Canadian Aerospace Outlook

Industry to government: Stand up for jobs and growth in the Canadian aerospace sector

January 1, 2011

Production and profits are expected to rise in Canada's aerospace sector.

The association representing the interests of the Canadian aerospace industry across the country is calling on members of Parliament to get behind the purchase of F-35 Lightning II fighter aircraft.

The Aerospace Industries Association of Canada (AIAC) is also critical of the lack of understanding of the benefits related to the acquisition of the F-35. A motion was put forward recently in the House of Commons that called for the cancellation of the procurement. It was defeated 170 - 100, but it shows that not all members of Parliament are onboard.

“To say that by cancelling the current process and starting from scratch would somehow result in a greater number of jobs for our industry and without penalties is not only a stretch, but it is completely misleading,” said AIAC President and CEO Claude Lajeunesse. “The instability in the Canadian industry on this issue is creating a climate whereby jobs and investment are being threatened if not lost already.”

The AIAC took umbrage with the motion that stated the Direct Industrial Participation (DIP), which underpins the purchase of the F-35, would create fewer jobs than the Industrial and Regional Benefits (IRB) approach. According to the association, it demonstrates a lack of understanding of aerospace and defence-related issues at the government level.

“The IRB policy, the traditional approach to procurement policy when buying military equipment off-the-shelf, would result in guaranteed offset investments equivalent to the cost of the aircraft, evaluated at only U.S.$4.8 billion, not $9 billion as suggested by some,” said Lajeunesse. “Cancellation and delay of this purchase will not only mean lost jobs and investment related to the 65 planes, but also billions of dollars and thousands of Canadian jobs lost relating to thousands of planes to be built as part of the broader program.”

While the AIAC is pleased with the recent improvements brought to the IRB policy by the minister of industry, it still sees the DIP concept as providing companies with more opportunities to compete for the production of 3,000 to 5,000 aircraft as Canada is a full participant in the F-35 program along with eight other countries. This amount represents more than $12 billion in opportunities for the partner’s fleet only, excluding those related to sustainment and foreign military sales.

“The projects generated to date already place Canadian companies in prime position to reap benefits once the high rate of production starts. [This is] worth more than the minimum that would be guaranteed for capital equipment under the IRB approach,” said Lajeunesse. “We need to move forward on this critical investment for our military and for our industry in order to continue to reap the benefits from being part of this international program.”

Looking Ahead to 2014

A slowdown in global economic recovery that delayed the rebound of Canada’s aerospace industry will likely end this year, according to The Conference Board of Canada’s “Canadian Industrial Outlook: Canada’s Aerospace Product Manufacturing Industry - Autumn 2010.”

Weakness in business confidence delayed the recovery, particularly in the demand for business jets. As well, countries with large budget deficits began to cut defence spending.

“Improving market conditions for commercial jets means that new orders are now coming in for the industry, albeit at a modest pace,” said Associate Director, Industrial Economic Trends Michael Burt.

The industry’s pretax profits were forecast to fall in 2010 by 47 percent, to $152 million, because of weak sales and declining prices. Profits already have begun to rebound on a quarter-over-quarter basis, although they remain below 2009 levels.

Production is expected to improve beginning now.  As order books gradually expand and inventories of existing aircraft are sold, the pace of production will increase. By 2014 production is expected to surpass its prerecession peak, making it an exception among industries within Canada’s manufacturing sector.

Profits are forecast to rise to $308 million in 2011, but margins are expected to remain thin because of continued strength in the Canadian dollar versus other currencies. For example, since most of the aerospace industry’s products are sold in U.S. dollars, the strong Canadian dollar negatively affects profitability.