Video report How will aircraft makers and airlines cope with the AEROSPACE economic crisis? FINANCIAL TIMES SPECIAL REPORT | Monday November 14 2011 ft.com/dubai­show www.ft.com/aerospace­nov2011 | twitter.com/ftreports Eastern dawn lightens the gloom Emerging markets are the Inside this issue best hope for makers of Emissions civil and military aircraft, Rivals dig in over EU carbon report Andrew Parker trading scheme and John O’Doherty Page 2 he aviation industry’s recov- Fractional ery in 2010 after two years of NetJets pull­out recession-induced losses dissolves a quiet relationship looks as if it will be short- Page 2 Tlived. Many airlines are braced for reduced full-year profits or losses Etihad UAE carrier works hard again in 2011 and 2012 because of to soar Page 2 slowing economic growth or stagna- Emirates Dubai airline’s bid to tion in western countries. be biggest takes off Page 3 This may have negative repercus- sions for the commercial aircraft mak- Qatar Airways Expansion plans ers, led by Boeing and Airbus. Their hinge on growth of the region as healthy order books could be damaged a hub Page 3 if airlines respond to the deteriorating economic environment by cancelling Fighter procurement Fast jet aircraft or pushing back their delivery makers lock on to ageing aircraft dates. fleets Page 4 The manufacturers are part of larger groups that are already adjust- Stealth fighters India and ing to reduced defence spending by Russia form ground­breaking western governments focusing on partnership but American rival repairing budget deficits. Both the tries to muscle in Page 4 commercial and the defence sides of these groups are likely to find some of Military transport US prepares their best business in emerging mar- to lose its lead on the heavy kets in the coming years. lifters Page 4 At the Dubai air show, which runs On FT.com Our from November 13 to 17, one of the big reporting team talking points will therefore be the at the Dubai prospects for the airlines and aircraft show will add to makers amid a combination of weak this report with economic growth and high fuel prices. video interviews Investors were alarmed by the Sep- and further tember 20 profit warning from exclusive Lufthansa, Europe’s largest airline by content revenue. That was blamed on disap- www.ft.com/ pointing passenger bookings. One aerospace­nov2011 week later Cathay Pacific, the world’s Holding pattern: the airlines, and therefore the aircraft makers, are waiting to see the full effect of economic slowdown Reuters third largest air cargo carrier, said freight volumes may fall by more Airline profit margins against global growth Jet fuel price Aircraft backlog than 10 per cent in the fourth quarter Net post-tax profits as a World GDP growth, US cents per gallon Airliners on order but yet to be delivered, end-year compared with the same period last % of revenues (%) year. a European consortium involving Then, on October 3, shares in AMR, 3 5 400 3000 EADS, Finmeccanica of Italy and UK- parent of American Airlines, plunged 2 4 based BAE Systems – has already 33 per cent on fears the airline may Airbus been delivered to its four launch cus- file for bankruptcy because of operat- 1 3 300 Boeing tomers in Germany, Italy, Spain and ing costs higher than at rivals. So far 2000 the UK. So far, 285 jets have been 0 2 this year, the Datastream index of glo- delivered to those countries, with a bal airlines is down 27 per cent. -1 1 200 further 187 to come. “The industry is brittle,” says Tony But as European governments grap- -2 0 Tyler, director-general of the Interna- 1000 ple with large budget deficits, they tional Air Transport Association, the -3 -1 100 are cutting back defence spending. It main representative body for the air- now looks all but certain that no new -4 -2 lines. “Any shock has the potential to orders will come for the Typhoon put us in the red.” -5 -3 0 0 from its four launch partner coun- The airline industry made a com- 2002 04 06 08 10 12 2000 02 04 06 08 10 11 2000 01 02 03 04 05 06 07 08 09 10 tries, leaving the fighter dependent on bined net profit of $16bn in 2010, Sources: IATA; Thomson Reuters Datastream; Ascend winning export customers. according to Iata, but the airline body This explains why aerospace compa- expects this figure to fall to $6.9bn in nies are intensifying their search for 2011 and $4.9bn in 2012. benberg. He adds that the weak eco- ued to add capacity is that they don’t kets, which have better growth pros- adverse impacts on revenues are deals in emerging markets, where While air travel continues to rise on nomic environment will act as a spur want to lose market share to Gulf pects