Terror will mean early downturn

The terrorist attacks on the US have sparked fears of a recession in the aerospace industry, as airlines reduce orders in the face of falling passenger numbers.

While some manufacturers had expected to feel the pinch of the global downturn at some point, the sector until last week looked relatively buoyant.

Airbus said last month that it planned to produce 400 instead of 450 aircraft in 2003. But in the aftermath of the tragic events in the US, aerospace companies look set to face falling orders sooner than expected.

Airlines throughout the world have already begun cutting capacity, predicting a drastic slump in passenger demand as people are afraid to fly. Analysts fear this could lead to a significant drop in orders to both aircraft manufacturers and component suppliers.

Virgin Atlantic is grounding five aircraft and reducing flights by around 20% from next month, and will cut 1,200 jobs as it reduces capacity on flights across the North Atlantic.

Reviewing needs

The decision could also threaten its plans to buy Airbus A380s. The airline signed a £2.6bn deal for six superjumbos last December, with an option for a further six. A spokesman said it was still too early to say whether this order would be affected. ‘We are looking at the whole of our network strategy, and reviewing all our aircraft needs and orders.’

British Airways is also reviewing the likely impact of the disaster on passenger demand, and is expected to announce a reduction in flights and a raft of job cuts.

Keith Hayward, head of economic and political affairs at the Society of British Aerospace Companies, said the attacks on the US are likely to have a much more serious impact on the industry than previous disasters such as the Lockerbie bombing, and the affects could last for up to five years.

‘There will be a significant impact on demand for commercial aircraft in the medium to long-term. It will be particularly sensitive for any companies with an exposure to the US market, and will primarily impact on Boeing orders. But the misery will be shared round as other countries are drawn in.’

US airlines are expected to be particularly affected by the attacks, with US Airways, Continental, American Airlines and Delta all reducing their schedules by at least 20%.

In response, Boeing announced it would be cutting 20,000 to 30,000 jobs by the end of next year, and has slashed its delivery forecasts for 2002 from 510 to the low 400s.

Airbus said it was not yet certain of the consequences of the terrorist attacks on its order books, but was continuing to assess the market. Airbus parent company EADS was due to announce its interim results today.

A threat to both Airbus and Boeing could be particularly damaging to Rolls-Royce, primary engine supplier to both firms, and the company’s share price has fallen by a third since the attacks last week.

A spokesman for Rolls-Royce said it was too early to predict the affect the attacks would have on demand for its engines. Only 35% of the company’s sales are to the civil aircraft market, with the rest to the defence, energy and marine sectors, he said.

Other aerospace suppliers are also expected to suffer a slump in orders. A spokesman for Smiths Group said the company was likely to be affected by a drop in the number of aircraft being built by Boeing and Airbus, but the timescale of this reduction was still uncertain. ‘Whether there are immediate cuts in orders, or existing orders are fulfilled and there is a slowdown thereafter, only time will tell.’

While sales to the civil aircraft market are likely to suffer, the company could see defence orders increase if, or rather when, the US retaliates.

The smiths spokesman said: ‘The civil aircraft market is not looking good, but we are also strong in defence, and there is every chance at the moment that the defence market will go up.’

Alan Sharman, director-general of the Defence Manufacturers Association, said there is likely to be increased activity in the defence market, but this may involve some major rethinks.

‘The US may now commit firmly to the JSF project, as opposed to half-heartedly as before. But some big platforms will no longer be so crucial, so money may be diverted to other areas,’ said Sharman.

Increased activity

Suppliers of counter-terrorist technology are likely to face the biggest increase in orders. Some of these suppliers have already reported increased interest from customers, Sharman said. ‘Counter-terrorist technology is something the UK is very good at because of years fighting the IRA. Companies making chemical detection technology and airport security equipment are also going to see increased activity.’

The UK’s premier defence manufacturer BAE Systems has seen its share price rise by over 12% since the attacks, amid speculation the firm could benefit from increased orders.

A spokesman said it would be inappropriate to comment on the affect of possible US retaliation on its order books. Three of the firm’s US employees were lost in the attacks. Two were on one of the hijacked aircraft, the third was working at the Pentagon.