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Aerospace industry expects another year of turmoil

Dec. 18, 2009, Montreal – Canada's economy may be showing signs of improvement but the aerospace industry faces continued turbulence in 2010 with a full recovery from the worse crisis to strike the sector possibly as far as two years away.


December 18, 2009
By Ross Marowits | Canadian Press

Dec. 18, 2009, Montreal – Canada's economy may be showing signs of improvement but the aerospace industry faces continued turbulence in 2010 with a full recovery from the worse crisis to strike the sector possibly as far as two years away.

"Clearly in 2009 there were still orders that had come in from the previous years, so what we're looking at is a more difficult year in 2010,'' says Claude Lajeunesse, head of the Aerospace Industries Association of Canada.

"Hopefully, if the economy continues to recover, then towards the end of the year or early 2011 we can expect that it will pick up.''

Production curtailments, particularly among business and regional jets, resulted in 3,000 net layoffs in Canada in 2009, including from the supplier base. Most of these were located in Quebec, which houses the country's largest aerospace cluster.

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The figure is net of the hundreds of workers hired for new projects, including engineers hired to get Bombardier's CSeries off the ground and others taken on by Bell Helicopter.

Bombardier alone cut 4,360 jobs around the world in 2009, including 1,740 in the Montreal area. Parts suppliers also shed 1,100 of the 12,000 people employed in the area.

Additional layoffs are expected in 2010 as manufacturers continue to scale back production in the face of reduced demand. Bombardier has already announced that more than 600 workers at its regional jet plants in Montreal will be laid off.

Lajeunesse said the companies that will likely do best next year are those that are part of the supply chain for Boeing's 787 Dreamliner, which had its maiden flight this week and avionics firms such as CMC Electronics.

Lajeunesse characterized 2009 as a transition year. The industry which typically lags the general economy started the year with a strong order book, but saw the situation worsen when new orders became increasingly rare and customers deferred and cancelled deliveries.

Marc Parent, president and CEO of simulator and training giant CAE has seen several cycles in his 25-year career but said the global recession and financial crisis pushed the industry to its deepest crisis, even surpassing the time following the 2001 terrorist attacks.

"This is unprecedented in its impact on the civil aerospace industry in particular,'' he said in an interview.

Parent said the civil industry will come back as it has in the past once GDP improves, airline traffic increases and corporate profits rebound. He expects the sector will double over the next 20 years to support globalization and industries' needs for transportation.

The business jet market is expected to face continued challenges next year, although manufacturers are seeing signs that worst may have passed.

For the first time in a year, Bombardier recently enjoyed a positive, albeit small, net number of business plane orders with 26 new orders offset by 24 cancellations.

"Although the business jet market is still experiencing difficulties, we are seeing some signs of stabilization,'' chief executive Pierre Beaudoin said during a recent conference call.

But stabilization isn't the same as recovery and its certainly not the same as growth, noted Richard Aboulafia, aerospace analyst at research firm Teal Group.

"But given the terrors of 2009 stabilization is welcome,'' he said in an interview.

Aboulafia said the outlook for Canada's aerospace industry is fairly bright despite uncertainties about the CSeries, the future popularity of regional jets and whether the heavy impact on the small business jet market will expand to larger planes.

He forecast that it could take years for the industry to return to its peak period in late 2007 and early 2008.

In addition to losing business as OEMs reduced production, parts suppliers also faced financing challenges, says Jacques Saada, executive director of the Quebec Aerospace Association.

While no companies have shut their doors, consolidations that are customary in a downturn are likely, he said.

Saada expects it will take time for an eventual recovery to sift through the chain of small and medium-sized suppliers.

The aerospace sector also isn't monolithic. It is a series of markets with unique issues that won't necessarily rebound at the same time.

In the meantime, suppliers are continuing to invest in research and innovation to further develop niche markets such as composite materials, air quality on planes and machining techniques, he said.

The federal government also needs to optimize its military procurement policies to help Canadian firms and maximize employment, said Lajeunesse.

Ottawa's new industrial regional benefit policy is positive but it needs to move on overall procurement, he said.

"It's quite clear that right now we do not benefit as much as we could.''

Ottawa plans to spend upwards of $20 billion over the next 15 years to modernize its military infrastructure.

While the contracts will mostly be with foreign-based manufacturers, Canadians should benefit from spinoffs and lucrative after-service contracts, he said.

"We have to make sure that Canadian industry is at the forefront and that we are making decisions that will protect our sovereignty and ensure that Canadian companies will be able to service these planes.''

Growing military programs has helped aerospace companies such as CAE and landing gear manufacturer Heroux Devtek to cushion softness in civil programs.

While Canada plans to spend, global defence expenditures are expected to slow after nearly seven years of incredible growth as governments, particularly the United States, look to trim their deficits.

"We're not going back to what the industry was in the 90s but it's tough to move beyond those excellent growth rates,'' said Aboulafia.