ALEXANDER CAMPBELL, BUSINESS EDITOR
We have been here before. Around 10 years ago, the aerospace industry faced a similar catastrophe. The 1990-91 Gulf War drove down airline traffic by unprecedented amounts, especially across the Atlantic, and pushed fuel prices up as the cost of crude oil soared. The recession produced a hostile economic climate that discouraged holidaymakers and squeezed corporate travel budgets. And the end of the Cold War led to demands for defence cuts - the peace dividend - that shocked manufacturers around the world.
This time, the reality rather than the threat of terrorist action has frightened passengers out of the skies, and the recession has pushed down defence spending in many countries despite the war - much of that spending will go simply on maintaining an ageing aircraft fleet.
How to deal with this situation will be the overriding problem of the next 12 months. The recession and drop in demand, though not a complete surprise, has been unexpectedly sudden and severe. Civil and defence customers alike are calling for delays in aircraft deliveries, and reductions in orders and prices, while the rising numbers of mothballed aircraft mean that airlines' assets are losing value, and that selling new aircraft is now much more difficult.
Many airlines are leasing rather than buying aircraft, and others will follow. This allows airlines to keep their assets liquid as a precaution against hard times, rather than tying them up in aircraft which may soon be grounded for lack of passengers, or lose value as the market continues to plunge. Aircraft-leasing companies, or manufacturers willing to offer lease terms, should see an increase in custom - though they will still be under pressure to offer favourable packages. In the business and general aviation field, fractional ownership will continue to grow.
Mergers
Last year, the aerospace sector saw more mergers. But, to the fury of the companies involved and the US government, European regulators blocked the GE/Honeywell merger in July. As a result, the European Commission (EC) is overhauling its anti-competition rules, and may decide to bring them closer to US law, making merger approval easier in the future, in theory at least. Mergers between European airlines, made difficult if not impossible by current bilateral agreements and national laws, may also be speeded up by changes in EC rules (see P22).
As for merger strategy - whether companies choose to expand their existing businesses (vertical acquisition) or diversify into new areas (horizontal strategy) - fashions may well change.
A year ago, vertical mergers were popular. But the GE/Honeywell experience has reminded business of the impact of antitrust laws. Boeing's horizontal approach, by contrast, has been a good move. By expanding into defence, space and communications, it has built a broad base that will help it survive the several nasty blows it has received in recent months - losing the Joint Strike Fighter (JSF) contract, falling airliner orders and so on - by spreading risk.
Tough time ahead
Despite huge contracts like the JSF, the decision to go ahead with production of the Lockheed Martin/Boeing F-22 Raptor, and the prospects for the Airbus A380 and A400M, as well as Boeing's Sonic Cruiser, the major aerospace companies face a tough year.
None of these big-ticket projects will start full-scale production for some time, meaning that integrators and suppliers will be left selling the same products to customers less willing and less able to buy. From confidence about a soft landing a year ago, aerospace management is now far less hopeful about both civil and defence sales. Airlines, unable to see an end to the continued fall in traffic, have shed jobs and delayed making purchases.
Airframers, followed by second-tier suppliers, have followed suit: engine manufacturer GE has shed 4,000 jobs, Rolls-Royce, 4,800, and United Technologies 5,000. These will not be the last.
The top 10 aerospace companies remain more or less unchanged. The main points of interest are the reductions in revenues, the absence of a merged GE-Honeywell, and the impressive rise of Bombardier.
Falling passenger numbers may cause carriers to order smaller aircraft over the next few quarters in order to keep services going at high-load factors. Pilots' scope clauses, which limit the numbers of smaller aircraft relative to the numbers of large aircraft in a fleet, may restrict this. Notwithstanding, Bombardier and Embraer could profit from such a move.
Source: Flight International
