Canadian Manufacturing

Canadian, US aerospace industry to benefit from emerging markets

Growth in emerging markets to make up for static demand at home, BMO Capital Markets report says



CHICAGO and TORONTO—Rising demand in emerging markets around the world represents a key opportunity for aerospace manufacturers in the United States and Canada as orders remain stagnant at home, according to a new report.

The BMO Capital Markets report notes that with a relatively static yet stable market in North America, the U.S. and Canadian industries can benefit from strong growth in countries like the United Arab Emirates (UAE) and China.

“Aerospace exports to developing economies have grown significantly over the past two decades,” BMO Capital Markets economist Aaron Goertzen said in a statement.

“U.S. producers have a slightly stronger foothold in developing markets than their Canadian counterparts, but Canadian firms are also benefitting from the export of U.S.-assembled aircraft containing Canadian-made components.”

However, even with the expansion of emerging-market players, producers in advanced economies still hold a commanding share of the global market, according to the report, with the U.S. alone accounting for nearly half of global aerospace revenue.

Canada, meanwhile, is ranked as the fifth-largest global aerospace producer.

Overall, the North American industry accounts for $200-billion in annual revenue.

Air travel and freight volumes are expected to grow in 2013, which should support airline profitability and underpin further expansion in aerospace orders.

The gradually improving global economic outlook together with ultra-low interest rates should continue to support industry activity in this year after contributing positively to aerospace demand in 2012.

In particular, private orders for corporate aircrafts in the U.S. are expected to be strong in the coming years.

“Corporate aviation is highly cyclical, and we’re starting to see some real momentum,”BMO Harris Bank vice-president and director of corporate aircraft finance Joe DiLallo said.

“Deliveries and orders of corporate jets have increased significantly this year, and we anticipate growth will be in the five per cent range for the industry through 2016.”

According to the financial firm, the solid recovery in private demand has created a record backlog of unfilled orders, which would support industry output even if the global recovery were to unfold at a slower-than-anticipated pace.

Over the past five years the aerospace industry has kept two to three years worth of unfilled orders on the books—well ahead of historical norms.

As a result, the industry has started ramping up production and should continue to build momentum over the next few years.

Elevated fuel prices are increasing airline demand for more fuel-efficient aircraft.

Although high fuel prices weigh on airline profitability, they also increase demand for newer, more fuel-efficient aircraft—a big positive for aerospace producers.

Indeed, aerospace orders boomed as energy prices surged during the commodity run-up in 2007-08.

Although a softer economy has kept demand subdued compared to its frenetic pre-recession pace, upward pressure on energy prices expected over the medium term bodes well for the aerospace industry.

In particular, Bombardier’s C-Series regional jet—whose maiden flight is slated for late June—incorporates advanced materials and modern engines in order to provide a noticeable improvement in fuel consumption.

Although defence spending provided an important support to aerospace producers during the recession, government restraint will likely weigh on growth ahead.

Government cutbacks are likely to weigh most noticeably on the U.S. industry, given the larger role of defence production south of the border and the more significant restraint needed to put U.S. public finances back on a sustainable track.

But aging military fleets should support aerospace producers over the longer-term as governments look to renew.

The eventual rise of interest rates from current lows will likely temper demand growth.

Heavy reliance on financing by end-buyers makes demand in the aerospace industry relatively sensitive to fluctuations in interest rates.

With rates currently near historic lows, their eventual normalization will create a noticeable headwind for the industry.

Canadian producers are currently grappling with an elevated Canadian dollar, which is weighing on the sector’s international competitiveness.

In contrast, the substantial depreciation of the U.S. dollar over the past decade has contributed to a meaningful pick-up of aerospace trade south of the border.

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