Ahead of this year’s International Air Show in Paris, Colin Cieszynski looks at the impact of falling oil prices on commercial aviation and how aerospace stocks have performed over the past year. Within this report Colin discusses: • The effects of falling oil prices on commercial aviation • Bombardier’s C-Series introduction to the aviation market • Wider issues within the corporate aircraft sector • Aerospace stock performance over the past year The International Air Show which alternates between Paris and Farnborough in the UK is the aerospace industry’s main event of the year. Historically, the trade show part of the event, which runs for the first four days, is a key showcase for the industry. Aircraft manufacturers tend to use the event, which attracts a lot of media and public attention, to announce large orders, launch new aircraft programs and debut aircraft when ready to fly. The crash in oil prices has had a significant impact on commercial aviation over the last year, benefitting some areas and severely impacting others, the effects of which could play out over the course of the show. Lower fuel costs have benefitted commercial airlines, boosting earnings and providing them with cash to go shopping. Airbus has suggested it expects to win a number of orders at the show, possibly accounting for hundreds of planes. Boeing has been relatively quiet about its prospects for the show, but recently announced production has started on its first 737MAX on schedule. Overall, it appears that even without a new program launch this year, we could see robust demand for Airbus A320s, A330s and A350s and Boeing 737s, 777s and 787s. There has been a lot of talk over the last year about the dwindling prospects for really big planes and it will be interesting to see if there are any orders for A380s or 747s at all. A make or break show for Bombardier’s CSeries? At the other end of the spectrum, this could be a make or break show for Bombardier who is expected to showcase its CSeries jet after missing Farnborough last year. With testing well underway now, this is where the rubber hits the road given the company is under pressure to improve its existing order book and announce new orders as investors. This could be the show where investors and the industry figure out how big the market really is for CSeries, and whether it has the potential to break through and become a mainstream program or become a niche product. Corporate Aircraft Sector Struggles The business aircraft market’s troubles may also attract attention. The oil price collapse has forced energy companies to cut costs back dramatically. As they use corporate aircraft to reach remote production and exploration locations, the slowdowns have cut deeply into demand. An economic slowdown in emerging markets like China hasn’t helped matters either. In recent weeks Bombardier and Sikorsky (helicopters) have announced layoffs in their business aircraft operations due to falling demand. The Airshow may indicate how long and how deep the corporate aircraft recession may be. Aerospace Stock Performance Source: CMC Markets Stock performance of the main aircraft producers has varied dramatically over the last year, particularly since the start of 2015. So far this year, Airbus has been on a tear, outperforming the rest of the group by a wide margin. Most of the gains were made between December and March and in recent months, the shares have levelled off a bit. High expectations for the show may already be baked into the share price. On the other hand, Bombardier was crushed over the December to February time frame but has been base building. In recent months, the shares have stabilized at a lower level and while hopes may be high, expectations appear to be pretty low for the show. If Bombardier was to surprise and pick up some CSeries, turboprop or corporate aircraft orders the shares could rebound. However, if CSeries washes out at the show, the shares could be vulnerable to further downward pressure. Despite a number of order wins of late, Embraer has been under distribution, steadily losing altitude over the last year. This year with the CSeries on display, there may be more of a focus on Bombardier, because even with all its troubles, it may have more potential as a positive surprise. Boeing was flat through the second half of 2014 but has started to come around in recent months. Airbus appears to have the home airfield advantage, although if Boeing can come away with a few wins, the shares could respond as expectations don’t appear to be excessively high at the moment. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. Please remember any information relating to past performance does not necessarily guarantee future performance.
Paris Air Show Preview: What could the oil price collapse mean for orders this year?
20:00, 10 June 2015