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Fitch: Aero & Defense 2011 Outlook - Growth Offsets Risks from Cash Deployment and Program Execution

Dépèche transmise le 24 janvier 2011 par Business Wire

CHICAGO--(BUSINESS WIRE)--According to a new report issued today by Fitch Ratings, Fitch's outlook for the global aerospace and defense industry in 2011 is stable, with projected growth in most end-markets offsetting risks related to cash deployment, program execution, and European defense budgets.

Industry indicators such as airline traffic and profits are positive for the commercial aerospace sector, and most end-markets should grow in 2011. Fitch expects large commercial aircraft (LCA) deliveries from Airbus S.A.S. (Airbus) and The Boeing Co. (Boeing) will rise 6%-7% in 2011 and a further 13%-14% in 2012 as the sector benefits from large backlogs and healthy orders. The commercial aftermarket should grow in the mid-to-high single digits this year. Fitch believes business jet revenues and profits could begin to rise in 2011 because of delivery mix and the impact of restructuring, but unit deliveries will remain depressed and at risk in the absence of new orders. Fitch expects regional aircraft deliveries will decline 5% in 2011. Suppliers will likely see the highest revenue increases in the sector as they benefit from the aftermarket and the buildup to higher production rates in 2012. New aircraft programs will continue to be a key credit driver in 2011, particularly Boeing's 787, which is a wild card in Fitch's delivery forecast.

Core U.S. defense spending should continue to rise in fiscal 2011 and 2012, so the general outlook for the sector is still stable in the near term, although the growth rate has fallen and there are likely to be some shifts within the budget, including some program cuts. Supplemental funds for operations in Iraq and Afghanistan should trend down in the next few years. Risks to the U.S. defense outlook include margin pressures from tougher contract terms; cash deployment actions to offset lower growth; and pressure on spending after fiscal 2012 due to fiscal challenges and growing support in Congress for defense reductions.

Despite declines in European home-market defense budgets in the short to medium term, procurement expenditure, mostly affecting original equipment manufacturers (OEMs), is unlikely to fall at the same rate as overall defense spending, thus limiting the revenue downside risk for European defense companies.

Fitch's ratings for the Aerospace and Defense (A&D) sector incorporate expectations for substantial cash deployment, which could constrain credit quality improvement despite strong liquidity positions and healthy cash flow. Expectations include higher pension contributions, increased merger and acquisition (M&A) activity, and little debt reduction.

An outlook change could be prompted by a weaker than expected global economic recovery, or by exogenous shocks such as terrorism or pandemic disease. Continuation of growth in Asia is important to the outlook given that the region is a main engine of commercial aerospace growth. A spike in fuel prices could also negatively affect the sector's outlook, as could another capital markets crisis that hurts aircraft finance availability and government finances. Large government deficits could lead to further defense spending cuts in core European markets. There is execution risk in new programs such as the A400M and Boeing's 787 program, both of which could be catalysts for downgrades in the case of additional cost increases. The outlook might also be affected if anticipated growth in Emerging Markets defense spending, expected to offset the lack of growth in Western Europe, is scaled back.

The full report '2011 Outlook: Global Aerospace and Defense' is available on the Fitch Ratings' website 'www.fitchratings.com.'

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research: 2011 Outlook: Global Aerospace and Defense

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=599425

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