Action is picking up in the aerospace trade ahead of next
month's Farnborough International Airshow -- the highlight of the
year for aerospace and defense firms.
France's Airbus SAS, along with U.S. peerBoeing (
), generally book much of their year's largest orders during the
show, in Hampshire, England. The French-based consortium took a
brutal hit Wednesday, when Dubai-based airline Emirates canceled
an order for 70 long-range A350 jetliners.
The deal was estimated to be worth $16 billion when arranged
in 2007. In November, Emirates placed orders for 150 new Boeing
777x wide-body aircraft, with an option for 50 more.
On Friday, Boeing announced an order for 80 737 jetliners from
China Eastern Airlines, its largest order to date from a
China-based carrier. The company valued the deal at $7.4
In addition to Boeing and Airbus, industry leadersLockheed
),General Dynamics (
) andNorthrop Grumman (
) often see strong order activity at the show.
Lockheed and the Defense Department plan to fly the F-35 -- a
hotly anticipated stealth fighter -- in its international debut
at this year's show.
The Defense Department sent minimal offerings to last year's
Paris Air Show amid budget restrictions and concerns for
Despite the buzz at this year's show, defense firms and
subsidiaries have been struggling to book new orders.
On the commercial side, manufacturers have the opposite
problem: straining to meet a mass of orders already booked.
"Aerospace is a major part of the overall U.S. manufacturing
growth coming back. There is a huge network of suppliers in the
U.S., and planes are a high-value export," Christian Mayes,
aerospace analyst with Edward Jones, told IBD.
Airlines In Emerging Markets
Demand for commercial jets is booming as the Middle East
expands its presence as a travel hub, and low-cost carriers in
Asia get approval for takeoff.
At the Dubai Air Show last year, Boeing announced orders for
342 planes valued at $100 billion, while Airbus inked 142 orders
worth $40 billion.
Boeing says twin-aisle aircraft like its new 787 and 777X
planes account for more than half of sales in the bustling
region. Single-aisle airplanes, like its 737, account for 47% of
The UAE is a hub for the Middle East's foreign workers to fly
back to India, Sri Lanka, Pakistan and the Philippines.
While Emirates, Qatar Airways and Abu Dhabi's Etihad battle
for the region's high-end market, budget airlines such as Air
Arabia and FlyDubai are rising in popularity and need new planes
to fill out their fleets.
In China, the country's Civil Aviation Administration
announced plans in February to ease regulations and consider tax
breaks that could bolster more budget carriers.
Boeing in December reported an order for 21 of the
next-generation jets from China's Cathay Pacific Airways. The
deal is valued at more than $7 billion at list prices.
Boeing inked an order last month for 50 of the 737 aircraft
from China's Juneyao Airlines, according to a Bloomberg News
Not to be outdone, Airbus announced an order for 70 A320
jetliners from China Eastern Airlines in March.
Narrow-body planes are becoming more popular worldwide as
orders for fuel-guzzling jumbo jets slow.
Canada's Bombardier andEmbraer (
) from Brazil are also players in the global aerospace
But Boeing and Airbus dominate with a combined record backlog
of 11,000 jets worldwide.
Developing countries are looking for new jets, not
hand-me-downs. And as travel for vacation and business heats up,
airlines in the U.S. and other developed nations have enough cash
to invest in refurbishing planes already in service.
Struggling To Feed The Need
Completing aircraft orders for an on-time arrival is going to
be a monumental task. Late last year, Boeing settled union
contract problems with machinists at its Seattle-area plants
after threatening a move to cheaper, union-free South Carolina.
The agreement cleared the way for production of its 777X
Boeing expects to ramp up production of its 787 aircraft to 12
units per month in 2016. It aims to hit 10 per month by the end
of this year as backlog for the plane grows.
The newly launched 787 line came under scrutiny in 2013 after
battery fires grounded the jet for four months.
But orders for the plane keep pouring in. In April, Boeing's
737 program hit the planned production rate of 42 per month.
"Boeing has a better product line, but Airbus has better
management," said Richard Aboulafia, vice president of Teal
Group. "Boeing is providing a lot of risk to new programs because
of pressure on suppliers and workforce."
The boost in production benefits parts makers likePrecision
Castparts (PCP) andB/E Aerospace (BEAV).
B/E announced plans Tuesday to split into two companies, one
to focus on aircraft cabin interior equipment, the other to focus
on technical service for the aerospace and energy services
The company raised its full-year EPS outlook, but it still
fell short of analyst estimates. B/E shares dropped 6% for the
week through Thursday.
Defense: A Different Tale
Orders for military jets are falling as the U.S. winds down
its presence in Afghanistan.
"For defense, we are really talking here about how much ground
we lose, just a little or a lot," Aboulafia said. "And a lot of
that depends on what happens in Congress. Right now our
expectations are for just a gentle erosion."
Aboulafia believes defense firms can find some relief
overseas, but not enough to compensate for a downturn in Pentagon
Tension is palpable between China and neighbors Japan, South
Korea, Vietnam and the Philippines. Countries in the region are
shopping around for new equipment or to replace aging planes.
Last year, South Korea rejected Boeing's F-15 and instead is
pondering a purchase of Lockheed's F-35 stealth fighter. The
radar-evading plane is still in demand by militaries around the
world despite being behind schedule and over budget.
At a conference last month, Lockheed's CEO Marillyn Hewson
said the company expects nearly half of the orders for the F-35
in the next five years to come from abroad.
Helicopter makers such as Bell, a division ofTextron (TXT),
are expected to take a big hit to sales after seeing healthy
demand during the wars in Afghanistan and Iraq.
But Asia has become a big market for helicopters as Bell and
other companies target oil and gas, corporate, law enforcement
and military markets in the region.
Late last year Lockheed announced plans to shut four factories
and lay off 4,000 workers as defense spending at home slows.
Mayes questions the practicality of defense firms cutting
workers as troubles are brewing in Russia, Ukraine and the South
China Sea, not to mention the recent resugence of conflict in
"If demand were to come back quickly, could they ramp up in
enough time?" Mayes said.
Such security threats around the world could change defense
demand, according to Hewson.
"While we have budget pressures, the No. 1 thing that any
nation has to do is be focused on their national security," she
The outlook for the aerospace sector is really a tale of two
Mayes is bullish on the commercial side as air traffic around
the world rises and airlines seek new or updated aircraft to meet
As backlogs pile up, success depends on manufacturers reducing
the amount of time it takes to deliver orders.
On the defense side, Aboulafia expects only a slight erosion
in congressional spending. Demand for new military equipment
could easily increase, he says, along with fighting in Eastern
Europe, Southeast Asia and the Pacific.