AIRSHOW-UPDATE 1-Austerity rules at frugal Farnborough
* Defence companies brace for cuts
* Air traffic demand seen picking up
* Cat-and-mouse game over engine decisions (Adds U.S. analyst quote, F-35 order)
By Andrea Shalal-Esa and Tim Hepher
FARNBOROUGH, July 16 (Reuters) - Cocktails will be well down the to-do list at next week's Farnborough Airshow as arms companies strive to reflect the growing mood of austerity.
Many arms companies have cut back on their visible presence at the aerospace gathering and organizers have been told to cut back on anything that might suggest frills and perks to Pentagon planners and others weighing big defence cuts. [ID:nLDE66E235]
That means less champagne, but plenty to talk about inside the invitation-only chalets before the biennial July 19-25 jamboree near London opens to the public next Friday.
"Companies are scaling back the massive chalets, the dinner parties at Madame Tussaud's," said U.S. analyst Jim McAleese.
He forecast a generally subdued atmosphere given a major drive by Defense Secretary Robert Gates and the Pentagon's chief weapons buyer, Ashton Carter, to cut over $100 billion from U.S. defense accounts. That means the posh parties that once characterized the big international air shows may be passe.
"The American taxpayers pay for almost every dollar's worth of Farnborough, from the marketing to the chalets to the social events," said McAleese.
The sole exception is alcohol -- which is not allowed as an expense in government contracts, he said.
"The test is, would I be embarrassed to be seen at this event by Secretary Gates or Undersecretary (of Acquisition, Technology and Logistics) Carter," he said.
European aerospace companies face a raft of uncertainties over spending reviews affecting projects ranging from aircraft carriers and the combat jets they carry to unmanned spy drones.
Defence giants in the United States have seen relatively stable spending, but are bracing for steeper cuts as they battle to maintain existing projects such as the Lockheed Martin Corp (LMT.N) F-35 Joint Strike Fighter, history's costliest arms procurement project, on budget and schedule. [ID:nN15230198]
"There is only one thing on everyone's lips and it's cuts," said Howard Wheeldon, senior strategist at London brokerage BGC Partners, who has attended every Farnborough since 1968.
Canada unveiled plans on Friday to buy 65 F-35 jets, but other defence platform sales are scarce. [ID:nN16111466]
Overshadowing the airshow will be high-profile battles between Boeing and EADS (EAD.PA) subsidiary Airbus over a $50 billion contest to provide aerial tankers to the U.S. Air Force and the world's largest trade dispute over aircraft subsidies.
The two companies and their engine makers are also involved in a cat-and-mouse game over multi-billion-dollar decisions on possible upgrades for their popular single-aisle jetliners, but expectations of a big European announcement have faded.
As arms firms scrape the bottom of government coffers for funding, analysts say acquisitions could heat up in coming months, especially for second-tier defence and civil companies.
Damien Lasou, managing director leading Accenture's Aerospace and Defense Industry Group, expected a strong shift into services by many defence and aerospace companies, especially given pressures on defence budgets.
Leasing the use of weapons systems, rather than buying them outright, could reduce costs for governments, while providing companies a steady stream of revenue.
POSSIBLE 787 DELAY
On the commercial side of the show, all eyes will be on Boeing's carbon-composite Dreamliner, taking a break from flight testing to make its first public appearance outside the U.S. following production delays of over two years.
Boeing suffered a setback on the eve of the show when it announced first delivery of the lightweight airliner, designed to consume less fuel than older aircraft, could be pushed back again into 2011 from the fourth quarter. [ID:nN15224632]
The switch to composite materials on planes such as the 787 and rival Airbus A350, due in mid-decade, could be another cue for consolidation along an increasingly specialised supply chain.
"(Valuation) multiples are low and there are candidates that are technologically very interesting, especially those that have very large investments coming up, for instance for a switch to composite materials," said Stefan Ohl, managing director at AlixPartners in Munich.
"You used to say that the strong will eat the weak. Now you could say that the liquid will eat the illiquid. That means those that have a full war chest."
Analysts expect a more positive tone on aircraft orders as air traffic demand picks up, especially after a surprise order for 32 Airbus A380 super-jumbos from Dubai's Emirates last month.
Emirates could place an order for Boeing 777s at the show but demand remains modest compared with earlier this decade.
Aviation analysts will be watching for further orders for the Bombardier Inc (BBDb.TO) C-Series 110-130 passenger jet, designed to eat into the bottom end of the Airbus-Boeing product range, as well as moves from new players China and Russia. (Additional reporting by Maria Sheahan, David Ljunggren; editing by Sharon Lindores and Andre Grenon)
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