Thursday, 6 January 2011

Aerospace Optimism!

There is further evidence of a positive mood within the Aerospace industry today as the troubled national carrier British Airways and R-R announce an agreed contract that could be worth in excess of $5bn to R-R should all options be taken up.
Negotiations originally started way back in Sept 2007 but have now concluded with an order for R-R to engine 9 Airbus A380's (plus 7 aircraft options), and 24 Boeing 787's (plus 12 aircraft options) as BA seeks to upgrade its fleet. The contracts also include Rolls-Royce Total Care support.
This follows hot on the heels of: Easyjet's announcement that it is taking up its options on A320's from Airbus; and industry forecasts that both Airbus and Boeing are looking to step up production rates

As at 11:30:
  • British Airways 239.2 +5.6 (1.95%)
  • Rolls-Royce  667.5 +13.5 (2.06%)

Looking to the future?

In looking at Aerospace it is really worth stepping back and appreciating the longer term nature of the business and the levels of investment required. For airlines, trying to increase fleet capacity to match predicted passenger levels is: very expensive; can take many years to pay back; and has a high level of risk in any decision due to the level of financial commitment required. In turn this level of investment requirement trickles down through the extended supply chain of aircraft manufacturers and suppliers.
It does however, present a unique opportunity to get a view into the future through the eyes of this industry.
Although there is still an element of replacement aircraft for better cost efficiencies, and reduced environmental impacts, it still suggests that there are companies looking to a viable economic future as opposed to the doom laden present where every minor setback is the herald to a double dip recession, financial meltdown and the collapse of society as we know it.

You have to ask yourself: is the airline industry self sustaining and stand alone or is its very existence as a service provider dependent upon all of our prosperities? If it is the latter then the industry will only invest if it can see increasing air traffic from international freight and passenger travel. In turn, this will only materialise if there is: political and economic stability, a high and consistent level of employment; and international consumer demand.

Points that clearly stand out for me are:
  • the industry sees growth on a longer term horizon than many of us choose to appreciate (even Governments only seem to focus on their term of office and what might get them re-elected);
  • increasing orders in the industry will also trickle down into the supply chain which will benefit a huge number of companies, directly or indirectly (don't forget the butty shops), and produce more employment in many areas around the globe;
  • there are companies here that could be very suitable to a buy and hold investment strategy: long term horizons, considered investment; and incremental returns over a long period of time (as long as management is capable, of course).
More to consider here than first occurred to me when reading this morning's announcement. Not sure that I would choose to invest in the airlines themselves but, elsewhere in the supply chain there will be companies with attractive lead-times, free cash flow, good margins, and technological advantages (and, if not, don't forget that great butty shop).

I am already invested in R-R (Growth) and BAE Systems (Value and Income), both of which are diversified beyond Civil Aerospace with Defence, Energy, Marine and other new technologies such as fuel cell, and "cyber crime" (as evidenced by recent BAE acquisitions), but that is not to say that there aren't also other attractive options such as Meggit, GKN, United Technologies and General Electric. Food for thought, then.

Hmmm, not sure why, but all this thinking about aerospace is making me hungry?

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