Tags: Airbus, Boeing, Economic Recovery, Technology Article

Farnborough Air Show Highlights Robust Recovery in Aviation Industry

By , Associate Editor, Money Morning •

The Boeing Co. (NYSE: BA) and its European rival Airbus SAS, got off to a confident start at the Farnborough Air Show yesterday (Monday), receiving billions in orders that highlight a commercial aviation industry on the rebound.

The aerospace industry's biggest annual air show is being held this week outside of London, where it holds court every other year, alternating hosting duties with Paris. The show is expected to be a profitable one for Boeing and Airbus as leasing companies and airlines place orders to expand and upgrade their fleet.

The industry giants were upbeat entering the show, expecting orders to showcase a healthy post-crisis aircraft market.

"You'll be surprised by some of the announcements we'll make," Airbus Chief Operating Officer John Leahy said at a press conference in London on July 17. "The world economy is turning around. I would have told you maybe four, five months ago that maybe we wouldn't have announced many orders, if any, at the air show. Now we're going to announce quite a number."

Since the show kicked off, Emirates Airline of Dubai - the largest major airline in the Middle East - ordered 30 of Boeing's 777 jets in a deal worth nearly $7 billion.

"Since we took delivery of our first 777 14 years ago, the airplane's reliability, performance and operating economics have firmly established it as the backbone of our fleet," Sheik Ahmed bin Saeed al-Maktoum, chairman and chief executive of Emirates, wrote in a statement.

Emirates ordered 32 Airbus A380 superjumbo jets last month, valued at about $11 billion.

Outpacing the commercial airlines' purchases were those of leasing companies. General Electric's (NYSE: GE) Commercial Aviation Services (GECAS) unit ordered 40 Boeing 737-800s and 60 Airbus A320s at Farnborough, for a combined sale value of around $8 billion.

"GECAS' order is a further demonstration of the strong demand for the A320 family and underlines its attractiveness to leasing companies, who are returning to the market with full steam," Airbus CEO Tom Enders said in a statement.

Air Lease Corp. made a first-day order of 51 Airbus jets worth about $4.4 billion. The newly established leasing company is expected to order over 100 jetliners this week worth about $7.5 billion total. Air Lease is one of the biggest new companies, started by airline industry powerhouse Steven Udvar-Hazy, and has already agreed to buy 60 jetliners from other leasing companies and airlines.

Leasing companies are expected to increase their stake of plane ownership from about one-third of all jetliners to 40% in a few years. The demand of lessors has helped Boeing and Airbus parent the European Aeronautic Defense and Space Company (EADS) maintain production levels through the recession.

Jetliners are seen as a safer investment than airlines, as planes can be moved from a failing airline to a successful one if lease payments aren't being made - and lessors have no problem taking back their asset if the airline isn't paying on time.

"You can get funding for aircraft because they produce good cashflow," Robert Martin, chief executive of BOC Aviation, a unit of Bank of China and one of the world's biggest airplane lessors, told The Wall Street Journal. "And unlike other investments - like buildings - you can move an airplane."

The orders placed so far have underscored the continued demand for the signature single-aisle jets. Some industry experts have wondered if the aircraft makers would replace the smaller models as competitors come out with wider-bodied versions.

The most notable competition comes from Canada's Bombardier (TSE: BBD.B) and Brazil's Embraer (NYSE ADR: ERJ).

Analysts speculate that the companies will re-engine their smaller aircrafts before launching a new model.

Udvar-Hazy refers to Boeing's 737 and Airbus' A320 as the "bread and butter" of the industry.

"At this point in time, these are the aircraft that our airline customers are asking us to provide," Udvar-Hazy said. "Time will only tell if we move on anything else."

Boeing is also using the show to take orders for its long-awaited 787 Dreamliner jet, slated for release later this year but could be pushed into 2011.

Commercial Aviation Gaining Speed

Both Boeing and Airbus have recently said they expect commercial air traffic to return to its average growth rate of 5% a year over the next several years.

Boeing announced before the show it had received orders for 177 planes this year; Airbus had sold 131.

Although both companies are thought to have discounted some recent sales, a sign that prices haven't plunged is that jetliner lease rates have dropped less than 20% since they peaked before the financial crisis.

A travel increase in emerging markets like Brazil, China and India, and a heavy increase in Middle East airline traffic has boosted jetliner demand. Budget carriers have been able to increase their fleet by servicing these countries.

Rising fuel prices have also encouraged airlines with older models to upgrade to newer, more efficient planes.

With demand gaining traction and a $10.3 billion cash pile under its belt, EADS is looking to expand and restructure its business this year.

"We have a strong cash position; the crisis is partly behind us; integration is very well advanced and now it's time to go for acquisitions," Louis Gallois, chief executive officer of EADS, told Financial Times. "I am supported by the board for acquisitions and we will do it."

EADS is expected to target U.S. defense electronics companies and security groups in its acquisition hunt.

Gallois says the future of the aviation industry involves more collaboration between the big guys and the smaller names.

"I think we are going to a more diversified world where there will not be only Airbus and Boeing but an industry with alliances between partners," he said.

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