Defence and Aerospace special report: Aviation sector bears brunt of crisis woes

Date: 18/10/01

By Laurence Frost

MUCH has already been reported about the crippling effects that last month's terrorist attacks are having on the world's airlines. Carriers have not been shy in their estimates of the damage they expect from the slump in demand for flights and increased insurance and security bills.

Aircraft makers have been much more reticent; the fallout for the aerospace companies is slower to arrive and harder to quantify, as they work through backlogs of existing orders.

Airlines were already braced for economic turbulence well before the first hijacked plane hit the World Trade Center. But the 11 September attacks capsized growth forecasts of around 1 per cent for the whole US economy in the second half of 2001. Now economists expect a contraction of similar magnitude. And airlines are bearing the brunt of declining economic activity, even more than usual.

The International Air Transport Agency (IATA) last week predicted that its 275 member airlines would lose $4.5 billion (4.9 billion) this year as a result of the attacks - on top of the $2.5 billion (2.8 billion) they were already expected to lose. Pierre Jeanniot, the organisation's director-general, also said the sector could take a year to bounce back.

In the US, job cuts have totalled over 120,000 so far as schedules have been slashed. Credit agency Moody's has downgraded its ratings for 10 airlines, and although traffic picked up noticeably at the end of September, it is still down 30 per cent for major carriers.

European airlines estimate that they lost 154 million during the four-day closure of US airspace, and demand remains depressed. But if the effects of the terrorism this side of the Atlantic were less severe, they were also more dramatic. Two troubled flag carriers, Swissair and Sabena, collapsed within three weeks and now face bankruptcy and messy dismemberment.

The entrails do not look good for the aerospace companies as the airlines review their order books. And although the full picture is yet to emerge, this has not prevented aerospace players from moving to anticipate the crisis. The world's largest aircraft maker, Boeing, was one of the first to act, announcing 30,000 job losses just a week after the tragedy, while a more measured reaction from European rival Airbus saw ambitious growth plans and recruitment frozen. The Toulouse-based firm has said it is in talks with a number of carriers who want to postpone deliveries by as much as a year.

Leading engine makers General Electric and United Technologies - the parent of Pratt & Whitney - have both issued profit warnings. Rolls Royce is expected to shed 4,000 jobs and cut production by 20 per cent at a board meeting today (18 October). Analysts believe makers of regional jets - aircraft with fewer than 100 seats - could weather the coming storms better than their larger cousins. Companies such as Raytheon, Cessna and Bombardier could find themselves relatively protected as business travellers turn increasingly to the superior security of private jets.

But it will be the two main players, Boeing and Airbus, who are watched most avidly. Airbus is less exposed than Boeing to the US market, where air travel is expected to decline most sharply - but some people are now wondering whether the recent calamitous events may have turned the longer-term contest between the companies' two rival visions on its head.

Earlier this year, Boeing raised eyebrows when it shelved plans to compete head-to-head with the new 555-seater Airbus A380 by launching a 'superjumbo' of its own. Since then the project has been gaining in both credibility and firm orders. But the cutbacks in leisure travel we are witnessing, and increased public uneasiness with large aircraft, could end up favouring Boeing's 'Sonic Cruiser' - a smaller, faster, longer-range craft still at a very early stage of development.

Airbus is maintaining that its A380 is still due to get off the ground on schedule. “Last year we needed 50 firm orders in order to launch the A380 programme,” said Rainer Hertrich, joint CEO of Airbus parent company EADS. “We have achieved that aim.” Although there have been no actual cancellations so far, German airline Lufthansa is reported to have postponed plans to purchase 15 new A380s. Others who have already ordered A380s still have plenty of time to review their decisions.