Aerospace industry hard times could make it a better bet for investors, as long as the concentration on financial fundamentals remains

After the collapse and the US corporate scandals, could aerospace be a better place to put money than under the bed? History will view 2001, like 1939, as a year dominated by the terrible events of September. No one will forget the images of the terror attacks on the USA, or their impact on the aerospace industry.

But any analysis of the industry's financial performance in 2001 will perforce provide a different picture. The attacks and consequent airline crisis came late in a year that, until 11 September, was shaping up to be one of the aerospace industry's better efforts.

Commercial aircraft deliveries were building towards the peak of the current cycle, while defence procurement was showing signs of recovering from its long slide. The industry's giants were improving their financial fundamentals by managing for cash, paying down debt and pruning their merger-inflated business portfolios.

After the attack, civil aircraft manufacturers worked heroically to stay as close as possible to their original delivery forecasts, stretching their customer financing resources to the limit. Airbus delivered 325 aircraft against a planned 334, while Boeing delivered 527 of a planned 530 aircraft. This not only benefited the companies themselves, but helped their thousands of suppliers by giving them time to adjust to a downturn that, while always anticipated, was made catastrophic by the impact of the attacks on passenger traffic.

The effect of their efforts was to defer the worst of the crisis to 2002 and 2003. And make no mistake, this year will be a bad one for the whole industry. Defence spending is on the increase, but only in the USA. Procurement dollars are starting to flow, but only to US companies - or those with a major US presence. But while overall industry revenues will suffer during the civil downturn, it is not a given that its profitability will also nosedive. What last year's figures reveal - in Flight International's Aerospace Top 100 survey, produced in association with strategy consultancy Roland Berger - is how much the industry's underlying financial performance improved in 2001.

US industry accounted for over 60% of total aerospace sales by the top 100 companies in 2001 - but its ability to attract investment has been hampered by the heavy debt burden and poor financial fundamentals resulting from the merger mania of the 1990s. Last year's figures show that the industry giants have made progress in putting their financial houses in order.

Although the overall operating margin for the 46 US companies in the top 100 declined slightly last year, largely due to the impact of 11 September, it remained ahead of the slightly improved figure for the 37 European companies that made it into the 2001 survey. Some of the companies in the top 10, Boeing included, made substantial margin gains, despite the difficult final quarter.

As the increase in US defence spending kicks in to ease the bite of the civil downturn, more companies are in better condition to benefit. European companies do not have the luxury of a growing military market, and will have to rely on their underlying financial strength to weather the storm.

It would be wrong to suggest the aerospace industry can escape the effects of the global economic slowdown. And it has not been immune to the loss in investor confidence that has laid waste to the world's financial markets following the accounting scandals at Enron and Worldcom.

But when the economy recovers and investors return, they would do well to look carefully at the financial fundamentals of the aerospace industry. Major players hope to benefit from the "flight to quality" that is widely anticipated, as once-bitten, twice-shy investors respond to the sequential catastrophes of the collapse and corporate scandals. They point to their stronger cashflows, lower debts and leaner businesses.

While it is not out of the question that a significant aerospace or aviation entity could yet be caught cooking the books, dealing the industry as a whole another unwelcome blow, it is unlikely to be any of the industrial giants with substantial defence businesses, because of the accounting checks and balances that come with government contracts.

It is ironic, but the invasive and expensive government oversight defence contractors have been complaining about for years could prove to be their saviour. However, real financial security will only come from continued industry efforts to improve the bottom line, whatever the business environment.

Source: Flight International