Credit Suisse On Commercial Aerospace Outlook II Details Explained
2020 will be remembered as the year of exogenous and endogenous crises for the commercial aerospace industry, the first year of the virus and the second year of the MAX debacle. Commercial aerospace was one of Covid-19’s most natural economic victims, as international flight restrictions and biological safety concerns ground global air traffic to a near halt, with US passenger throughput touching in mid-April down 96%.
2020 will be remembered as the year of exogenous and endogenous crises for the commercial aerospace industry, the first year of the virus and the second year of the MAX debacle. Commercial aerospace was one of Covid-19’s most natural economic victims, as international flight restrictions and biological safety concerns ground global air traffic to a near halt, with US passenger throughput touching in mid-April down 96%. While both U.S. and global air travel demand picked up in the summer, this trend flattened in the fall with global flight activity remaining down 35-40% for most of the year.
Following a relatively resilient Q1, most aftermarket suppliers reported commercial aftermarket sales down in the 50-60% range across Q2 and Q3. Demand destruction also hamstrung OEMs, whose “firm” backlogs appeared anything but that as airlines deferred deliveries and undelivered aircraft stacked up. Airbus commercial deliveries declined 34% Y/Y while Boeing deliveries dropped a further 59% (-81% vs. 2018). While margins for many OEMs and OE suppliers fell precipitously, aftermarket supplier margins held in well, indeed considerably better than many had expected, leading to a solid string of positive estimate revisions through the summer and fall for many of these names.
See Zee Business Live TV Streaming Below:
In addition to our confidence in recovery prospects over the next 2-3 years, we also remain confident in the long-term commercial aero bull thesis. Recall that this thesis asserts that the commercial aero industry should grow at 1.5-2x the rate of global GDP (the historical relationship) as developing economies grow and continue to increase the number of flights/capita (which dramatically lag developed economies), while, at the same time, consumer attention in developed economies continues to focus increasingly on experiences vs. products.
Credit Suisse sees nothing as it relates to Covid-19 that disrupts these long-term trends, and therefore believe that this should remain a GDP+ industry in their view. Thus while commercial aero stocks are clearly expensive in 2021E and 2022E, further normalization in 2023 and structural growth beyond supports premium multiples in the near-term, particularly given the early cycle nature of the current market.
Bullish on Recovery Fundamentals:
Despite a 64%/49% downward estimate revision to group FY '21/22 EPS estimates, commercial aerospace stocks ended 2020 down just 19%, a spread which has driven group multiples toward multi-decade highs on both an absolute and market-relative basis. However while value has become scarce within the sector, growth should soon return as we believe the group will experience a robust recovery beginning in the spring/summer of 2021. That view is premised on a strong inflection for leisure travel demand (75% of 2019 PAX) as vaccination rates rise and COVID-19 caseloads fall.
Credit Suisse expects that the leisure market will benefit from pent-up demand, elevated accrued vacation (particularly in Europe where annual rollovers are more frequently allowed), and robust household savings. While corporate travel will undoubtedly face headwinds, Credit Suisse believes that 70% of corporate travel is revenue-related (e.g., conferences, customer site visits).
This revenue related travel should benefit from competitive dynamics, wherein a competitor’s willingness to travel to see a customer face-to-face or generate leads drives others to do the same. And while internal corporate travel likely faces substantially greater long-term demand destruction, we could see some offset if corporate retreats become in-vogue as workforces become more distributed and natural touchpoints in the office diminish.
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.