by Valerie Poulin

OTTAWA, ON – Canada’s aerospace product manufacturing industry has had a bumpy ride since 2001. Even though production has been on the rise since 2004, the industry is still having a hard time stabilizing, flying between highs and lows. Still, it remains a pillar of Canada’s manufacturing sector; the aerospace industry exports over $10 billion worth of airplanes, helicopters, engines, and parts annually, and employs about 50,000 workers.

The air travel recovery that has been ongoing since the major setback following 9/11 is expected to keep boosting the aerospace product manufacturing industry. The International Air Transport Association (IATA) is forecasting traffic growth of between 5 and 6% for 2008. With load factors running high, this increase in passengers is translating into rising demand for aircraft. Uninterrupted strong economic growth and the globalization of business have contributed to this recovery. Increased disposable income coupled with an emerging middle class in developing countries has also contributed to higher demand for aircraft, in particular for large aircraft. The stellar year that Boeing and Airbus enjoyed in 2006 has been widely felt by Canadian aerospace product manufacturers who supply the two largest aerospace companies. Even Bombardier has seen its net orders increase to 363, up from 302 the previous year.
However, the regional jet market continues to perform poorly. Over the last two years, Bombardier has delivered just over 80 regional jets annually, down from 130 in 2005 and from about 200 per year from 2002 to 2004. The market seems to be mature, so demand for regional jets consists essentially of replacements. On top of that, Bombardier has faced increasing competition from Embraer.

Downtime in Bombardier’s regional jet business has fortunately been compensated by hectic demand for its business jets. Bombardier’s net orders reached 274 aircraft in 2007, a 25% increase over 2006 and a strong 72% increase from 2005. Manufacturers of engines, parts, and flight simulators are all benefiting from this strong demand. The helicopter market is also solid, fuelled by U.S. army orders as well as by the mining and the oil and gas sectors.

Canada’s aerospace product manufacturing industry is clearly benaefiting from the worldwide economic boom and catch-up from the lacklustre years following 2001 during which the industry’s profit margin fell from almost 12% to 3%. But although profitability is improving, aerospace product manufacturers are still vulnerable to volatile macroeconomics drivers. Oil prices hitting over US$80 per barrel (U.S. $100 on Jan 2, 2008) are threatening the U.S. airline industry’s recent financial recovery, in turn threatening the aerospace industry. A Canadian dollar at par with the U.S. dollar is also challenging the industry’s profit margin by depressing export prices for Canadian manufacturers. Even though profit margins are set to improve, they are still thin by historical standards, sitting 3 percentage points under the 20-year average.

WORLDWIDE DEMAND: Bombardier and its Canadian suppliers are benefiting from soaring worldwide demand for business jets. With the Chinese and Indian economies booming and their companies expanding abroad, demand for private jets is expected to grow considerably. Bombardier holds about one-third of the worldwide business jet market with its three main products: the Challenger, the Learjet and the Global. In 2006, Bombardier delivered a record of 210 jets out of the 885 delivered worldwide, and won orders for another 260 jets.

Over the 10 next years, global demand is expected to stay strong, hovering in the vicinity of 1,000 business jets delivered every year, equivalent to a 74% increase over the decade ending in 2006. Bombardier is in good shape to get a fair share of this growing market since its production already covers every segment of the business jet market. In contrast, Gulfstream concentrates its production on larger aircraft, and Cessna specializes in smaller twin-engine jets. For their parts, Dassault and Embraer offer an even more limited range of products. However, although Bombardier’s leading position is enviable, competition is surfacing. The European Dassault Falcon Jet 7X recently received its certification and is ready to compete with Bombardier’s Global Express. Dassault is also working on what could be the next rival to the Learjet or Challenger. Furthermore, Bombardier’s biggest competitor, Embraer, is now developing two small twin-engine aircraft: the Phenom 100 and the Phenom 300.

With a global market of close to US$20 billion, the business jet market is a big engine for the Canadian aerospace product industry. Strong global economic growth, a dynamic export market, and an increasing reliance on private aviation for business and personal use are feeding the segment. Production of business jets and related manufactured components is expected to be a major contributor to the Canadian aerospace industry over the forecast horizon.

COMPETITION: Competition in the aerospace industry is a daily concern. Players in the industry must continually innovate to stay ahead. In this industry, where research and development consumes a big chunk of costs, the first entrant in a market usually monopolizes a significant share of it and becomes the industry standard. Bombardier has postponed the launch of its CSeries twice since its announcement in 2004, taking the risk of losing the advantage of being the first mover in the area of 110- to 130-seat aircraft. Indeed, the CSeries airplanes are widely seen as a critical step for Bombardier, especially as the company has been facing a declining market for its regional jets. The project would also be critical for the Canadian aerospace industry as a whole because it would create about 5,000 assembly jobs—half at Bombardier and half with suppliers—and about 3,000 jobs making engines and components.

