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Farnborough Surges Back, but Defense Cuts Loom

Monday, 26 Jul 2010 | 9:31 AM ET

The Farnborough International Airshow saw the giants of the aerospace industry back on fighting form with Boeing and Airbus receiving major orders, but the threat of military spending cuts loomed large on the horizon.

The final day at the Farnborough Airshow and day two of the public event days.
Sharon Lorimer
The final day at the Farnborough Airshow and day two of the public event days.

"It's been a great show considering some of the outstanding economic and financial pressures prevailing in the market place. Resilience to weather the storm has thus far been highly successful for all players," Saj Ahmad, aerospace analyst at FBE Aerospace, told CNBC.com.

"Overall, the sentiment at the show was certainly better than the air shows in Paris and Dubai last year," he added.

EADS' Airbus received orders for 130 planes at the event, with a list value of $13.2 billion, and provisional orders of 122 with a value of $15 billion, according to Reuters. Boeing sold 103 aircraft with a value of $10.4 billion and saw provisional orders of 54 planes at $4.1 billion, Reuters said.

"I think the cycle is coming back," Jim Albaugh, president & CEO of Boeing Commercial Airplanes, told CNBC at the air show, adding that he has been surprised by the strength of the recovery in the industry.

"We can't build these airplanes fast enough. If we could get up to rate and go above the projected rate of 10 per month, I'm certain we could sell them," Albaugh said.

David Joyce, president and CEO of GE Aviation, agreed that the general mood of the industry seen at this year's air show was much more upbeat compared to the Paris Airshow in 2009.

"Go back a year, we were in the middle of a time when air travel was actually contracting, it's been reversed since Paris," Joyce told CNBC. "In general it feels a lot better than it did last year so we're pretty optimistic about this recovery." (GE is the parent company of CNBC).

The strong order figuresshow that many airlines are banking a long-standing recovery in passenger demand for air travel, but that runs the risk of over-capacity if the economy suffers a double dip.

"If the pendulum swings the other way, there will be greater pressure to rein in production," Ahmad said.

While the world's two largest plane makers stole most of the headlines as usual, the air show saw the competition for their dominance gathering pace.

"It's been a duopoly for quite a while and that duopoly is over. You've got Lombardia, you've got Embraer, you've got Comac in China, you've got the Russians, you've got the Japanese. The single-hull market place is going to be very crowded," Albaugh said.

Though the airs how played host to robust orders for aircraft, it also saw a shift in the global demand picture with the Middle East and Asia taking over the growth mantle from the Western world.

"In the Middle East and in Asia we're seeing that recovery (is) very strong. Not as strong in Europe and the United States, but we have raised our order forecast twice so far this year," Albaugh said.

The relative strength of the low-cost carriers was also in focus as the recession-resistant model of companies such as Ryanair came into its own during the downturn.

"Low-cost airlines have been driving both traffic and profit… Passengers (are) continually looking at stretching less of their money to go further and get better value," Ahmad said.

On the Defensive

The move to austerity from Western governments managed to dampen the upbeat mood of the air show, especially for companies reliant on defense contracts.

"Defense budgets are clearly flattening across the United States and Europe. What you’re seeing now is a true return to shareholder value… You will see more M&A," David Baxt from Jefferies International told CNBC.

Farnborough International Air Show 2010 - A CNBC Special Report
Farnborough International Air Show 2010 - A CNBC Special Report

"There are a lot of defense companies that are starting to trade like they are utilities

I think large-cap private equity is looking at the industry very, very hard," Baxt said.

"I would not be surprised to see one transaction or two of significance from a going private perspective," he added.

Wes Bush, CEO & president of Northrop Grumman, agreed that defense budgets are feeling the pressure, but pointed out the world is not necessarily safer than it was this time last year.

"We do believe we are in for a period of flat, perhaps even a slight decline in, defense budgets over the coming years," Bush said.

Another factor affecting the outlook for the industry is the lack of available credit for the smaller players, according to ADS Chairman Ian Godden.

"There is still a need to deal with the SME community who are not seeing enough finance… our worry is that they will not be able to finance their own growth," Godden said.

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