Commercial aerospace executives say the industry is poised for better times over the next few years after seeing profits battered by a slump in air travel and business-jet output.
Goodrich Corp (GR.N), Rockwell Collins Inc (COL.N) and Pratt & Whitney told the annual Reuters Aerospace and Defense Summit they are seeing signs of improved passenger and freight traffic that should lead to higher maintenance and repair sales to their commercial airline customers.
Goodrich predicts growth to return to the sector in 2011 as demand for air travel returns to more normal levels.
Goodrich Chief Financial Officer Scott Kuechle said 2010 would be a year of transition as conditions gradually improve.
In 2011, that's when we expect to see not only utilization move back up to more normal levels but the overall supply-demand start to come back in balance, Kuechle said. That should be a very good year for the industry.
The chief executive of Rockwell, a former jet fighter pilot, said the next two years were likely to be better for airlines and the business jet market.
The great downturn has slowed to a crawl and we believe by the time we end this year we will be in a relatively stable environment, Rockwell Chief Executive Clay Jones told Reuters Insider during the summit in Washington on Tuesday.
The signs of stabilization, coupled with the drop in capacity this year, pave the way for fares to rise as well.
POSITIVE EARNINGS REVISIONS
Weakness in air travel has led the global airline industry to cut flights and ground aircraft, hurting maintenance revenue for Goodrich, Rockwell Collins and others. They supply plane parts to Boeing (BA.N) and Airbus (EAD.PA).
Rockwell Collins posted a 12 percent drop in net income for its fiscal year ended in September. Analysts expect Goodrich earnings to be $4.54 per share in 2009, lower than the previous year, according to Thomson Reuters I/B/E/S.
This year, the International Air Transport Association projects the global airline industry will lose $11 billion, with heavy losses in Europe and North America. Next year, the industry is slated to lose $5.6 billion, the trade group said on Tuesday.
Yet, in recent months many analysts have upgraded commercial aerospace stocks while downgrading their defense counterparts, which face a tougher outlook as the Pentagon scales back growth in the defense budget.
Pratt & Whitney President David Hess told the Reuters Summit this week that the United Technologies (UTX.N) unit expects to be back on the path to an earnings increase in 2010 after seeing a decline in 2009 as the global airline industry pares its losses and sees an improvement in traffic.
So we think both of those things certainly will help our commercial-engine business, Hess said.
Macquarie Securities analyst Robert Stallard said that Rockwell Collins, Goodrich and Precision Castparts Corp (PCP.N) stand to garner maintenance and repair sales as airlines see improving revenue and traffic next year.
You could actually start to see positive earnings revisions for aerospace companies along the middle of next year, Stallard told the Reuters Summit. I think the sweet spot for aerospace ... perhaps is still to come.
Goodrich expects usage of airplanes to start picking up next year and firm even more in 2011, a factor that could aid its maintenance and repair business, Kuechle said.
Analysts added that growing demand for air travel from China and India will also help fuel a recovery in the global airline industry and drive demand for new planes.
The growth of a large middle class in China is driving demand for leisure and business travel as well as freight traffic, Deloitte LLP analyst Tom Captain told the Reuters Summit.
The global industry for commercial is continuing its journey and changing directions, Captain said. It's clearly heading east to China and India and places like that.