Commercial Aerospace Rises; Defense Losing Altitude

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 ( BA ), 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 billion.

In addition to Boeing and Airbus, industry leadersLockheed Martin ( LMT ),General Dynamics ( GD ) andNorthrop Grumman ( NOC ) 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 cuts.

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 new orders.

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 report.

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 ( ERJ ) from Brazil are also players in the global aerospace market.

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 planes.

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 markets.

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 spending.

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.

Cruise Control

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 Iraq.

"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 said.

The outlook for the aerospace sector is really a tale of two industries.

Mayes is bullish on the commercial side as air traffic around the world rises and airlines seek new or updated aircraft to meet demand.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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