Profits in the Canadian aerospace industry fell to their lowest level in three years in 2013, dropping by more than half to $699 million as a weaker loonie increased costs that more than offset higher revenues, according to a report by the Conference Board of Canada.
Industry output grew 1.7 per cent while better prices increased revenues to $17.7 billion, up from $15.5 billion in 2012.
However, a 19.6 per cent bump in costs as a result of a falling Canadian dollar and heavy capital investments prompted the industry's margin to fall to four per cent in 2013 from 9.3 per cent in 2012 when profits were $1.46 billion.
"The Canadian aerospace industry had a steady but unspectacular 2013," the study group said in its spring aerospace outlook.
The Conference Board expects average profit margins will recover to around five per cent between 2015 and 2018 as the dollar stabilizes, up from an estimated 4.4 per cent this year.
The industry's profits are expected to grow nearly 13 per cent to $787 million this year as revenues grow 1.8 per cent to $17.8 billion, outpacing a 1.4-per-cent increase in costs to $17 billion.
It said the global aerospace industry should enter a cyclical upswing as a pickup in the world economy, rising airline profits, increased capacity from the rising middle class in emerging countries and the need to replace aging aircraft increase demand.
The airline industry posted an operating margin of three per cent in 2013, the strongest results in three years. The International Air Transportation Association (IATA) expects profits will rise for a fourth consecutive year in 2014, marking the longest run of profitability since 2000-2003.
"The aerospace industry is expected to enter a period of strong growth, supported by a recovery in development markets and a more sustainable outlook in emerging markets," said the board report.
The order book for the Canadian aerospace industry reached a record $49.2 billion in February 2014, representing 34 months of production and supporting long-term revenue growth. It was as up more than $10 billion from a year earlier and above the recession low of $20.9 billion in the fourth quarter of 2010, a year in which profits were just $678 million.
The Conference Board said the Canadian aerospace industry faces opportunities as narrowbody commercial aircraft are expected to be the fastest growing segment over the next 20 years. Bombardier (TSX:BBD.B) hopes to capture a part of the market with its new CSeries plane. It will compete with re-engined planes from Boeing, Airbus and Embraer and new models from China's Comac.
"How the CSeries fares in the newly competitive single-aisle segment, and how Canadian suppliers are able to support the segment, will define the industry's long-run success."
The business aircraft segment has been slower to recover from the 2008 financial crisis and recession. Only 678 aircraft were delivered in 2013, six more than 2012.
The board said negative sentiment about private aircraft will change as the U.S. economy recovers and China views business jets as a corporate tool rather than a status symbol.
"Strong corporate profitability in the U.S., a recovery in business activity, strong equity markets, and a renewed acceptance of corporate jets will help demand for business jets to recover, but the slack in the used jet market will continue to act as a headwind."
Canada's aerospace industry leaders include Bombardier, Pratt & Whitney Canada, flight training and simulator manufacturer CAE Inc. (TSX:CAE) and Magellan Aerospace (TSX:MAL), which together had more than $15 billion of revenues.
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