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Aerospace-defense sector outlook improving despite global trade risks

A Boeing employee drives a lift near a GE engine for a Boeing 777 airliner at the Boeing factory in Everett, Wash.
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A Boeing employee drives a lift near a GE engine for a Boeing 777 airliner at the Boeing factory in Everett, Wash.

Despite some global trade uncertainties created as a result of the U.S. election, Fitch Ratings boosted its overall outlook of the aerospace and defense industry to positive from stable on Monday.

Still, Fitch said there are global trade risks ahead that could hurt commercial aerospace companies. Analysts have suggested that President-elect Donald Trump's talk about tougher trade policies with China, in particular, could impact some aircraft buying overseas.

"Revised trade policies emerging from the recent U.S. election could negatively affect the competitiveness of North American commercial aerospace companies," Fitch said in its 2017 Outlook: Global Aerospace & Defense report. "More restrictive trade policies could also disrupt the global aerospace supply chain."

Overall, the rating agency said it expects the stable outlook is justified given positive trends within aerospace and defense segments "offsets political risks, new aircraft program ramp-ups and business jet sector weakness."

On the large commercial aircraft side, the ratings agency said the number of aircraft from Boeing and Airbus is expected to rise about 8 percent next year and grow by 4 percent in 2018. It also sees global airline passenger traffic trends supporting the positive trends as well as industry forecasts for improved global airline profits due to continued low fuel costs.

Fitch also observed there is additional political risk from the U.S. government's Export-Import Bank, which Boeing's commercial airplanes business and other manufacturers depend on for financing international customers.

"The future of the U.S. Export-Import Bank (Ex-Im) is another development to watch, as shutting the Ex-Im bank could negatively affect the competitiveness of U.S.-based aerospace manufacturers," said Fitch.

Some lawmakers consider the Ex-Im Bank, which provided financing for just over 10 percent of Boeing's aircraft sales in 2015, a form of corporate welfare and would like to eliminate it. That said, backers of the financial institution say if that happens U.S. companies with international sales could potentially find themselves at a disadvantage against foreign competitors.

According to Fitch, Airbus and Boeing combined had 12,345 aircraft on their order books as of October 2016, which it said was roughly equivalent to eight years' worth of deliveries. The total value of those orders was as much as $875 billion.

Although the ratings agency didn't mention it, some industry analysts also have pointed to potential risk from higher interest rates that they believe could result in some airlines slowing their aircraft replacement buying programs.

For 2017 alone, Fitch estimated that around $120 billion to $125 billion in global financing would be needed for new commercial aircraft from Boeing, Airbus, Bombardier and Embraer.

Meantime, on the defense side Fitch said it sees 3 percent to 5 percent spending growth on a global basis over the next three years. It projected that the U.S. budget accounts for 45 percent to 50 percent of the total defense market, but added that the growth domestically is less than the international market.

Fitch said it expects the results of the U.S. elections could result in "upside" potential for U.S. military spending and more business for defense companies.

As reported, President-elect Trump has promised to increase the number of U.S. Navy ships and add more aircraft to the military. Also, he has pledged to boost the number of U.S. troops, which has been seen as a positive for both ammunition companies and missile manufacturers.

"Cost overruns or delays on new programs are risks to the outlook in both the commercial and defense sectors," Fitch said. "On the defense side, risks include the budget cap overhang in the U.S., additional continuing resolutions and political disruptions."