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Middle East Unrest May Stall Aerospace Recovery

Analyst: Fuel Cost Spike Could Impact Manufactures, Leasing Companies, Airports, Airlines

The global aviation sector was expected to make good profits in 2011, but that outcome is now in question considering the current political situation in the Middle East region. Frost & Sullivan forecasts this Middle Eastern crisis to hit the aviation sector soon. The Aviation Turbine Fuel (ATF) prices account for a major portion of the operational expenses. The crisis in the countries in Middle Eastern states has raised the oil prices per barrel. Assuming the situation continues, the oil prices are expected to touch US $ 115- US $ 120 per barrel within the next two weeks which would result the global airlines in losses for the current year.

The Middle Eastern crisis has also restrained the inflow of tourists into the region, especially in countries like Egypt and Tunisia. The economies of Egypt and Tunisia are strongly supported by Tourism and these economies are in grave danger if the tourist inflow does not get back to normal. Another key threat is the rise of political unrest in the region which would impact the aerospace sector at all levels. The key area which would feel its impact is the offset sector where the foreign investors would be reluctant to procure from this region. The continuation of political turmoil would also lead to a dip in the defence budgets in the region. There is also a risk of civil war in the region which would lead to the unstable airport infrastructure, airline operators and MRO market apart from destabilizing the entire economy of the region.

On advent of a civil war, it is expected that the radical Islamic groups would venture into the countries in this region; this is a key risk to the Western countries. The oil economy of this region would financially support the radical groups to procure advanced weaponry system in large scale. Libya produces about 1.6 Million barrel of oil, majority of which is exported to Europe. Saudi Arabia would need to increase its production to cater to the European needs, failing which the economies in Western countries would be in a risk because the oil prices would increase. This would risk the stability of the economy as the oil prices form a part of the inflation.

Iran has also been restless due to the political turmoil and it has sent two warships across the Suez Canal (Khark and Alvand) and is expected to move towards Syria which has created a platform for international intervene from Israel. The US defence budgets are expected to decrease over the next few years and it would be interesting to witness if the US would intervene, its interest in oil reserves would force the US intervention.

However, if the oil prices continue to rise it will be bad news for Aircraft Manufacturers, Airline Leasers, Component Manufacturers, Airports and the MRO houses. All the associated trade with each of these sectors would also be affected. It is strategically important for Aerospace and Defence companies to have a huge cash capital to acquire financially hit companies which would add value in the long term. The political turmoil in Middle East is a good platform for the entry of radical groups which need to be addressed with utmost caution, failing which the entire Middle East would turn out to be another disturbed region and would affect the entire global economy.

FMI: www.frost.com


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