The big financial freeze that has gripped much of the aerospace industry since around the time of the last Farnborough airshow in 2008 is starting to thaw. And, as a consequence, deal making is back in fashion.
This was the headline assessment of the state of the sector from Michael Richter, managing director of the aerospace and defense group of financial advisor and asset manager Lazard on the eve of this week’s show.
What has changed lately, Richter told AIN, is that visibility and certainty have started to re-emerge as factors giving companies and investors the confidence to start making longer term moves. “In the past six to eight weeks, there have been several billion-dollar transactions in the market or coming to the market,” he said, predicting that as many as 15 to 20 of such deals could come to fruition in the coming weeks. Private equity interests are once again active in the market, he explained, and, in some cases, investors who want to avoid liability to new U.S. capital gains tax rates are driving asset sales.
“The market has transitioned from an uncertain outlook to one where there is greater visibility,” he said, pointing out that net airliner orders have been positive since the last Paris Air Show in June 2009, with a slower than anticipated rate of cancellations. More recently, airlines have started to show improved profitability.
Richter said that, along with many in the industry, he has been pleasantly surprised by the pace and scale of the recovery. “But the problem was real and serious and we are still not out of the woods,” he warned, noting that while the significant layoffs made by companies have now stalled, the rate of rehiring has been slow.
“This time last year, most analysts on Wall Street were predicting that it was impossible for Boeing and Airbus to maintain their production rates owing to the alarming cancellation and deferral rates,” Lazard explained. “Most suppliers were adjusting business models to accommodate the possibility of a production slow down. However, the unprecedented order backlogs, increased orders from international customers and conservative operating stance adopted by the airlines in recent years, which includes cash reserve build-ups and reduced costs, continues to preserve this backlog.”
Lazard’s aerospace and defense group consists of 20 bankers around the world. It continues to be very active, having advised on more than 10 transactions during the past 12 months, including several strategically significant deals.