Seven Reasons For Optimism (and Worry) In Commercial Aviation

Aerospace analysts Ron Epstein and Kevin Michaels shared some interesting insights at the kickoff panel at the 2014 Canadian Aerospace Summit on Tuesday in Ottawa. I could not take copious notes, as I was moderating the session and it was being filmed, but here are a few highlights:

*Epstein, the senior aerospace and defense analyst at Bank of America Merrill Lynch, says the capacity increases planned by China's Comac suggest the fledgling aircraft builder ultimately aims capture essentially 100% of China's airliner market -- which would require the central government in Beijing to order Chinese airlines to buy domestically.  He also believes Comac doesn't care about exports and is primarily focused on selling airplanes inside China. But Michaels, the global managing director of aviation consulting and services at ICF International (and a contributing Aviation Week columnist), is skeptical such a plan would ever succeed. He notes that China's airlines don't want to pass up state-of-the-art Airbus and Boeing jets in favor of Chinese jets aircraft which, for the foreseeable future, won't be as capable.

*Will the world's airlines be able to absorb all of the commercial jets that are slated to be produced, especially with Airbus and Boeing upping production rates? Michaels thinks things look good for the next 2-3 years. But both he and Epstein warn that the aircraft industry is cyclical. It may have sailed through the global economic downturn of 2008-09, but at some point hard times will return. "The next downturn is long overdue," Michaels says.

*Don't assume lower oil prices are a short-term anomaly. Boeing Chairman and CEO Jim McNerney recently said crude would have to go below $70 a barrel for a sustained period of time to threaten his company's bulging order book. But Epstein believes crude prices are now near a point where, if sustained, airlines could reconsider buying new jets and hold on longer to old gas guzzlers. He stopped short of predicting that would happen, noting that long-term oil prices have proven notoriously difficult to predict. Another potential loser: commercial rotorcraft manufacturers, who rely on the oil and gas industry for a good portion of their business.

*If tensions between the West and Russia escalate, Russian President Vladimir Putin could put the squeeze on Airbus and Boeing by choking off the supply of titanium, Michaels warns. But Putin would think long and hard before taking such a drastic move, which could trigger retaliatory sanctions against Russia's aerospace industry.

*With Bombardier's new CSeries jet having completed just 500 of its 2,500 hours of flight testing and certification, odds are the state-of-the-art aircraft may not enter service until 2016, the two analysts say. And that would be a costly delay, though Epstein notes the capital markets have traditionally been kind to Canada's Bombardier. Michaels forecasts the CSeries will ultimately see production rates of 50 jets per year from 2016 onward, though 2015 is iffy.

*Embraer's re-engined "E-Jets," which are scheduled to enter the market later in the decade, will be a slam-dunk winner, both Epstein and Michaels predict.

*The low-medium segment of the business aircraft market is finally showing signs of stabilization, six years after the global economic downturn sent it into a freefall.

Epstein and Michaels even gamely took on a non-aerospace question from the audience: whether the proposed Keystone XL pipeline - which would transport oil from Canada through the central U.S. down to the Gulf of Mexico for export  -- would ultimately be approved. President Barack Obama has been deeply skeptical of the project. Both men said they believed the pipeline would ultimately get built -- but they didn't say when.