Thomas White Global Investing
Spain
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November 13, 2009
A Postcard from Europe
Spain: What Ails the Aeronautical Industry?

Spain aeronautical industry

Spain has significant aerospace clusters in cities like Madrid, Andalusia, Catalonia, and the Basque country to name a few.

Bailouts are not new. In fact, during the global meltdown of 2008, bailout was the catch phrase of the moment, invoking the reality of the financial crisis in the minds of many Americans. Since then, most major government’s have offered bailouts in some form or the other. Spain itself has been reeling in the aftermath of the meltdown, having entered its first recession in 15 years. The recent financial crisis has only exacerabated an ongoing correction in the construction sector. Yet, Spain’s new $5.50 billion bailout offered to its aeronautical industry comes at a time when many governments across the world are pondering withdrawing stimulus measures in the wake of positive economic data.

Although many associate Spain with olive oil exports and tourism, Spain’s aeronautical industry is fifth in Europe in terms of turnover and employment, with at least 34,000 people directly involved in the sector. With the industry posting steady growth of at least 12% in the decade from 1998 to 2007, the Spanish aeronautical market is clearly crucial in the government’s plan to revive the country’s economy. Industry turnover even in the last year totaled nearly $7.6 billion, an increase of around 25% over the previous year. Yet, with air travel dipping substanially over the past year, weary consumers have cut back on travel. With this, airlines have struggled to stay afloat, spurring a drop in aircraft demand and widespread cancellations of new orders. Spain is expected to see a year-on-year decrease in traffic of 8% in 2009 with almost all major market segments operating fewer flights than last year. The Spanish aeronautical industry has felt this aftershock.

It is a situation that is enough of a concern to the government, that a stimulus has been launched this late into the recession. The $5.50 billion aid package will be distributed between next year and 2014 towards what the Ministry of Industry, Tourism, and Trade has said will boost the ‘development of new products and maintain demand as well as aid work in Spain.’ Christened the new “Aerospace Sector Strategic Plan” or SPFS, the government is hoping that the intitiative will just be the trigger that will enhance the industry’s competitiveness. For example, the Spanish division of Airbus will receive a $748 million injection from this stimulus package to further its development of the A350 XWB model. Spain began developing expertise in carbon fiber composites decades ago and the country’s extensive research on carbon fiber is beginning to pay off. The A350 XWB model will be the first commercial aircraft to be made extensively with carbon fiber.

Decades ago, in 1919, when Juan de la Cierva flew the world’s first stable rotary-wing aircraft, few imagined that it would become the forerunner of today’s helicoper. That set a trend that has made Spain one of the leaders in technological innovation. Now the industry itself lies challenged. Much of the debris from last year’s financial wreckage has been clearing, but Spain’s aeronautical sector still has miles to go before it can fly again.

 

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