Aerospace and defense is one of the most government-dependent and geopolitically sensitive industries in the world. The largest defense companies — Lockheed Martin, RTX, Northrop Grumman, General Dynamics — derive the majority of their revenue from US Department of Defense contracts, supplemented by foreign military sales and commercial aerospace work.
The global aerospace and defense market exceeded $900 billion in annual revenue in 2024, driven by elevated defense spending following Russia’s invasion of Ukraine, growing US-China competition, and a commercial aviation market recovering strongly from COVID. Defense budgets have been rising across NATO, with European countries rapidly increasing spending toward the 2% GDP target.
How Aerospace & Defense Companies Make Money
Government Defense Contracts
The majority of revenue for the largest US defense companies is US government contracts — primarily from the Department of Defense, but also intelligence agencies, NASA, and allied foreign governments. Contract types determine risk allocation:
- Cost-plus contracts: The government pays the contractor’s costs plus a guaranteed fee. Low risk for the contractor; used for R&D and complex development programmes. Boeing’s defence problems stem partly from fixed-price development contracts taken at unfavourable terms.
- Fixed-price contracts: Contractor delivers at a fixed price, bearing cost overrun risk. Drives efficiency but creates risk if programmes are misestimated. Boeing’s KC-46 and T-7 trainer programmes have generated billions in losses.
- Time and materials: Labour and materials billed at agreed rates, with profit built in.
Foreign Military Sales (FMS)
The US government brokers arms sales to allied nations through Foreign Military Sales — the government acts as intermediary, maintaining oversight of where US-origin defence equipment goes. FMS sales have surged as European allies rush to re-arm after Russia’s Ukraine invasion.
Commercial Aerospace
RTX (through Pratt & Whitney) and GE Aerospace manufacture jet engines for commercial aircraft — Boeing 737, 787, Airbus A320, A330. Engine economics follow the classic razor-and-blades model: sell engines at or near cost, earn decades of high-margin aftermarket revenue (spare parts, MRO services). Pratt & Whitney’s GTF engine maintenance revenues will grow for decades as the installed fleet ages.
Space Systems
Northrop Grumman, Lockheed Martin, and newer entrants like Rocket Lab and Joby Aviation are competing in the rapidly growing space economy — launch services, satellite systems, and the emerging eVTOL / advanced air mobility market.
Revenue Models Compared
| Model | Revenue Basis | Operating Margin |
|---|---|---|
| Cost-plus government contracts | Cost + fixed fee | 8–12% |
| Fixed-price production contracts | Unit price × deliveries | 10–15% |
| Aftermarket / MRO (jet engines) | Parts and services on installed base | 20–30% |
| Foreign military sales | Contracted equipment price | 10–18% |
| Space launch services | Contract price per mission | 5–20% |
Key Companies in Aerospace & Defense
Prime Defense Contractors:
- Lockheed Martin — world’s largest defense company by revenue; F-35 fighter programme; missiles, space, rotary aviation
- RTX Corporation — Raytheon missiles and defense; Pratt & Whitney jet engines; Collins Aerospace; $20B+ backlog
- Northrop Grumman — B-21 stealth bomber; space systems; cyber and autonomy
- General Dynamics — Gulfstream business jets; submarines; combat systems; IT services
Industrial and Advanced Manufacturing:
- General Electric (GE Aerospace) — GE90/GEnx/LEAP jet engines; largest commercial engine manufacturer
- Howmet Aerospace — structural aerospace components (turbine blades, fasteners); titanium and nickel alloys
Emerging Space and Defense:
- Rocket Lab — small launch vehicle (Electron); medium launch (Neutron in development); space systems
- Red Cat Holdings — small unmanned drone systems for defense applications
Key Metrics for Aerospace & Defense Companies
Backlog
Total contract value of orders received but not yet delivered. The most important leading indicator for defense revenue. Lockheed Martin’s backlog exceeds $150 billion — providing multi-year revenue visibility. Backlog growth signals new contract wins; backlog consumption signals delivery execution.
Book-to-Bill Ratio
New orders in the period divided by revenue recognised. Above 1.0 means the company is booking more than it delivers — backlog growing. Below 1.0 signals backlog drawdown.
Segment Operating Margin
Defense companies operate multiple segments (e.g. RTX: Raytheon, Pratt & Whitney, Collins). Each has different margin profiles. Pratt & Whitney’s GTF programme has been margin-dilutive due to engine inspections and warranty costs; Raytheon Missiles has been margin-accretive due to Patriot demand.
Free Cash Flow Conversion
Defense businesses convert a high percentage of earnings to free cash flow — capital investment requirements are moderate relative to revenue, and working capital benefits from government advance payments. FCF conversion above 90% of net income is typical for mature defence businesses.
Program Execution and EACs
Estimate at Completion (EAC) adjustments on major programs are the primary source of earnings volatility. Boeing has taken >$20 billion in EAC charges on fixed-price development programs. Watch for EAC adjustments as early warning signals.
The Geopolitical Tailwind
Russia’s full-scale invasion of Ukraine in February 2022 fundamentally changed the defense spending outlook for the West. European NATO members who had let defense spending slide below 2% of GDP are now racing to rebuild depleted stockpiles and increase end-strength.
Key demand drivers:
- Missiles and munitions: Raytheon’s Patriot, HIMARS ammunition, 155mm artillery shells — all in extreme demand as Ukraine depletes European and US stockpiles
- Air defense: Expanded demand for NASAMS, SHORAD systems, and counter-drone technology
- Submarines: Virginia-class submarine production; AUKUS programme for Australia
- F-35: Continued demand from existing partners; Finland, Germany, Switzerland joining
Key Comparisons
Related Glossary Terms
- Free Cash Flow — the primary capital return metric for defense companies
- Gross Margin — aftermarket service margins vs program manufacturing margins
- Capital Expenditure — manufacturing facility investment for ramp-up
- Return on Invested Capital — the efficiency of defense contractor capital deployment