Industry Week in Review – April 6, 2012
Following the recent International Society of Transport Aircraft Trading (“Istat”) conference and this week’s Engine MRO Forum put on by Aviation Week, debate over the surging demand for new jets and whether Boeing and Airbus are producing too many new narrow body plans has begun to escalate.
In 2011 Airbus and Boeing received more than 2,200 net orders, nearly double the level in 2010 and well beyond the 1,011 jets they delivered. Subsequently, the two airframers are sitting on backlogs equivalent to about seven years of output. And, production increases underway will soon have Airbus and Boeing completing 42 A320 and 737 narrow body jets a month, respectively, by 2014, with aims to go higher
The debate revolves around whether surging demand for new jets will fall flat and leave the market flooded with an oversupply of new jets. Skeptics question how many small and struggling airlines can expect to take delivery of the planes they have ordered. India’s Kingfisher Airlines, for example, currently on the edge of collapse, has ordered dozens of Airbus A320s, A330s and A350s.
Additionally, demand for relatively young, used jets appears to be stuck in low gear. The lack of demand for these planes is forcing owners to park jets sooner than anticipated, flooding the market with used engines and depressing prices. Three years ago Rolls-Royce leased individual engines for Boeing and Airbus narrow body jets for $120,000 a month.
Today, these engines can only command $50,000 a month. Republicans and lessors, alike, are pointing at the government’s export banks, complaining that their loan guarantees are enabling Tier III buyers to purchase new jets rather than taking used models. Guarantees of financing for aircraft purchases hit a record $11 billion last year.
Big Movers
CPI Aerostructures Inc. (Up 10.3%) – Shares rose this week after CPI was upgraded to “Buy” from “Hold,” with a price target of $17 per share. CPI was rated “hold” on March 19th this year, when the stock was trading at $15.80 per share.
AAR Corp. (Down 8.0%) – Shares fell this week following AAR’s downgrade from an “outperform” rating to a “neutral” rating. Analysts at Wedbush wrote, “the most recent quarter showed that weakness in the airlift business is likely to continue into fiscal 2013, further increasing concerns about the longer-term opportunity in the airlift segment and the broader defense segment sales as troop levels in Afghanistan are expected to decline substantially and OCO funding is increasingly pressured.”
Relevant Transactions
Acentia acquired 2020 Company, LLC, a premier professional services firm that delivers business and technology solutions through consulting and outsourcing services to the government, in the areas of health, education, and science. The acquisition, whose terms were not disclosed, extends Acentia’s reach with the services and expertise to pursue and execute more and even larger opportunities on programs of national significance. KippsDeSanto & Co. acted as exclusive financial advisor to 2020 in this transaction.
CPR Aerospace to acquire Wood Group Turbopower, LLC, a provider of overhaul and repair services to military operations, commuter airlines, business aviation, and utility freight markets in the U.S. and internationally, for a total consideration of $18.7 million. Wood Group PLC had discontinued the Turbopower business a few years ago and has reported the company as discontinued in its financial statements.
Cobham acquired additional 23% of Thrane & Thrane, a manufacturer of equipment and systems for mobile communication based on satellite and radio technology worldwide. Cobham made the deal soon after it withdrew on offer to buy Thrane & Thrane for $73.73 per share following Thrane & Thrane’s board announcement that it “felt unable to recommend Cobham’s purchase proposal.” Cobham now owns approximately 25.6% of the Company.
