Rising fuel prices keep European expectations in check as global commercial avionics market recovers

LONDON, 21 April 2011. A robust commercial avionics market is still expected to return in the 2014 time frame, say analysts at Frost & Sullivan in London, but in the meantime rising fuel prices are showing no sign of stabilizing and frustrating European airlines -- such as Lufthansa, AF-KLM, and British Airways-Iberia -- that had seen a recent increase in profit and traffic.

Apr 21st, 2011
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Posted by John McHaleLONDON, 21 April 2011. A robust commercial avionics market is still expected to return in the 2014 time frame, say analysts at Frost & Sullivan in London, but in the meantime rising fuel prices are showing no sign of stabilizing and frustrating European airlines -- such as Lufthansa, AF-KLM, and British Airways-Iberia -- that had seen recent increase in profit and traffic.These three airlines "face similar challenges in the European and global aviation market," says Diogenis Papiomytis, principal consultant in Frost & Sullivan's Aerospace, Defence & Security group. "They have all seen their profits increase compared to 2008 to 2009, with traffic growing again, particularly across long-haul markets. However, they also have to deal with high fuel prices, following the Middle East crisis. Prices are reaching unsustainable levels, at over $110 per barrel, at a time when most of the European airlines are adding capacity in the hope of a rapid recovery in air traffic. "With European peripheral economies -- Ireland, Spain, Portugal, Italy, and Greece -- in financial trouble, the Euro is also expected to lose some of its gains against the U.S. dollar,”"Papiomytis continues. "The exchange rates so far have benefited European airlines, with income denominated in Euros and fuel expenses in U.S. dollars. As the U.S. dollar becomes stronger, fuel will have an even greater impact on their bottom line."Natural disasters such as the earthquake in Japan and subsequent tsunami also had a detrimental effect on airlines with substantial Asian operations, such as Lufthansa, he says.Lufthansa"Lufthansa is the most profitable of the three and its strategy of buying into smaller airlines in Western and Central Europe is without a doubt successful," Papiomytis explains. "Nonetheless not all airlines under the Lufthansa Group are performing well. BMI had losses of 145 million Euros in 2010 and is not expected to be profitable this year either. It was mostly impacted by the North African crisis, as BMI restructured its network and increased flights to Middle East and North Africa. Austrian Airlines and Germanwings, both part of the Lufthansa Group, were equally unprofitable, although we expect them to recover this year."Even though Lufthansa implemented a cost reduction program and saw its traffic recover, particularly long-haul, the crisis in Japan is still affecting them, "as they have ambitious growth plans for Asia," Papiomytis says. "We don't expect them to make any more acquisitions this year, as the priority is to restructure its existing subsidiaries and bring them to profitability."KLMPapiomytis goes on to say that consolidating operations between Air France and KLM is still ongoing with a focus now on restructuring their European activities, increasing the productivity of their employees, establishing new bases in France, and assessing their future needs to make new aircraft orders. "We expect them to announce substantial orders at the Paris Air Show this year."British Airways-Iberia"The British Airways (BA)-Iberia (IAG) focus, as they just completed the merger, on paper, is to now consolidate their operations across three main areas -- passenger, cargo, and maintenance," Papiomytis says. "They have their separate divisions in each of these areas, and apart from passenger operations we expect them to create unified businesses for cargo and maintenance. That will allow them to achieve synergies, but primarily to increase non-passenger related revenues. BA's dispute with its trade unions is also a major issue, particularly with the cabin crew. This summer will be key in the negotiations."One unifying concern for all three operators is the "upcoming addition of aviation in the European Emissions Trading Scheme (ETS), which would increase their costs further," Papiomytis says. Most European governments are also keen to raise aviation taxes, on top of the ETS scheme, which would push many airlines into the red. Smaller airlines will face more challenges, even the possibility of bankruptcy, in the face of these added costs."Avionics outlook"We don't yet have an indication on fuel prices stabilizing at a particular level," so the avionics market is still seen as returning to health in the 2014 time frame, Papiomytis says.Papiomytis says he sees avionics retrofit market growing more quickly than new aircraft installations."In regards to new aircraft vs. retrofit, indeed most of the business for avionics suppliers will come from new programs," he explains. "However, retrofit is going to grow at a faster pace and will provide opportunities for maintenance suppliers as well as OEMs. Retrofit will be driven by [Single European Sky ATM Research (SESAR) in Europe SESAR and the U.S. Next Generation Air Transportation System (NextGen)] implementation, even though aviation authorities seem more willing to push implementation than cooperate and create global standards. My opinion is that aircraft integrators and OEMs have to cooperate and drive standardization, rather than authorities. "Depressed retrofit markets will outperform other segments, due to major retrofit programs in the U.S and Europe," he adds.Spending in the world commercial avionics market is expected to increase over the forecast period with a compound annual growth rate (CAGR) of 5.2 percent," Papiomytis continues. There will be accumulated spending of $57.8 billion in forward fits, $14.4 billion in retrofits, and $29.7 billion in services, he adds. Experts are predicting 5 percent year- on-year growth for the avionics market through 2020, Papiomytis says."Surveillance is still the highest value segment, with integration picking up pace after 2014 and becomes a standard in business aviation and across select air transport programs," Papiomytis notes. Technology areas that will show strong growth for suppliers include flight data management and automated avionics test equipment, Papiomytis says.Market drivers include ageing fleets that drive retrofits; glass cockpits that are becoming a "must have" for aircraft designers; and requirement driven approaches such as required navigation performance or RNP, he says.Avionics market leadersIn air transport avionics, Papiomytis says that "Honeywell has the strongest individual presence on Airbus/Boeing aircraft, especially B737/B777, and is a preferred supplier for Embraer."Rockwell Collins also is strong on Airbus/Boeing BFE markets and is a preferred supplier for Bombardier, he continues. "Thales is the main avionics integrator for Airbus and preferred supplier for ATR; its market share increasing in tandem with Airbus market share."In business and general aviation avionics "Rockwell Collins is the OEM of choice for avionics on approximately 60 percent of the business jets and 40 percent of the business turboprops," Papiomytis says.Meanwhile Honeywell's Bendix King series is the most recognized brand, but is losing share to Garmin, which also "owns roughly 60 percent of the piston aircraft avionics market," he adds.

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