The proposed target date for the CSeries’ entry into service is now 2013, changed from 2010, because Bombardier has not yet secured enough orders to go ahead. But other aerospace companies covet this market and may now enter the market first. Among them, Airbus, Boeing, and Embraer are respectively the world’s two biggest commercial aircraft markers and Bombardier’s closest rival.

In another segment of the industry, the Russian aircraft maker Beriev Aircraft Company is threatening the market share of Canadian-built firefighting aircraft. Although Bombardier’s water bombers played an important role in fighting forest fires in Greece this past summer, Bombardier’s 215 and 415 turboprops—which used to be the only aircrafts in the world specifically designed for firefighting— could lose their edge to the Beriev Be-200, a larger, jet-powered amphibious aircraft.

Booming demand for aircraft around the word and the expectation of significant profits are attracting new competitors. Also, some emerging countries’ governments are keen to invest considerable amounts of money to develop domestic expertise and realize the benefits of the nascent market. Even though Canadian aerospace manufacturers are well established and have a vast expertise, they will have to keep developing new technologies and implementing alliances to stay competitive.

Valerie Poulin is an Economist, Industrial Outlook, Trade & Investment for the Conference Board of Canada. (poulin@conferenceboard.ca)

LOOKING OUTSIDE CANADA FOR QUALIFIED WORKERS
Shortages of qualified workers are limiting Canadian aerospace production, since some companies have had to refuse contracts because they are unable to fill vacant positions. Labor shortages also fuel the industry’s labor costs by pushing up wages. The aerospace industry is facing such a labor shortage that some small and mid-sized companies intend to recruit directly abroad. The few Canadians who graduate from aeronautics programs are, for the most part, hired by the biggest companies even before finishing school.

With industry production expected to grow by 4.5% per year on average over the forecast horizon, over 5,000 new direct production workers are expected to be needed by 2011, and so Canadian manufacturers are turning to the rest of the world to fill the demand. Among other countries, India offers a promising recruitment pool since many engineers and machine workers are trained there every year, and the wages and conditions offered by Canadian aerospace manufacturers are enticing. Eastern Europe is another source of migrants with diverse skills and experience.

CAE WINS AUSTRALIAN CONTRACT
MONTREAL, QC – CAE has been awarded a contract valued at approximately C$160 million by the Commonwealth of Australia to provide MRH90 helicopter training systems and services to Australian defence forces. CAE will have overall responsibility for providing two MRH90 full-flight and mission simulators (FFMSs), training facilities, and comprehensive engineering and support services. CAE has also gained eight full-flight simulators and training device orders valued at over C$126 million: Continental orders Boeing 787 FFS and CAE Simfinity training devices; US Airways orders three Airbus FFSs and CAE Simfinity training devices; Etihad orders Airbus A320 FFS and CAE Simfinity training device; Air Algérie orders Boeing 737NG FFS and Alteon Training orders two FFSs.

TKACH INTERIM NORTHSTAR PRESIDENT
CHICAGO, IL - The Board of Directors of Northstar Aerospace, Inc. has appointed Michael J. Tkach as interim president and CEO effective January 1. Northstar is an independent manufacturer of flight critical gears and transmissions with operating subsidiaries in the U.S. and Canada.

AIAC LAUDS PURCHASE OF HERCULES AIRCRAFT
OTTAWA, ON - The Aerospace Industries Association of Canada (AIAC) praised the federal government's decision to purchase 17 new C-130J Hercules transport planes for Canada's military. The AIAC (www.aiac.ca) advocates positioning of Canadian companies to participate in Lockheed Martin's new aerospace and defence programs, says AIAC President Claude Lajeunesse. The national trade association represents Canada's aerospace manufacturing and services sector, including about 400 companies. It the fourth largest aerospace industry in the world, with annual sales of $22 billion.

BOEING CONTRACTS $420 MILLION IN QUEBEC
MONTREAL, QC - The Boeing Company says it has provided contracts worth more than $420 million to companies in Quebec. This follows the Canadian government's 2007 order for four C-17 Globemaster IIIs, the first two of which already are in service with Canadian Forces. Mark Kronenberg, Boeing Integrated Defense Systems vice president for international business development, says the company is on track for meeting the Canadian government's Industrial Benefits (IB) policy. "Boeing will match every dollar spent by the Canadian government in acquiring its C-17 fleet by partnering with and issuing contracts to companies in Canada."