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Show's over

Created:
21 July 2008
Updated:
22 July 2008
Written by:
John Hughman

Once every two years, the world’s aerospace industry touches down in suburban Hampshire for the Farnborough International Airshow. The otherwise unexciting provincial town becomes the fulcrum of a global commercial marketplace worth $180bn (£90bn) a year. And even against the looming downturn in the global economy and a crippling oil price that has already seen some airlines mothball planes to stay afloat, this is an industry that still knows how to throw a party.

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By the end of day four, orders at the show totalled some $57.7bn (£28.8bn), in stark contrast to the fears of imminent order cancellations that preceded the week-long event. Airbus, which was the top dog at this year’s event with orders and commitments of $40.5bn (£20.2bn), says that it now has a six-year backlog of orders and will expand production lines by a third over the next three years. “It is clear that both manufacturers and airline carriers are in fact expanding their fleets and routes to satisfy growing demand for air travel,” said Farnbourough managing director Trevor Sidebottom, in defiance of the predictions of gloom.

But such optimistic rhetoric has done little to assuage the fear of investors, who have been running scared from the sector - or, at least, from those companies who generate a significant proportion of their revenues from supplying the civil side of the industry.

Shares in Rolls-Royce, which as the world’s number two jet engine supplier makes half of its revenues from commercial customers, have fallen 35 per cent in the year so far as the industry outlook has weakened, significantly underperforming both the FTSE All-Share and the FTSE Aerospace & Defence indices.

Likewise Meggitt, the FTSE 250 aircraft component supplier, has lost 45 per cent of its market capitalisation since peak last October. Meggitt makes wheels, braking systems and engine sensors that are found on new planes including the Boeing 787 Dreamliner and Airbus’s A350, and delays to these programmes have weighed on shares in the company, which makes 48 per cent of its revenues from civil aviation.

Even within the commercial segment there are two very distinct stories running in parallel. When the combined airline/aerospace industry emerged from its last slump in 2004, analysts predicted a ‘super-cycle’ driven by new orders from the booming oil economies of the Middle and Far East.

And again, it was the Eastern economies that stole the show at Farnborough, particularly those in the Gulf which are using oil riches to fund rapid expansion of their fleets. Abu Dhabi-based Etihad made a clear statement of intent over its ambitions, with firm orders for 90 aircraft, which included 10 Airbus A380 super-jumbos, and options and purchase rights on a further 90. Other carriers to have placed significant orders include startup budget carrier FlyDubai, Saudi Arabian Airlines, Qatar Airways, Air China, Malaysia Airlines and Tunisair, as well as a number of leasing firms including Dubai Aerospace Enterprise.

But Western carriers have kept their hands very much in their pockets this year and without their business, the anticipated super-cycle hasn’t had much of a chance to get off the ground. With around 900 net new plane orders so far in 2008 it looks unlikely that last year’s tally of 2,750 will be breached and that 2007 marked the top of the cycle. Certainly, most of the worst news from airlines is coming from Western fliers, and 2008 has already seen the high profile collapses of business airlines Silverjet, Eos and Maxjet. Observers see consolidation as the only way many battered airlines will survive.

This is bad news for the aerospace industry because it could ultimately mean fewer planes are needed as airlines stop flying duplicated or underperforming routes. Spanish low-cost operators Vueling and Clickair have announced plans to merge to protect pricing, while Spain’s second-largest airline, Spanair, says that it will drop nine routes and cut its fleet by 15 planes. Easyjet, which bought smaller rival GB Airways in October last year, is trimming its fleet by seven planes. Consolidation also means lower overall flying time, or lower 'seat kilometres' in industry parlance. That could spell trouble for suppliers that are heavily reliant on aftermarket sales. Rolls-Royce and Meggitt make 60 per cent and 44 per cent of their respective civil aerospace sales from parts or services to existing customers.

Airbus and Boeing believe their massive order books of 7,000 planes in aggregate will insulate them from the cyclical downturn afflicting their customers, which should mean a steady pipeline of work for UK component and sub-system suppliers that sell to them. But analysts increasingly worry that this pipeline of work could start to shrink if the situation at airlines gets any worse and the spectre of cancellations becomes a reality. With the pressure on airlines showing no signs of abating, it seems unlikely that the aerospace industry will escape unscathed.

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