Aerospace Analyst: Soft Landing Likely, But ...

The English-speaking world’s most-quoted aerospace analyst, Richard Aboulafia, was in Seattle Monday to deliver his annual address to the Pacific Northwest Aerospace Association, an industry group representing primarily smaller aerospace parts suppliers in Washington and Oregon.

Afterwards, he and I retired to a convivial watering hole for our annual post-PNAA-speech debriefing, where he told me he was surprised at the pessimisim he heard from participants at the event. His firm — Virginia-based Teal Group – foresees a three-year recession, and based on that, Aboulafia is projecting a relatively soft landing for the aerospace manufacturing industry.

But he’s also warning listeners that, now more than ever, past performance is no guarantee of future success. We’ve got 60 years of market data involving airlines and jet builders, but we’ve never seen conditions like this before, Aboulafia said, and the answers to some of the most important questions can vary greatly based on how you assess the key data.

The big question, he says, is whether the disasterous global economic numbers we saw in October and November (which are coming to light now as airlines report horrible fourth-quarter earnings) are a one-time abberation caused by the Wall Street crisis of the fall – or whether they’re early indicators of a long-term collapse. We convinced ourselves that they’re more-likely just a one-time event, an economic freeze-up akin to what we saw following September 11th. (Then we ordered another round.)

But as Aboulafia said during his speech Monday, the worrisome thing is that there’s so much we just don’t know. And that, he said, was the thing that jet-parts-builders in the audience seemed to be focused on.

What about the big backlogs at Boeing and Airbus? I asked. Depending on the model, the backlogs stand at four to six years, suggesting they could withstand even 30-percent cancelations without having to cut production rates well into 2011. That should give confidence.

“I don’t even like to use the word backlog anymore,” Aboulafia told me. It gives a false sense of security, he continued. Airlines, so far, aren’t cancelling orders, but they’re all trying vigorously to defer them, taking their orders to the back of the line. This could lead to weak demand in the near term – which would be bad for employment in key aerospace clusters like Seattle, Kansas and Texas.

The sharp declines in fuel prices are a mixed blessing, we agreed. Yes, they’ll help the profitability of airlines around the world, which will make them better-able to afford new airplanes. But they’re also killing the balance sheets of some of the biggest jet buyers — state-backed airlines and jet-leasing companies in the Middle East, like LCAL in Dubai – which had been using their petro-dollars (or petro-Euros, as the case may be) to buy airliners in bulk, but now are cutting back.

So what you’re saying, I said, as we settled up the bill, is that this is kind of a Sully Sullenberger market: If everything goes right, we’ll set down gently and everybody gets out of this OK. But if one thing goes wrong, we could very well find ourselves at the bottom of the river.

He laughed, we shook hands, then headed out into a damp Seattle night.