Oil-hit planemakers brace as biggest air show looms

LONDON (Reuters) - The world's biggest air show opens in Farnborough near London next week with jetliner manufacturers facing a drop in orders due to high oil prices and global defense firms bracing for slower spending growth.

Many analysts say dire warnings that aviation is threatened by a permanent switch to sky-high fuel prices seem overdone and note Boeing (BA.N) and Airbus (EAD.PA) have enough plane orders on their books to last about seven years.

New business will get done at the Farnborough event, but it may struggle to reach even half the record tally of 600 firm new orders seen the Paris air show just one year ago.

"There is a vague feeling that we are going straight off the edge of a waterfall, but I don't think it is that bad," said aerospace consultant Richard Aboulafia at the Teal Group.

Industry sources say there will be new orders this year for jets including the Airbus A380 superjumbo, and a major deal from leasing giant ILFC (AIG.N), which could be good news for Boeing.

Qatar Airways is expected to place an Airbus order and Abu Dhabi-based Etihad could help to sustain Middle East demand.

Still, the industry is feeling its worst chill since a recession worsened by the September 11 hijack attacks in 2001.

A year ago, the biennial Paris air show, which is held on alternative years from Farnborough, all but ran out of ink as aircraft salesmen celebrated a "longer and stronger" industry cycle following three years of bumper orders for Airbus and Boeing.

The size and luxury of purpose-built chalets where deals are signed may not reflect it -- they were planned months ago -- but this year's event may feel more like a wake by comparison.

Oil prices above $140 that read like flight numbers could spell doom for dozens of airlines. Their costs have doubled in a year.

A little noticed but even more spectacular rise in the value of exotic metals used in modern aerospace production, like heat-resistant rhenium, has rattled the big engine makers.

The air show also comes close to the anniversary of a credit crisis which has mauled the business plans of new airlines and, like the oil price, led to plane order cancellations and deferrals.

"We have seen bankruptcies in low-cost airlines without a strong business model and now see the old ladies like American, Air France, Lufthansa, starting to adjust capacity," said Damien Lasou, global managing director for aerospace at Accenture.

By cutting capacity on longer routes, where fuel is a higher proportion of cost, airlines hope to save more in fuel than the revenue lost.

A significant proportion of the fuel carried on the longest flights is used just to carry the rest of the fuel.

Capacity cuts can lead to older planes being mothballed and new orders being deferred, though Boeing believes fuel pressures could also speed up the switch towards efficient new planes.

"Part of the downturn is a natural part of the cycle. We don't know but it could be fairly long and protracted. The only way out is to ensure aircraft are more fuel-efficient," said Howard Wheeldon, senior strategist at BGC Partners in London.

DEFENCE MANOEUVRES

While carrying such heavy baggage, the industry is under pressure to find renewable alternative sources of fuel to reduce carbon emissions, to which aviation contributes some 2 percent.

Executives say high oil prices could provide the impetus, though few expect commercial flights powered by biofuels soon.

Boeing and Airbus will put on a show of co-operation to discuss the search for "sustainable" flight during the air show.

But they reach Farnborough battling on three fronts -- a bid to control the lucrative fast-growing mid-sized jetliner market, a deadlocked trade subsidy dispute and a $35 billion contest to equip the U.S. Air Force with mid-air refuelling tankers.

The contest was reopened this week after Boeing successfully challenged a decision to award the deal to Airbus parent EADS and its U.S. partner Northrop Grumman (NOC.N).

The politically charged contract will not be settled at Farnborough but is being closely watched by other participants.

Anxious to gain a slice of the world's richest market for defense spending, European firms say the duel could shape the openness of the U.S. market to European participation.

U.S. contractors look towards international growth to offset the possibility that U.S. military spending may be peaking.

The show is also set to open amid heightened tensions after Iran test-fired missiles in the Gulf this week.

Analysts said the tensions could spur billions of dollars of new business for defense contractors. But any related new spike in oil prices could pile more pressure on civil businesses.

Defense giants will display missiles and defense systems at the show, with Raytheon (RTN.N), the world's largest missile maker, expected to talk up its Patriot air and missile defense system.

Lockheed Martin (LMT.N), the Pentagon's number one supplier by sales, says Patriot-using nations are looking for PAC-3 upgrades to the missiles for which it is the prime contractor.

On display at Farnborough will be an eye-in-the-sky converted business jet that could be key to any Israeli air strike on Iran. The Israeli Air Force has taken delivery of three of the Gulfstream jets, converted by state-owned Israel Aerospace Industries into early warning and control aircraft.

Speculation that Israel, which fears Iran is seeking to build atomic weapons, could bomb Iranian nuclear installations has mounted since a big Israeli air drill in June.

(Additional reporting by Dan Lalor and Avida Landau; Editing by Jason Neely)