than western countries. Further- likely to be very limited, unless the some countries have military ambi- a long-term basis – there were 2.7bn to further consolidation between air- rivals.” more, many of the orders from air- economic downturn deepens and goes tions to match their fast-growing eco- passengers last year – it is closely lines. “As economic conditions deteri- These Middle East companies – lines in developed markets are for on for several years.” nomic clout. The Eurofighter consor- correlated to gross domestic product. orate, we expect consolidation to rise Emirates of Dubai, Etihad of Abu more fuel-efficient narrow-body air- Defence manufacturers, meanwhile, tium is on a shortlist of two suppliers In September the International Mone- up the agenda,” he says. Dhabi and Qatar Airways – are threat- craft that will replace ageing gas guz- are adjusting to the prospect of of 126 combat aircraft to India, which tary Fund cut its global growth fore- Tie-ups between US carriers over ening to inflict as much pain on Euro- zlers. reduced orders for combat aircraft could be worth $20bn, while Boeing is casts for this year and next, citing the the past three years have meant that pean flag carriers on long-haul routes from their traditional customers in hoping to secure orders for its F-18 EU sovereign debt crisis and the weak they are responding to high fuel costs to Asia as low-cost airlines have western countries. Super Hornet fighter jet in Brazil, in a US economy. this year by cutting seating capacity, inside the EU. ‘I think it’s likely the Development of the F-35 joint strike deal that could be worth $5bn. Andrew Lobbenberg, analyst at in a move that has given them the But for the aircraft makers, the Mid- Pentagon will cut the fighter – by Lockheed Martin of the If Boeing and EADS can keep a Royal Bank of Scotland, predicts that opportunity to raise fares. dle East airlines are extremely impor- US – has been hit by delays, leading tight rein on the cost of their develop- European flag-carrier airlines will in In Europe, by contrast, where there tant customers. Emirates, for exam- number of F­35s. to predictions that the Pentagon will ment programmes – which both the coming months see a fall in are still too many airlines, flag carri- ple, is the biggest operator of the My feeling is that one cut the planned US order of 2,443 air- companies do not have a distin- demand for business – so-called pre- ers are still planning to increase seat- Airbus A380 superjumbo, with 17 craft. One option would be to axe the guished history of doing – they can mium – travel, particularly on long- ing capacity. already in its fleet and a further 73 on version will get the chop’ jump-jet version of the F-35. look forward to a period of rising haul routes over the north Atlantic. Geoff van Klaveren, analyst at Deut- order. “I think it’s likely the Pentagon will earnings. This would particularly hit the flag sche Bank, says: “The European carri- Such deals are a sign of how Boeing cut the number of F-35s,” says John This underlines how the aircraft carriers’ profitability because, unlike ers still focus too much on empire- of the US and Airbus, owned by Nick Cunningham, an analyst at Louth, an analyst at the Royal United makers have much greater control low-cost airlines, they generate about building rather than shareholder EADS, the European aerospace com- Agency Partners, the equity research Services Institute. “My feeling is that over their prospects – in stark con- 50 per cent of their revenue from busi- value, and should be more conserva- pany, hope to be insulated from company, says: “[Boeing and Airbus] one version will get the chop.” trast to the airlines. ness passengers. tive with capacity – especially with another aviation downturn by their are likely to see an increasing number Europe is also wrestling with politi- With few signs of relief in western “Our caution towards flag carriers low economic growth and high oil large order books. of aircraft delivery deferrals, but their cal and budgetary challenges of its economies, many airlines are braced is based on a view that premium traf- prices. Perhaps one of the reasons Much of the backlog consists of long backlogs and the ramp-up of own. for a hard rather than a soft landing fic is going to tumble,“ says Mr Lob- why European airlines have contin- orders from airlines in emerging mar- delayed programmes means that The Eurofighter Typhoon – built by over the coming year. Dreamliner ushers in fresh rivalry Gulf states start to call The embarrassing series increasing aircraft produc- seduced by the prospect of Manufacturers of delays has removed tivity.