2007 – The Year Aerospace Took Off

2007 will surely go down as one of the best years the aerospace industry has ever seen with both the civil and military sectors benefiting from bulging order books.

Richard Aboulafia, an aviation analyst at Teal Group, a research firm, believes that 2007 was indeed the best 12 months the industry has ever experienced. For, as Aboulafia points out, the industry is enjoying 'the first simultaneous upturn in the civil and military sectors that has ever taken place'.

Aboulafia cites a number of factors for the remarkable strength of the aerospace industry. These include:

• Robust global growth
• The strength of corporate profits
• The globalisation of the economy and the industry as markets in emerging economies, such as China and India, develop rapidly
• The self-contained wars in places such as Iraq and Afghanistan that are fuelling demand for military equipment
• The massive upgrading of fleets that is taking place among civil airlines, which are being forced to accelerate efforts to improve the efficiency of their operations in response to the continuing high oil price and increasing environmental pressures to reduce emissions and noise

However, the US civil market, long the dynamo of the civil aerospace industry, was one of the weakest areas of the global market in 2007, according to Aboulafia.

This is because US airlines are amongst the most financially vulnerable of their global peers – they are not enjoying the rapid growth rates seen in other parts of the world, particularly Asia, and they are not experiencing the wave of M&A consolidation that is being seen in other markets.

LAUNCH OF THE 787 DREAMLINER

It was certainly a remarkable year in terms of new aircraft and technological developments. In July, for example, Boeing unveiled its 787 Dreamliner – the firm's first all-new jet since 1995.

The US-based company also took a leap in technology with the airliner, which is the only big commercial aircraft made mostly of carbon fibre rather than aluminium and which is billed as the most environmentally friendly ever built.

Boeing says the 787 is much more fuel efficient than its competitors and produces 20% less CO2. Boeing also adopted a new manufacturing process for the 787, minimising the work done in final assembly, simplifying tooling and outsourcing production to a network of global suppliers.

Boeing's belief that the future belongs to medium-sized planes that can service smaller airports appears to be proving more prescient than Airbus's view that airlines want bigger planes to meet increasing passenger numbers flying between major hubs.

Certainly Drew Magill, director of marketing at Boeing, says the launch of the Dreamliner was one of the highlights of the year for the company. By the end of December, Boeing had received 817 orders for its Dreamliner, making it one of the most successful airline launches ever, while Airbus had received orders for just 177 A380s.

But Magill also points out that other significant highpoints for Boeing in 2007 include the delivery of the first 737-700ER to launch customer ANA, the delivery of the first 737-900ER to launch customer Lion Air and the launch of the latest versions of the 747 and the 777 airliners.

Boeing enjoyed a record year for new orders in 2007, with 1,413 (net orders) racked up, surpassing the high set in the previous year. Magill says "the continuing strength of the global economy, which has grown above its long-term trend for the past three to four years, is the main factor behind the record levels of demand."

But he adds that "the trend towards liberalisation is also continuing to open up new markets for Boeing." The level of demand for new planes in particular is unprecedented, with the launch of new more-fuel-efficient aircraft undoubtedly helping to spur orders.

Magill also expects the good times to continue. He believes the global economy will continue to grow above its long-term trend despite the possibility of a downturn in the US.

Furthermore, Magill says that rapid growth of emerging economies such as India, China and Brazil means that global demand for aerospace products is much more balanced than it was ten to 15 years ago when demand was concentrated in the US and other developed economies. Certainly in 2008 booming demand in Asia should help to offset a slowdown in sales growth in the USA.

A380 TAKES OFF

The European Aeronautics Defence and Space Company (EADS) also enjoyed a bumper year in terms of new orders in 2007, "possibly the best year the company has ever enjoyed," says Jeremy Greaves, communications and PR vice president of EADS UK. According to Greaves, highlights of the year include the first commercial flight of the A380 with a Singapore Airlines's superjumbo taking off in October on a flight from the island republic to Sydney.

