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Conference Board predicts slow aerospace rebound in 2012

Dec. 19, 2011, Montreal - Canada's aerospace sector should slowly rebound next year as  demand increases in what remains a fiercely competitive global market, the Conference Board of Canada said Monday.

December 19, 2011  By The Canadian Press

Dec. 19, 2011, Montreal – Canada's aerospace sector should slowly rebound next year as demand increases in what remains a fiercely competitive global market, the Conference Board of Canada said Monday.

After its third year of decline in 2011, production of commercial and business aircraft should improve thanks to a modest economic improvement in North America and large orders from emerging markets, the think-tank said in its fall industrial outlook.

However, demand will remain "moribund" in Europe next year.

The government debt crisis in Europe and continued weakness in the U.S. economy hurt the global economy in 2011. The industry is cyclical and typically lags economic recoveries.


However, growing demand in emerging economies creates optimism for the medium and longer term, the Conference Board said.

"Developing countries are the key commercial air transport market of the future," economist Lin Ai wrote in the report.

Countries such as Brazil, China and India offer new markets for Canadian manufacturers, but they are also developing their own aerospace industries that will add to the competition for orders.

Asia-Pacific is expected to become the largest aircraft market over the next 20 years. Boeing recently said that China's spending on new planes will be $600 billion over that period, 25 per cent higher than last year's forecast.

While Russia and China are developing new planes it's unclear when the new aircraft such as the Sukhoi Superjet or Comac C-919 will be available or how they will perform, said the report, which mirrors forecasts from financial analysts and other industry observers.

"The Canadian aerospace industry must continue to improve the quality of its products and to develop leading technology if it is to compete more effectively in the global marketplace," Ai said.

Companies such as Bombardier and Pratt & Whitney are developing new fuel-efficient products, a step needed to compete more effectively.

Bombardier is increasingly focused on India, Malaysia, China and African countries for orders as it competes with Brazil's Embraer and Europe's ATR for regional planes.

Cuts in defence spending among traditional buyers in Europe and the United States will add to the pressure, but the report said India, Saudi Arabia, Brazil and the United Arab Emirates have announced defence acquisitions.

Business jet orders failed to keep up with record corporate profits in 2011, although large aircraft have fared better than smaller planes.

The general Aviation Manufacturers Association said business jet shipments were down 13 per cent in the first nine months of the year.

The sector should end 2011 with a third year of production decline. But revenue growth will have more than offset cost increases, leading to a near doubling of profitability to $264 million, the board said.

However, profits were well below their 2009 level of almost $500 million and profit margins are expected to remain thin over the next five years.

Pre-tax profits should rise each year to reach $565 million on $18.7 billion of revenues by 2016.

Metal, energy and labour costs are expected to increase, pushing cost up 4.9 per cent annually between 2012 and 2106.

Recent easing of the Canadian dollar has helped to increase the competitiveness of Canadian-made aircraft and parts, which are priced in U.S. dollars.

And lower oil prices have given airlines breathing room. But fuel prices are expected to rise over the long-term, providing impetus for carriers to invest in new fuel-efficient aircraft.

A Forbes Insights survey found that 83 per cent of respondents said they were likely to acquire or lease new aircraft in the next five years.

"This is encouraging news for the Canadian aerospace industry, as it will help sustain production in the medium term," said the Conference Board report.

Bombardier's CSeries hopes to take advantage by offering lower operating and fuel costs. Airbus, Boeing and Embraer are putting new engines of their narrowbody workhorses in a bid to fend off this new competition.


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