Economists Wary Of Aerospace Bubble

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While sales of business jets are at record highs and forecasters predict strength in that segment throughout the next eight years, economists are questioning the near-term viability of the aerospace industry ... and it's not just oil prices. Airbus sells its products in U.S. dollars but pays its employees in local currencies. With the value of the dollar experiencing a relative free-fall the impact of that arrangement may become powerful. Airbus' parent company, EADS, has lowered its 2007 profit forecast from $580 million to zero, according to ABC news, citing the dollar's decline as cause for the loss of $19 billion from the company's backlog. A weak U.S. economy is also perceived as a potential threat to worldwide airline travel. U.S. Federal Reserve Chairman Ben Bernanke has downplayed fears of a recession, but has predicted an economic slowdown into 2008. But there are many factors that affect the impact these forces have on different segments of worldwide aviation markets.

Europe, at least, has a powerful euro to help counter $100/barrel oil. In the U.S. some economists fear that high oil prices -- or even fallout from the country's subprime mortgage debacle -- may force the economy into recession, cutting demand for air travel. That situation may hit airlines hard but will affect business jet operators as well, as fare hikes to counter rising fuel costs would be difficult to apply and corporations slash travel budgets to counter high energy costs. In the doomsday scenario, fallout from that situation would lead to a reduction in sales at major aircraft manufacturers, plus the cancellation of some existing orders. One key to survival would be fuel efficiency -- already a target of designs like Boeing's 787 Dreamliner and championed by the HondaJet, Eclipse 500, and coming designs from Spectrum Aeronautical, among others. Another key is for companies to hedge currency, limiting their exposure to the dollar's downfall. Large companies like Airbus and Bombardier have such programs in place, but relief in this form is temporary. If the dollar's decline is not corrected, many in the industry fear layoffs would follow.

Relatively speaking, a weak dollar does put U.S. aerospace exporters and even U.S. airlines in a position to benefit from overseas sales and business derived from international routes. But economists fear that all the while competition will be working hard to maximize efficiency -- and that could make it far more difficult for U.S. companies should the dollar improve.