Europe: It’s the Public Debt, dummkopf!

Regular Channels contributor BRENDAN GALLAGHER gives us his take on the European Market

Over the last few weeks the aviation headlines in Europe have been the mixed bag you would expect from a region still staggering from one of the nastiest economic shocks in decades.

In November 2008, as the US and the rest of the world reeled and floundered about in search of ways of achieving financial sanity, three auto industry executives famously flew to Washington on company aircraft to beg the government for bailout money, drawing exactly the kind of governmental and public condemnation that senior auto industry executives might be expected to have foreseen.

On the up side, Airbus claimed victory over Boeing in the ritual battle of order announcements at the Dubai Air Show. Top European low-fare operator Ryanair remains highly profitable – up 80 per cent to $571 million for the half-year. And while rival easyJet caught a fuel-hedging cold that depressed profits for the full year by 65 per cent, it’s expecting a $165 million rebound over the next 12 months.

But some of Europe’s full-service carriers are suffering from full-blown flu. British Airways lost $343 million after tax in the first half of the year and plans to cut 3,000 jobs by April and another 4,900 by March 2012. Air France/KLM took an $850 million hit in the same period, and Ireland’s Aer Lingus posted an operating loss of $138 million along with a dive in revenues that included a vertiginous 28 per cent decline on long-haul routes.

One shining exception is Lufthansa, $335 million to the good for the first nine months. Even so, the German flag carrier is feeling the pinch of a difficult market and is passing on the pain to Airbus by pushing back its 2010-13 A380 deliveries.

All this is happening against a broader economic backdrop suggesting that it might be premature to celebrate even the beginning of the end of the recession, and that the European aerospace industry and its suppliers elsewhere would be wise to brace for further turbulence.

In the UK, stocks continue a steady rally, house buyers are returning to the market and property prices seem to have bottomed at last. On the other hand, half of the country’s employers plan to keep a lid on pay in anticipation of no more than feeble growth in 2010. They are also finding it harder to get credit now than it was in the middle of the year, despite a government program of liquidity-promoting “quantitative easing” that has cost close to £200 billion ($330 billion) so far. And there’s the rub, for national economies as a whole and for aerospace.

The UK’s fiscal bailout is being funded by massive levels of public debt. The resulting budget deficits are completely unsustainable in the long term, and the government is under mounting pressure to start the long haul towards balanced books by hiking taxes and cutting spending.

There will be a general election in the middle of next year, and the party most likely to take over from today’s battered administration has made no secret of the fact that some big-ticket defence aerospace projects are firmly in its sights – the big-deck carriers with their complement of Joint Strike Fighters, the third tranche of Typhoon combat aircraft, the Airbus A400M transport, the replacements for the Royal Navy’s ballistic missile submarines.

Britain isn’t the only European country feeling the fiscal heat. France’s recession-busting strategy includes a $52 billion injection of cash into high-technology research and development projects. Unfortunately, Fitch, the influential international credit rating agency, warns that the scheme will add to an already high and rising public debt and lead to a debt-to-GDP ratio above 85 per cent by the end of next year, higher than the levels projected for Germany and the UK. If the French Government takes fright, one of the casualties could be the $3 billion earmarked for aerospace work.

In Dubai a couple of weeks ago top Airbus salesman John Leahy said that while the industry faced a difficult winter, spring might not be that far away. He could be right about Airbus, with its bridgeheads in fast-recovering places like the Middle East and China. But more Eurocentric suppliers are well advised to wrap up warm against the coming public spending freeze by redoubling their efforts in the region’s air transport and business aviation sectors.