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Comment: An industry in denial?

The last days of Rome partying on the Titanic: whatever your historical metaphor, many felt the bustle and excitement of last week's Farnborough show had an aura of decadent mass denial about it. Airlines are facing their biggest crisis in a generation. With oil prices likely only to go one way, the problems are deeper rooted and longer term than the downturn after 9/11, where short-lived hysteria about airline security compounded difficulties caused by a weakening US economy. Yet, a visitor to Farnborough would have confronted an industry that - on the surface at least - looks confident. Attendance was strong chalets and pavilions were bigger than ever there were plenty of orders and even the launch of an all-new aircraft: the long-awaited Bombardier CSeries.

There are lots of reasons why an event like Farnborough would be among the last to suffer in a downcycle. Firstly, there is the show's considerable military element. True, defence spending is at best static in most of the West, but new priorities from dealing with insurgents abroad to improving border security at home are spurring innovation in surveillance technology and becoming an ever more important part of the mix for traditional aerospace and defence manufacturers. That is why - even though they had few aircraft on display - the likes of BAE Systems, Lockheed Martin and Thales were at Farnborough in bigger force than ever.

Secondly, Farnborough has become such an effective global business-to-business event that exhibitors dare not fail to show or even downsize their presence for fear that competitors will seize upon the chance to convince customers their rival's star is waning. Much of the credit for that goes to the organisers, who have revitalised a format that six years ago looked tired as new niche conventions offered exhibitors more bangs for their buck.

Thirdly, aerospace's ups and downs reflect, but do not mirror, the mood swings of the airline sector. While carriers fret about next quarter's traffic and fuel costs, manufacturers delight shareholders by accurately predicting the nature of the market in five to 10 years' time. True, today's airline cash crisis is tomorrow's cancelled order, but there was little sign of that at Farnborough. So far, we have not seen the ranks of parked aircraft and furloughed pilots that followed the 2001 terrorist attacks in New York, although worse could be to come.

Sodenial, delayed reaction or a realisation that maybe, just maybe, the industry can ride this out? There are reasons for optimism. As has been the case for much of the past decade, the Middle East has been the engine of demand - its airlines' expansion plans based on securing a major share of the west-east transit market and attracting investors and tourists to fast-expanding desert cities, all underwritten by royal owners who ultimately profit from high oil and gas prices. Farnborough saw a staggering order for more than 200 aircraft, mostly widebodies, from an airline, Etihad, that did not exist a few years ago, and a deal from low-cost start-up FlyDubai for 54 Boeing 737s.

Another reason to be upbeat is that, despite the oil price, most of today's established airlines, especially in Europe, are much nimbler and tighter-run than in 2002, when they had to cope with bloated workforces, creaking systems and outdated working practices. Coupled with demand from India, China, South-East Asia and other expanding markets, there is a consensus that the manufacturers' lengthy backlogs - although more fragile than a year ago - will largely hold.

But the most significant cause for hope for aerospace is the biggest headache for airlines. Rocketing oil prices are forcing the pace of change in fleet renewal. Airlines, particularly in North America, that have held on to 1980s-era assets will soon have no option but to ditch these gas-guzzlers to stay in business. Even current types look obsolete compared with what is being promised for the next generation of narrowbodies. These are currently unavailable until towards the end of the next decade, although airline demands for a step-change in efficiency and further technological breakthroughs by the engine manufacturers may hasten that.

Spend time among airline financiers, however, and the mood is different. The guys that move money around have been squeezed by the credit crunch and are wary of funding capital investment backed by unconvincing business plans. Airlines may no longer be able to afford to run thirsty aircraft. The worry is that they may not be able to afford to replace them either.

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