Forecast improves for aerospace industry

01/07/2013 5:43 PM

08/08/2014 10:14 AM

A new forecast takes a more optimistic view of the aerospace industry, which includes a return to growth in the aftermarket business and a “belated pick up” in the business jet market.

At the same time, growth for Boeing and Airbus suppliers could ease as the planemakers, which have been raising production rates to meet orders, approach full production and burn down inventory buffers, Robert Stallard, an analyst with RBC Capital Markets, wrote in an industry report released Monday titled: Global Aerospace & Defense: The 2013 Oracle.

The U.S. avoided the doom of a fiscal cliff and the Mayan end of the world, it said, along with the completion of the U.S. election.

“With many of the macro issues of last year behind us, and raw economic lead indicators showing signs of modest improvement, we are taking a more optimistic stance as 2013 kicks off,” Stallard wrote.

Business jet demand could pick up this year, he wrote.

Emerging markets

Demand for large cabin business jets has been robust, but buyers for small and midsize cabin planes are relatively scarce.

Larger jets are still expected to be more in demand, especially in emerging markets, such as Russia and China, where economic growth is more robust.

Still, “we do expect some order pick up to come through across the platform range (in) 2013,” Stallard wrote, although revenue increases won’t be realized until later this year and in 2014.

For example, at Cessna, revenue is expected to increase 5 percent in 2013 and 10 percent in the 2014 to 2015 time frame.

Business jet manufacturers, such as Cessna Aircraft, Embraer and Gulfstream, are likely to focus on building their order books during the European Business Aircraft Conference and Exhibition in Geneva, Switzerland, held in May, under an incrementally improved global backdrop, Stallard wrote.

But they may decide to delay new product launches until demand increases, which could occur in time for the National Business Aviation Association’s annual convention in October, he wrote.

Industry metrics such as flight activity, used inventories and pricing have been flat in 2012, the forecast said. But an improving U.S. economy and fewer disruptive “events” should mean improvement in those metrics.

And that, in turn, should mean a pick up in orders and production growth in 2014, he said in a report on Cessna’s parent company, Textron.

Commercial aviation

Orders for commercial airliners for Boeing and Airbus have “probably peaked over the last couple of years,” Stallard wrote, boosted by the of re-engined narrowbody airplanes, the Boeing 737 MAX and Airbus A320neo (for new engine option).

Now, “we think many investors are ... questioning whether the dip in new orders, with potentially a negative book to bill ratio, is the lead indicator of the next aircraft production cycle,” the forecast said.

Both manufacturers have taken a conservative approach to new airplane production. And the book to bill ratio – the number orders taken compared to the number of deliveries – has been positive in seven of the past eight years, the forecast said.

Airbus and Boeing are now sitting on a “colossal” backlog of nearly 9,000 airplanes on the books – the equivalent of seven years of production, based on 2012 levels.

Many aircraft models, including the 787, A350, A320 neo and 737 MAX, are sold out until 2020 or beyond.

The limited ability of an airline to take delivery of a new airliner in a reasonable time frame is likely to dampen the number of new orders, Stallard wrote.

Still, a peak in production is a couple of years away, he wrote.

Some airline leasing companies have argued that Boeing and Airbus will produce thousands more planes than the industry can absorb.

However, with airplane retirements, there could still be an undersupply if a 2013 forecast for traffic growth by the International Airline Transport Association is close to correct.

For aerospace suppliers, increased production rates by Boeing and Airbus have driven growth, but many suppliers have had growth in excess of the increased rates as some planemakers tried to build themselves an inventory buffer.

Growth in the supply chain could start to ease this year, as Boeing and Airbus reach peak production rates and start to ease off the build-up in inventory to use as a buffer.

The forecast predicts Boeing airliner deliveries will rise from an estimated 666 this year to 719 by 2015, and then drop to 691 the following year.

Airbus deliveries, meanwhile, are forecasted to rise from an estimated 623 in 2013 to a high of 755 by 2018.


The biggest fundamental shock for the aerospace sector was the unexpected slowdown in the market, despite airline traffic globally and capacity remaining in positive territory during the year, Stallard wrote.

This year, he expects a return to growth. In addition, continued profitability of the global airlines should support investment in airplane upgrades and retrofits, he said.

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