Opaque Outlook for Aerospace Industry in 2009
Jan 25, 2009
By Graham Warwick
The crystal ball is especially cloudy as this industry cycle begins its downward turn. It is hard to forecast the fortunes of one sector of the wider market when governments around the world are trying to save their economies from collapse.
Call it momentum or inertia, the velocity aerospace has built up in the past four years should carry the industry past the middle of this year and perhaps into 2010. But what happens next in government and commercial markets depends on factors beyond the industry's control.
In the public sector, the billions spent stimulating economies, the tax revenues lost as jobless totals mount and, for the U.S. and its allies, the costs of war in Afghanistan and Iraq will take their toll. These burdens on the public purse will restrict governments' ability to invest in defense modernization, aviation infrastructure and space exploration.
The aerospace industry enters this downturn financially sound, but how long that fitness lasts will depend on how quickly the markets recover. In the private sector, that will be determined by the length and depth of the recession and how soon the credit markets stabilize and aircraft financing begins to flow again.
A difficult year lies ahead for the world's airlines, however. After losing an estimated $5 billion in 2008 as fuel costs soared, the industry is forecast to lose another $2.5 billion this year as traffic tumbles. But after $3.9 billion in losses last year, U.S. airlines are expected to turn a small profit in 2009 as an early 10% capacity cut in response to the fuel crisis gives the country's carriers a head start in dealing with falling demand.
While this may be good news for U.S. carriers, it could spell trouble for Airbus and Boeing, where backlogs are heavily weighted toward the Asia-Pacific region and Middle Eastern airlines, whose losses are forecast to more than double in 2009. The manufacturers are bracing for delivery deferrals while working with customers to minimize order cancellations.
The effect is already evident in the bellwether air cargo market, where traffic declined 1.5% in 2008 and is forecast to drop another 5% in 2009. Citing slackening demand, FedýýEx in December deferred delivery of Boeing 777 freighters by up to 17 months, making it one of the first carriers to publicly acknowledge the impact of the downturn on its fleet plans.
Airbus and Boeing will likely have to slow production rates this year, but their new product plans should be largely unaffected. Delays to Boeing's 787 and 747-8 have pushed first deliveries of both aircraft well into 2010, while Bombardier's CSeries is not scheduled to enter service until 2013 and Airbus's A350 until 2014, when a recovery should be in full swing.
Business aviation was the sector hit first by the speed and global scale of the financial crisis. As corporate profits, personal wealth and aircraft financing all suffered, orders dried up, flying activity fell and used inventories soared. With delivery deferrals mounting and order cancellations threatening, manufacturers have moved quickly to scale back production and lay off workers, but analysts fear deeper cuts will be needed in 2009.
Scathing attacks on the CEOs of the big three U.S. auto makers for flying to Washington in private jets to seek a government bailout seared business aviation's image near the end of 2008, but the industry has bounced back before and will again. A slew of new aircraft are in development for delivery from 2011 onward, ready to simulate demand as the recovery begins.
On the defense side, the year could have significant ramifications for the fighter industrial base. In the U.S., the new administration must move quickly to decide the fate of the F-22 and fortune of the F-35, while international competitions could determine the future of the current generation of U.S. fighters.
Several key fighter decisions are set for 2009, pitting various combinations of the Boeing F-15 and F/A-18E/F, Dassault Rafale, Eurofighter Typhoon, Lockheed Martin F-16 and F-35 against each other and their Russian counterparts. But the economic crisis could lead to deferred competitions, delayed orders and reduced procurements. The biggest fighter contest, for 126 aircraft in India, should be decided this year, but could slip as the country focuses on terrorism and Pakistan.
In the U.S. defense market, 2009 looks set to be a year of "recompetitions." After disputes and delays, the Air Force's CSAR-X combat search-and-rescue helicopter contest should be decided this year, and the Army plans a quick selection of a replacement for the canceled Armed Reconnaissance Helicopter. The Army's terminated but never canceled Aerial Common Sensor program should get underway again in 2009, and may end up once more a joint program with the Navy.
The Air Force plans to restage the Transformational Satellite (TSAT) competition this year and, more significantly, intends to restart procurement of its KC-X replacement tanker. In each case, the contestants remain the same, but the TSAT requirements have been rescoped and reduced, while the guidelines for the KC-X contest will be refined and restated.
Russia's objections to a missile-defense site in Europe will be among the early challenges facing the Obama administration, which will also be taking a critical look at the Airborne Laser, scheduled for a critical shoot-down demonstration in 2009. Funding for NASA, and closing the looming gap in U.S. human spaceflight capability, will be another issue for the new administration that will have to manage many conflicting demands on overstretched government coffers.
