MONTREAL - CAE is well-positioned to maintain its global leadership in the flight simulator business despite intensifying competition that is cutting prices and hurting margins, according to an industry analyst.
Cameron Doerksen of National Bank Financial says the Montreal-based company's large installed base of simulators, low cost base and unparalleled ability to also offer pilot training services position it well in the long term.
CAE Inc. (TSX:CAE) has produced nearly half of all civil aircraft simulators operating around the world.
Excluding business jets and helicopter simulators, it dominates with a 56 per cent share of the market. Its next closest rival, L-3 Link, has only a 26 per cent share, followed by Flight Safety International, which doesn't focus on commercial planes, at 10 per cent.
"While CAE has always faced competition from the other major players and to a lesser extent smaller players trying to gain market share, the current environment may be more of a challenge to CAE than anything it has faced in recent years," Doerksen wrote in a report.
The main commercial aircraft competition is from L-3 Link, Lockheed Martin and Rockwell Collins, which all beefed up their civil simulation operations through acquisitions in recent years.
L-3 bought the civil simulation and training business of France's Thales, Lockheed Martin acquired Dutch-based simulator manufacturer Sim-Industries, while avionics supplier Rockwell Collins signed a joint venture in June with Chinese simulator maker Bluesky Aviation Technology, a subsidiary of state-owned AVIC.
Small competitors include Mechtronix, whose operations are near CAE's main plant in Montreal.
Doerksen said CAE has a "major incumbency advantage" because airlines or training providers are reluctant to switch suppliers.
Demand for simulators is expected to grow in the coming years as global aircraft orders rise, particularly in China, and thousands of new pilots are trained.
One simulator is needed for every 30 new narrow-body planes and about 15 to 20 wide-body aircraft. Airbus and Boeing expects to deliver about 1,250 new planes this year, while aircraft produced by Bombardier (TSX:BBD.B), Embraer and others suggest that up to 60 simulators will be needed this year.
CAE recently said it expects to sell a record 40 simulators this year, up from 35 in the last fiscal year. In the first quarter, it sold 23 units.
While commercial simulator sales have become less important to CAE over the past decade, Doerksen estimates the segment still accounts for 23 per cent of CAE's total revenues and 28 per cent of its operating earnings.
Meanwhile, the analyst said that while CAE's margins will come under pressure, demand for simulators will remain high. He also expects the company will benefit from improved results in its civil training business as disruptions around restructuring in Europe last year ease. The military market remains uncertain, but is not likely to worsen.
On the Toronto Stock Exchange, CAE's shares closed down four cents to $11.21 in Wednesday trading.
© Copyright 2013