Canadian aerospace recovery not expected until 2011, says Conference Board

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MONTREAL - Canada's aerospace industry has fared better than other manufacturing sectors through the recession but the effects of lower demand, especially for business jets, will constrain a recovery until 2011, the Conference Board of Canada said Tuesday.
So far the industry, supported by nearly two years of production backlog, has done relatively well.
"Almost any manufacturing industry is seeing a double-digit decline in production in the last year, so relative to many of their peers they're doing better," says Michael Burt, author of the board's industrial outlook report.
But slower demand and order cancellations in recent months is forcing production cuts and layoffs.
Production is forecast to decline by 2.1 per cent this year and by 2.3 per cent in 2010 before growing about 3.5 per cent annually through 2014.
Bombardier Aerospace (TSX:BBD.B) last week announced the layoff of 715 Montreal-area employees next year as it reduces production of regional jets.
That's in addition to 4,360 layoffs announced earlier this year around the world, including more than 1,700 in Montreal, because of lower commercial and business jet orders.
Other industry players, including simulator and training provider CAE Inc. (TSX:CAE), Bell Helicopters and parts suppliers have also been forced to reduce staffing.
Business jet orders tend to lag U.S. corporate profitability by one to two years. Consequently, demand should remain weak over the next 12 months while excess inventories of used planes are sold.
Commercial airlines, which are expected to lose $11 billion this year, have held off on orders in the face of weak demand, especially among premium business travellers. But higher fuel prices will force many to replace gas guzzlers to take advantage of a recovery.
These factors should cause production to take off and exceed 2008 totals by 2012, Burt said in an interview.
"The recession set back a lot of this nascent demand but I think the fundamentals are still healthy once the recession is passed," he said.
The result should be increased employment as aircraft production grows by three to four per cent annually following a two-year slide.
"You can't get increases in production on that scale just through productivity improvements, there's going to be some hiring involved with that," Burt said.
Despite decreased demand, pre-tax profits are expected to reach $461 million in 2009, thanks to the weaker Canadian dollar at the beginning of the year, the Conference Board said.
With prices and production now falling, profits are forecast to decline by 18.6 per cent next year. They are then forecast to grow by around 10 per cent annually until 2014.
Revenues are expected to begin recovering in 2011 but not return to the previous peak until 2013.
Strong military orders have acted as a cushion for some companies against civil aviation declines. But mounting government deficits may force spending cuts for some programs, Burt said.
The Conference Board's forecast mirrors other assessments of the aerospace industry.
Cameron Doerksen of Versant Partners, for example, said he expects Bombardier's aerospace margins and overall company earnings to "remain depressed through fiscal 2011."
Canada's aerospace industry employs about 60,000 people. It is centred largely in Quebec, which accounts for more than 60 per cent of revenues.

Organizations: Bombardier Aerospace, TSX, Conference Board of Canada CAE Inc. Versant Partners

Geographic location: MONTREAL, Canada, U.S. Quebec

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