Emerging markets to fuel airline spending trajectory

May 10, 2013

Emerging markets may not have all the technological know-how in civil aerospace, but from China across the world to Brazil, they do have the cash.

The civil aerospace sector performed well in 2013, according to Societe Generale data, trading at a 4 percent premium over the MSCI world index, while the defence sector has steadied, and in the medium to long term civil aerospace should be supported by strong orderbooks from emerging economies.

Research from PwC shows the global aviation industry is set to increase by 3.3 percent to 68 billion by 2022, driven by an increase in fleet size.

Last month China decided to ease a boycott of $11 billion in Airbus jet orders. A letter seen by Reuters gives a breakdown of the A330 orders, the details of which have been mostly kept secret awaiting final approval from the Chinese government.

They include 10 aircraft for Air China, 10 for Hainan Airlines, 10 for China Southern and 15 for China Eastern. The letter said first deliveries were tentatively scheduled for mid-2013.

China has already become the largest maintenance repairs and operations  market in Asia-Pacific and is expected to grow 9 to 10 percent annually, to reach $70 billion by 2015.

On Tuesday, Airbus results showed a sharp rise in first quarter core profit, with revenues rising 9 percent, though the aerospace group said it had consumed a significant quantity of cash to boost inventories for new projects.

Research from Societe Generale shows the largest order backlog for the industry comes from the Latin American share of the market, with an increase in aviation orders to 37 percent of the market in 2011 from 3 percent in 2000, a general trend that is set to grow given rising fuel prices.

Higher fuel prices means airlines will look to replace their fleet with more fuel-efficient aircraft and growing populations will bring increasing numbers of passengers. An increase in passenger traffic for the 2014 Football world cup championships in Rio de Janiero and the Olympic games in 2016 will fuel part of this.

SocGen has this:

With emerging economies now accounting for almost half of new orders, and Airbus and Boeing boasting eight-year backlogs, large jet delivery growth looks well set for the medium and long term.

Compared to last year EADS, the parent company of Airbus, Bombardier aerospace and Boeing are set to increase deliveries of commercial aircraft while revenues are set to grow at Boeing. EADS will see its orders drop for 2013 but the sector is due to see resilient earnings, research shows. Soc Gen has ‘buy’ ratings for EADS, Safran, Megitt and MTU as a result.

Research shows China accounts for 7 percent of Boeing’s sales. Outside the BRICs, demand for western aviation technology is evident. Oil-rich Kuwait is looking at plans by its state-owned airline Kuwait Airways to buy 25 new Airbus jets, a source told Reuters, a deal that could be worth up to $3 billion dollars.

Indian aerospace is also enjoying a round of investment through a series of joint ventures.

Source: PWC

For those curious about the global aviation industry’s outlook, the Paris airshow on June 18 should leave clear a slipstream.

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