pursue new markets, the study says.

In sum, the study shows that both the commercial-aviation and defense industries face critical challenges that they will need to address. Key economi[c] challenges will come from federal budget uncertainties, volatile fuel prices and new entrants into the few growing sectors of the industry. In particular, the recent volatility of oil prices, coupled with continued sluggish economies in the West, has made it hard to predict future industry trends. These factors are leading many aerospace and defense manufacturers, especially lower-tier suppliers, to delay investments,says the study.

"The aerospace and defense industry faces a very challenging next few years," said Fitzpatrick. "The simultaneous need for near flawless execution on the commercial side and belt-tightening on the defense side, plus the need to deal with supply-chain challenges across the board while also seizing M&A opportunities will push management capabilities to the extreme." M&A Outlook Driven by supply-chain pressures in commercial and budget cuts in defense, the pace of mergers and acquisitions in the aerospace industry is expected to rebound in the next few years. In addition, it finds, low valuations today across the industry, with multiples generally below 10 times earnings before depreciation and taxes, have made deals look far more palatable.