The news this week is likely to be swamped by all sorts of dire messages about the impact of Brexit. This will overwhelm other information that is likely to be of equal importance to investors with an interest in aerospace.
Brexit is big news - but we respectfully submit this is more about politicians and power. It will take a while for the dust to settle. The noise will go on for a long time. Business will adjust to minimize impacts and life will go on. The UK is not going to float away into the Atlantic to distance itself from the EU.
On July 11 the Farnborough air show will start. This is the largest aerospace event for the year. Being held in the UK this year, we expect many to provide a Brexit angle on everything. Aerospace has for a long time been a global affair. Brexit is not going to be that big an issue in the next few years. Airbus is not likely to close its facilities building wings in the UK.
The biggest news at these shows are the orders placed by airlines and lessors for Airbus and Boeing. Both OEMs deny storing orders for the show, but end up reporting big deals anyway. It may be the customers who like to media attention because the world's aviation media is all at the event. They literally run from announcement to announcement. One of the most complicated planning demands is figuring out which event to attend because for most it is impossible to attend each one. Besides there are often announcements one is advised to attend, only to find the customer has decided to delay the announcement. This causes intense ill will among the harried and sweaty media.
With that backdrop, what should we expect this year?
Airbus (OTCPK:EADSF) - As usual we can expect a host of deals coming. The focus is likely to be on A320neo family and A350. The A400M military freighter has run into another delay but the aircraft is likely to be at the event for a demonstration flight. Even with the hiccups on the program, Airbus does have a compelling project in the A400M. There could possibly be news about the A380.
Airbus is under intense pressure on A380. Its key customer, Emirates, is ready to commit more orders but wants better economics to improve the A380's numbers against the 777x. We understand that an engine performance improvement may be forthcoming from one of the engine vendors. Another possibility is the addition of sharklets on the A380. Airbus has already tweaked the A380's cabin space to allow for more seats. The standard A380 now seats 550. Emirates has a version with over 600 seats already.
Boeing (NYSE: BA) - We expect to see the new 737MAX make its show debut. Also we're likely to see a demo flight to show off its low noise footprint and agility. Air shows are great for this sort of thing as we saw in Paris last year with the near vertical takeoff of the 787-9.
Boeing might have news about its 747 from Iran and Russia. We might also formally get details on the Iranian order that has been floating for the past 10 days. Many are eager to understand how the deal is being financed outside the US dollar regime to avoid any Treasury limitations.
There are rumors Boeing might, at last, provide some visibility on its 757 replacement thinking. Boeing is very good at this - it releases some ideas it is working on. Such news often freezes the market segment as airlines and lessors decide to hold back from buying from Airbus (in this case) while they seek clarifications and details. By freezing the market, Boeing buys time while hobbling a competitor.
Boeing is 100-years-old this year and is likely to use the show to splash its unrivalled aerospace history - and is entitled to do so. The company has been at the forefront of aerospace from its earliest beginnings.
Embraer (NYSE: ERJ) - Despite a chaotic Brazilian economy and politics, Embraer is doing very well with its upcoming E-190E2. The company reserved a parking spot - just in case. There is a possibility the E2 will come to the show. Given the first flight was such a roaring success we believe the company has probably got sufficient confidence to bring the aircraft all the way to show it off. Show organizers, we understand, have alerted the large aircraft spotter community to expect it.
Embraer needs to do what it can to show off their E2. With competitors showing off their newest aircraft, market pressure is intense. Moreover, Embraer has a new boss. He is charismatic and having the E2 on site would be a superb marketing tool. The combination of new boss and new aircraft will get everyone talking. Which is exactly what Embraer will want.
Bombardier - 2016 is proving to the best year the company has had in a long time. It's new CSeries is about to be delivered to launch customer Swiss. The aircraft has impressed the industry by meeting its promising numbers. Two huge deals earlier this year gave the program crucial momentum.
In a visit with the firm's leadership last week in Montreal, we were told firmly that they are not planning anything for the show by way of orders. It is up to the customers we were told. Fair enough. Which does bring back Brexit - any EU-based customers are now likely to hold back and see how the issue starts to settle. This is tough because we were expecting customers like Lufthansa to exercise options. Another EU airline was, we thought, likely to emerge. Now it's less clear.
That said, we expect to see the CSeries once again do a demo flight. But, crucially, now that the aircraft has been certified, its crew can fly a more aggressive demo. Last year Bombardier's crew was under strict instructions to not show off any of its performance capabilities. No such limit this year. We would love to see an equivalent take off to last year's 787. The CSeries can do its because it has a good power to weight ratio. Moreover, it can do this more quietly than any other aircraft in commercial service.
Other items: One of the bigger issues facing commercial aviation is the growing shortage of pilots. With air travel growing at 4%+ per year, in the next decade we should see an additional 11,000 aircraft in service. The crucial number here is the number of crew per aircraft. This ranges widely by types and flight frequencies - but a rule of thumb is ten. Therefore these 11,000 aircraft need an additional 110,000 pilots. Throw in retirements and the number shoots up to over 150,000. This means an amazing future for the likes of CAE (NYSE: CAE), a leading pilot training company.
Another compelling item to consider is the move to e-enabled aircraft. This means we are going to see massive amounts of data, massive in terms the aerospace industry has never seen before. New aircraft have literally hundreds of sensors monitoring everything. These sensors generate scads of data. The new Pratt & Whitney (A United Technologies (NYSE:UTX) company) GTF, for example, is expected to generate petabytes of data per engine per year. They have 7,000 engines on backlog. Managing that data allows for impeccable predictive maintenance, offering unknown levels of flight operational reliability. Companies managing and reporting on this level of information will see new revenue streams that offer rich values for the long term.
While the list of issues can go on endlessly - we will add one more. aircraft tracking is likely to see more attention. Nobody is satisfied that it takes so long to find missing aircraft. Accidents are increasingly rare, and when they occur, the industry wants to know right away what went wrong. This is a totally reasonable requirement. Expect to see news from a host of connectivity providers that they have the ability to help airlines track their aircraft in real time. This tracking can extract data from all those sensors mentioned above. It should be possible to gather more data off an aircraft in-flight than a "black box" can record. Do future aircraft need the black box? Watch this space because its another place where investors can extract value from the firms moving into the space.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.