By Ken Pole | December 22, 2011 Estimated reading time 4 minutes, 40 seconds.
Despite the fact that carriers have continued to order new aircraft, the Conference Board of Canada said in a Dec. 19 review of the domestic aerospace sector that order sizes have not met expectations. Coupled with lingering global economic issues, it means the industry has not rebounded as much as had been hoped. On a positive note, the Ottawa-based think-tank said that a gradual buildup to 20 months of back-orders means that the aerospace sector can expect higher revenues for 2011.
Growth is expected to resume in 2012, as rising demand for commercial and business jets in North America, combined with large gains in orders from emerging markets, will drive the industry forward, it said. And while European demand is expected to remain moribund in 2012, medium- and long-term prospects are positive as other markets continue to grow.
Profits will improve in 2011, but margins will remain slim, the Board said. As the pace of sales begins to accelerate, profits are set to improve steadily over the forecast horizon, reaching $1.4 billion by 2016. Fierce competition and the effects of the strong Canadian dollar on pricing will keep margins below their peak, but price appreciation will help to cushion manufacturers’ bottom lines.
It expects the commercial aviation sector to benefit from steady growth in the emerging economies. Bombardier is focusing more on China, India, Malaysia and a number of African countries; Airbus and Boeing also are exploring opportunities for their more efficient aircraft. (A recent Forbes Insight survey indicated that 83 per cent of carriers have indicated that they are likely to buy or lease newer fuel-efficient aircraft within the next five years.)
At the same time, American and European defence departments, which tend to be among the most active buyers from aircraft manufacturers and parts suppliers, are under pressure to cut costs. The board expects that this weakness may be offset by new markets in Brazil, India, Saudi Arabia and the United Arab Emirates, each of which has announced major programs.
The rise of aerospace manufacturing in countries such as China and India, with strong state financial and regulatory support, represents fierce and growing competition for Canadian companies, which the board said must continue to improve product quality and develop leading technologies.
In business aviation, where corporate profits traditionally are a key indicator of potential, orders evidently did not keep pace with expectations in 2011, especially in the United States.
The business jet cycle has yet to reach its expansion stage, the Board said, citing a General Aviation Manufacturers Association report which states that shipments through the first nine months of 2011 were down 13 per cent from a year earlier.
Volatility in the financial markets and the fragility of the North American and European economies are weighing heavily on buyers, the Board said. Nevertheless, there is some good news for the makers of large business jets. They are performing better than their smaller counterparts because their biggest customers the large multinational corporations and extremely wealthy individuals have fared better than smaller businesses, which felt the pinch more severely during the economic downturn.
Again, emerging markets are the main source of new sales. The Board notes that China Minsheng Financial Leasing recently signed two deals worth more than $1 billion combined to finance purchases of business aircraft.
But demand for small- and mid-sized business jets has slumped due to growing cancellations, which have prompted layoffs in recent years at Cessna, Hawker, Bombardier and other smaller players in that market.
In all, demand for business jets is expected to remain weak in the short term. The industry has shifted its hopes to 2012. For example, at its recent annual business aviation outlook conference, Honeywell projected an increase of three to five per cent in sales in 2012, the report said.
Visit www.conferenceboard.ca for more details.
