Aviation Week & Space Technology - January 15, 2015

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Dec-84Dec-86Dec-88Dec-90Dec-92Dec-94Dec-96Dec-98Dec-00Dec-02Dec-04Dec-06Dec-08Dec-10Dec-

Net aircraft orders Oil price per barrel

Net Airbus and Boeing orders Crude price

WTI = West Texas Intermediate Sources: Royal Bank of Canada, Airbus and Boeing. Priced as of Dec. 31, 2014.

WTI Oil Prices vs. Firm Aircraft Orders

Going Concerns

COMMENTARY

It depends.
Like all conundrums, oil’s impact is
not universal and clear, even within the
aerospace and defense industry. First
come more questions: How low will
prices go, and for how long? And what
part of industry are you asking about?
The results may turn out to be surpris-
ing, even to insiders.
“For A&D, the consequences are
likely to be mixed,” notes
financial analyst Robert
Stallard at RBC Capital
Markets. His advice this
month to clients for the
year ahead when it comes
to oil: “Watch this one.”
To be sure, the big
original equipment manu-
facturers (OEM) have not
changed their story. Just
last week, Randy Tinseth,
vice president of market-
ing for Boeing Commer-
cial Airplanes, reiterated
that the Chicago giant
is seeing little impact on
its airliner orders as oil
prices touch lows last seen when the
world was entering the Great Reces-
sion, and specifically in 2009. West
Texas Intermediate crude oil has plum-
meted about 47% since June.
In fact, Tinseth argues, recent his-
tory points to orders rising as prices
drop, because airlines are making even
more money than planned. Moreover,
they still face aging fleet issues that
are pushing them toward buying new,
more fuel-efcient aircraft. And price
drops are coming from oversupply,
Boeing has contended.
Not so fast, say financial analysts at
Moody’s Investors Service and RBC,
especially if lower prices persist.

T

he questions started flying almost as quickly as Wall Street

realized oil barrel prices were going down last summer. Key

among them: What, specifically, does it mean for industry?

Check the Oil

The A&D industry is not monolithic,

and neither is oil’s impact

“Airlines globally just got handed a

huge cost reduction, even if delayed

by hedging, and we’ll see what they do

with it,” RBC states. “The same goes

for the economies of every oil importer.

However, oil exporters see the other

side, so we’ll see what that does to

defense imports and airlines in the

Middle East, for example.”

Moody’s analyst Russell Solomon

sees pressure building on OEMs

sooner rather than later. “From an

aerospace and defense industry

perspective, falling oil prices and the

increasingly likely ‘lower for longer’

outlook elevate the risk of aircraft

order deferral and/or cancellation,” he

said this month. That is because the

value proposition for airline carriers in

terms of reduced cost of ownership for

new/next-generation aircraft relative

to existing equipment is “markedly

reduced.”

Defense is no easier to divine. “The

decline in the prices of oil and petro-

leum products is a variable with pros

and cons for the sector whose impact

should become more apparent in the

coming months,” says Capital Alpha

Partners analyst Byron Callan. “There

isn’t a one-size-fits-all answer for

defense stocks or firms where defense

is an investment factor,” he said early

this month.

For instance, whether Saudi Arabia

or other oil-exporting customers of

Western arms sales cut back expected

orders due to lower domestic revenue

is one possibility. At the same time, the

Pentagon—the world’s single largest

energy customer—should see more

relief in its annual budget due to lower

operations and maintenance costs.

A reverse is always welcome, but

especially as so-called sequestration

spending caps tamp down research, de-

velopment and procurement of eagerly

sought weapons and systems. Still, it

will take time for dollars to work back

to the armed services—unless the de-

fense comptroller opts to quickly move

money, which entails a bet

that oil stays low for the

year or more. Any benefit

also could be overcome

by budget reductions

Congress may allow for in

fiscal 2016.

The outcome for other

subsectors is more direct.

Lower oil spending should

free up funds for deferred

maintenance and other af-

termarket services on the

commercial and civil side

of A&D, several analysts

have said.

Cheaper oil also could

give a boost to small

general aviation aircraft, small and

mid-size business aircraft, fractional

ownership companies and service

providers if they are sustained, ac-

cording to aviation consultant Brian

Foley. “Lower fuel prices will further

act as a sales catalyst since the smaller

segment is very price elastic, meaning

people are more inclined to fly and buy

when fuel is more afordable,” he said.

Then again, if ofshore drilling for

oil and gas is curtailed, operators and

helicopters flying crews to rigs could

feel a hit. It just shows that, as with ev-

erything else in A&D, the impact from

oil is similarly significant, but diferent

in efect. c

14 AVIATION WEEK & SPACE TECHNOLOGY/JANUARY 15-FEBRUARY 1, 2015 AviationWeek.com/awst

By Michael Bruno

Senior Business Editor

Michael Bruno blogs at:

AviationWeek.com/ares

[email protected]