The company has had a bumper year in terms of orders for the Airbus's A350 XWB, its answer to the 787, which got off to a roaring start. Eurocopter succeeded in winning its first military order from the USA – the US Army selected the EADS twin-engine UH-145 for its light utility helicopter (LUH) programme and ordered 350 of the aircraft. Finally, demand has been booming for the NH90 tactical transport helicopters – by the end of 2007 more than 500 orders had been placed.

Airbus celebrated another major milestone in December when it delivered its 5,000th aircraft – an A330-200 – to Australian flag carrier Qantas.

It now has a backlog of more than 3,000 aircraft on order and says it expects to get them all built and delivered to airlines around the world within six years.

However, the falling dollar delivered a blow to EADS's profitability – EADS and Airbus executives issued a number of warnings during the year that the weak dollar was causing difficulties.

For, according to Jeremy Greaves, "Boeing has a 20% to 30% cost advantage because Airbus mainly manufacturers its aircraft within the eurozone, but sells them in dollars. As a result EADS is going through a process of restructuring." Indeed in December, EADS announced that it was selling off six plants to British, French and German companies, as it focuses on core activities. Earlier in the year, EADS announced plans to cut 10,000 of its 57,000 jobs over the following four
years.

But according to Greaves, "there is no sign, as yet, that the credit crunch is having an impact on orders with demand from the Middle East and the Far East remaining particularly robust." However, he did warn that "this is a cyclical business and we are currently at the peak of the cycle. We're not expecting this level of orders to continue indefinitely."

COMPETITION HOTS UP IN THE REGIONAL JET SECTOR

In the regional jet sector, the rivalry between Embraer of Brazil and Canada's Bombardier showed little sign of abating in 2007 as they fought for leadership of the world regional jet market.

In December, Embraer confirmed that it would hit its 2007 target of $5bn in deliveries. Company president and CEO Frederico Fleury Curado said the importance of other markets, such as China, had been growing and this development would offset any fall in the US market.

Also in December, China unveiled its first home-grown passenger jet, the ARJ-21, an aircraft that Embraer and Bombardier will be competing against in the soaring Asian aerospace market.

MILITARY SPENDING BOOM

In the military sector demand is also booming. Total American defence spending is expected to amount to a record $750bn in fiscal year 2008 (which began on 1st October 2007), and in 2007 the defence industry continued to reap the benefit of the most favourable contract terms in recent memory.

The head of BAE Systems Plc, Europe's biggest defence company, certainly believes the good times are set to continue. Mike Turner told BBC radio in December that "the US (market) has never been healthier."

Bob Stevens, chief executive at Lockheed Martin, also believes that the high levels of defence spending will continue. He has been reported as arguing that the global security situation remains highly challenging, including the emerging threats from China and Russia, as well as the need to cope with international terrorism and the growing reliance on energy resources produced in volatile regions.

M&A SLOWS IN FINAL QUARTER

Merger and acquisition activity continued apace for much of the year although it certainly subsided in the final quarter as problems in financial markets came to the surface. Much of the M&A activity is being driven by capacity constraints as large contractors such as Boeing and Airbus outsource a growing proportion of production and suppliers compete to fulfill their needs.

Major deals to take place in 2007 included General Electric's $4.8bn acquisition of Smiths Group's underperforming aerospace division, while private equity activity in the sector also surged.

New York-based private equity company JLL Partners, for example, acquired McKechnie Aerospace from the UK's Melrose, while Dubai Aerospace bought aviation maintenance companies Standard Aero and Landmark Aviation from private-equity firm Carlyle in a deal thought to be worth over $1.5bn.

BRIGHT OUTLOOK FOR 2008

All the signs suggest that 2008 will prove another boom year for the industry. Aboulafia believes that the current upturn, which began in 2004, shows little sign of running out of impetus and could carry on until at least 2011.

He does not anticipate that the credit crunch will have a negative impact on global demand because 'global growth, the trend of globalisation, and robust military spending looks too strong'.

In particular, Aboulafia believes that potential demand in countries such as China and India with their huge populations, rapidly growing middle class and large land areas is phenomenal.