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Supply Chain Risks Still Loom for Aircraft Manufacturers

Monday, 9 Jul 2012 | 7:58 AM ET

The aeronautical industry is not experiencing a production bubble in the commercial sector, but supply will need to keep up with demand, David Baxt, Global Head of Aerospace and Defense at Jefferies, told CNBC.

Airbus and Boeing to Fight for Orders at Farnborough
"This year we do strongly believe it is going to be the year of the Boeing 737 Max, Boeing has indicated ending the year with potentially a 1000 orders and at this show Jefferies expects to see up to 400 commitments turned into orders for the Max," David Baxt, global head of aerospace at Jefferies, told CNBC.

“Jefferies does not believe that is the case," the aerospace analyst said when asked if we were currently in a production bubble.

"Passengerload factors are averaging 78-79 percent. Demand is there…year to day traffic is up seven percent. By way of background, airlines brings capacity into the system when they run 70 percent load factors so airlines are looking to bring as much capacity into the system as possible,” he said.

Airbus, a subsidiary of EADS , and Boeing have both experienced problems in their supply chains and have, “not by their choice” Baxt said, had to buy their suppliers PFW Aerospace, Alestis and Vought Aircraft respectively.

However, Baxt said the problem had not gone away and there could be more potential for supply problems if suppliers cannot keep up with the growing demand for commercial planes.

“I think first is getting deliveries right and getting the orders right and I think that will be sustained as technology [and fuel-efficiency developments] fundamentally changed airlines' desire to take delivery of new aircraft. Can the supplier base keep up? That’s the million dollar question," he said.

“It is Jefferies strong view that we’re going to have to see strong consolidation…on the aerostructure side to maintain this build cycle,” he added.

Baxt said that massive cuts in defense spending by national governments, and particularly the U.S., were changing the landscape of aeronautical economy in stark contrast with the flourishing private sector.

I don’t think [we’ve experienced] a show with a bigger divide between the defense world and the commercial aerospace world. The defense world is set for cuts. Massive cuts, sustained and significant by the world’s most significant buyer,” he said.

“[However] on the commercial aerospace side” he added, “we’ve got 9500 airplanes on order with seven years of backlog.”

Speaking to CNBC ahead of the opening of Farnborough International Airshow by Prime Minister David Cameron, Baxt said that the atmosphere was exciting at this year’s show as two aeronautical giants, Boeing and Airbus, are both thought to be eyeing one particular model.

"This year we do strongly believe it is going to be the year of the Boeing 737 Max, Boeing has indicated ending the year with potentially a 1000 orders and at this show Jefferies expects to see up to 400 commitments turn into orders for the Max" he said.

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