FARNBOROUGH PREVIEW - Aerospace outlook upbeat as air show starts, say analysts

14th Jul 2014 07:00

Turbulence is hitting aerospace and defence but the sector's prospects are still good, analysts said as industry chiefs gathered for the start of the Farnborough Air Show on Monday.Rising oil prices, airline profit warnings and the cancellation of an Airbus order have concentrated investors' minds ahead of the opening of the biennial industry showcase in southern England.Analysts say this year's show could be quieter than before as airlines take stock after a wave of orders that have left Europe's Airbus and US rival Boeing with large backlogs. The two manufacturers now face pressure to prove they can deliver existing orders on time.But global passenger traffic figures are still topping market expectations and there are signs of improvement in South America and India despite an apparent growth slowdown in Asia, they say.Concerns about warnings on 2014 earnings in the last few weeks from Air France and Lufthansa were more to do with missing hopes rather than traffic levels.And Emirates' cancellation last month of an order for 70 Airbus A350 XWBs, which it placed in 2007 for delivery from 2019, was probably due to the fact that it had decided the A350 would be too small, given the scale of the airline's growth in the last seven years.Aerospace analyst Sandy Morris at Jefferies pointed to Emirates' order last week for 150 Boeing 777Xs and said it may buy more A380s.Morris said: "The outlook for the aerospace & defence sector remains positive, in our view."The micro-developments in the first half of 2014 that weakened confidence in that outlook - such as Emirates cancelling an order for 70 A350 aircraft - are simply what happens from time to time and do not signal a change in the direction of travel."Liberum Capital aerospace & defence analyst Ben Bourne said the rate of industry orders was likely to slow because Airbus, Boeing and others had bulging order books.Fears remain about a demand "bubble", where orders could suddenly collapse, but the industry is unconcerned because the rate of aircraft replacement is rising.Bourne said: "Passenger growth is still ticking up because it tracks GDP growth, so if the economy is recovering, that bodes well for civil aerospace."Eastern promiseOrders from emerging market airlines in Asia and the potential launch by Airbus of a revamped A330, the A330neo, are thought likely to provide the main interest at Farnborough this week.Indian budget carrier IndiGo is tipped to announce an order for 200 Airbus A320neo jets to handle growing domestic and regional air travel demand.Chinese airlines may order more aircraft as China's regional development triggers demand for more air links.Potential buyers of the new A330 are believed likely to include Air Asia, Delta Air Lines of the US and aircraft lessors such as CIT and Air Lease Corp.Airbus is believed to be close to pressing ahead with the aircraft, but the move requires formal approval by the company's board.UBS analyst Charles Armitage said the A330neo was likely to be competitive with Boeing's 787 as the lower overall cost of the A330 versus the Dreamliner would offset its higher fuel costs.Armitage said: "We do believe the A330neo will be launched imminently - if not at Farnborough, then soon afterwards."Another source of orders could come from the budget long-haul sector, where Norwegian Air Shuttle has grasped the nettle by launching flights between London and New York for with one-way fares starting at £149. Irish budget carrier Ryanair is thought to be planning a similar service but has blamed lack of suitable aircraft for not pressing ahead so far.In defence, a fire in the engine of one of Lockheed Martin's F-35 Joint Strike Fighters (JSF) in the US has cast doubt over plans to fly the jet at Farnborough.But analysts believe defence companies will still have a more positive story to tell at the show than in past years, thanks to greater certainty over US defence budgets.Morris said: "Whether or not the JSF appears at Farnborough, its trials and tribulations might serve to focus attention on what we believe to be a more positive backdrop for European defence companies."By 'more positive', we mean initially a return to stable demand in the UK and US with the promise of some modest organic growth lurking on the horizon in 2016/2017."In due course, the JSF could be a useful source of growth for companies like BAE Systems and Cobham."PW