Canadian aerospace profits expected to drop on lower sales: Conference Board

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MONTREAL - Canadian aerospace industry profits will decline through the end of 2013 because of a slowdown in new aircraft orders, uncertainty in Europe and a six-month delay in Bombardier's CSeries aircraft, the Conference Board of Canada said Wednesday.

The think-tank expects industry profits will decline 30 per cent by the end of 2013 from the recent high of $710 million set in 2010.

Pre-tax earnings are expected fall to $504 million next year before nearly recovering to this year's level of $614 million by 2017.

Fierce competition and the strength of the Canadian dollar contribute to slim industry profit margins.

Conference Board senior economist Maxim Armstrong says the industry's outlook mirrors global economic trends.

"The aerospace industry is still coping with the lingering effects of the 2008–09 recession," Armstrong wrote in the latest edition of the board's Industrial Outlook.

"While new orders indicate that the industry is showing signs of recovery, the financial turmoil in Europe is creating uncertainty and making the comeback difficult."

Industry revenues surged last year but are expected to experience a correction in 2012.

Lower sales in the first half of this year are expected to push industry revenues down 5.4 per cent to $14.9 billion this year, before rising each year to reach $18.5 billion in 2017.

The improved outlook in 2015 and beyond coincides with the impact of Bombardier’s (TSX:BBD.B) CSeries commercial jet. The first test flight of the smaller version of the plane has been pushed back to next June. The plane is slated to enter into service a year later, followed by the more popular larger model by the end of 2014.

It will then take a few years for production to reach its full potential.

"Although there are some orders for the aircraft booked, some airlines are waiting until successful (first test) flights have been made and orders delivered before they take the plunge on this new aircraft," he wrote.

Bombardier has received orders and commitments from 13 customers for 352 of the 110- to 149-seat plane that will be assembled north of Montreal with components supplied from China, Northern Ireland and elsewhere.

Intense spending on research and development has allowed aerospace employment to remain resilient despite lower aircraft production.

Pratt & Whitney has allocated $1 billion to develop new engines to be used on the CSeries, while companies such as landing gear maker Heroux-Devtek (TSX:HRX) is designing equipment for several aircraft types including the Learjet 85.

Armstrong said modest growth in global demand for air transportation is delaying the need to expand capacity or to replace existing aircraft.

U.S. economic growth remains slow but an improvement in the financial position of American companies should lead to increased demand for business jets, the Conference Board said.

Bombardier is seeing the benefits as it recently received large orders for its business aircraft from NetJets and Europe's VistaJet.

The NetJets deal for 125 firm orders of three different jet models and options for 300 more aircraft is valued at US$9.6 billion. VistaJet's order for up to 142 planes at US$7.8 billion will see deliveries begin in 2014.

Passenger demand has been "modest at best" in North America, stronger in Europe despite the recession and growing in emerging markets that will be the big buyer of aircraft for years to come.

China alone is expected to order 300 commercial aircraft annually from 2011 through 2015, more than doubling its fleet to 4,500 aircraft.

India's SpiceJet expects to increase capacity by 15 to 20 per cent in the next three years.

Both countries are building many new airports but face the challenge of training enough pilots, airport traffic controllers and mechanics to meet growing demand for air travel from the expanding middle class.

Other countries with strong projected growth are Vietnam, Indonesia, Mexico, Brazil, Saudi Arabia and Nigeria. Fleet growth in Asia-Pacific is expected to average 5.7 per cent annually through 2030, followed closely by Latin America and the Middle East.

While emerging countries are big customers of Canadian-made aircraft, some are also starting to step up production of their own planes, especially regional jets.

That threatens the dominating positions held by Bombardier and Brazil's Embraer. China's COMAC is also seeking to enter the widebody market dominated by Boeing and Airbus by developing the C919, in co-operation with Bombardier.

On the Toronto Stock Exchange, Bombardier's shares were up four cents at $3.43 in midday trading.