Though there are signs the worst is over, the Canadian aerospace industry has had a tough couple of years, industry watchers say.

While the sector suffered only a small revenue decline last year, from $21.5 billion to $21.25 billion, according to the Ottawa-based Aerospace Industries Association of Canada, it followed a seven-per-cent decline in 2002.

"Obviously, it has been a difficult market for the last two to 2-1/2 years," says Peter Boag, the association's president. Overall, industry revenues are off 12 to 13 per cent from their peak in 2001, he says.

"Commercial aviation has been going through tough times, especially in North America," says Matthew Tobin, vice-president of marketing and alliances at MXI Technologies Ltd. in Ottawa.

The Ottawa area has felt the crunch. "There has not been necessarily a growth industry on the aerospace side," says Jeffrey Dale, president and chief executive of the Ottawa Centre for Research and Innovation (OCRI).

Mr. Boag and Mr. Dale say defence-related aerospace companies have fared somewhat better than those relying on the commercial market, but the Canadian industry is largely focused on commercial sales, Mr. Boag says.

At the root of the industry's problems is a downturn in demand for commercial aircraft that began in 2001. While the terrorist attacks of Sept. 11 did not trigger the slowdown, which started a couple of months before, Mr. Boag says, they did turn what would likely have been a cyclical flattening of demand brought on by a weak economy into a deeper decline. War in Afghanistan and Iraq and the SARS scare also contributed to a drop in demand for air travel, which made life difficult for major airlines and depressed demand for commercial aircraft and the components that go into them.

Today, air traffic is starting to return to pre-2001 levels, Mr. Boag says, but airlines still face tough times, with discount carriers putting pressure on traditional airlines and many travellers less willing to pay premium fares. He hopes this year will not bring a further decline.

"I think 2004 should be, at worst, flat from 2003 and perhaps a modest improvement," he says, "but significant growth is still a year or more away."

Among the encouraging signs are Boeing Co.'s plans for a new 7E7 passenger jet and Bombardier Inc.'s proposed C-Series family of mid-sized commercial planes.

But while Canadian suppliers could benefit from these large projects, Mr. Boag says, they face some challenges. One is making the up-front investment necessary to participate. Increasingly, he says, major aircraft manufacturers want partners to share some of the risk of projects. To do so, he says, Canadian suppliers need increased support from the federal government.

He says the Technology Partnerships Canada program, the government's principal vehicle for supporting the aerospace industry, lacks the funding to support the level of investment needed.

The industry also needs export financing, Mr. Boag says. Around the world, government export credit agencies provide financing for export sales. Canada's Export Development Agency performs this role here, he says, but the agency has been concerned lately about its exposure to the aircraft industry.

"They are increasingly finding it difficult to expand their aerospace book," says Mr. Boag.

The Canadian government could make better use its own purchasing power to bolster the domestic aerospace industry, Mr. Dale says.

"They could look to a buy-Canadian policy," he says. The North American Free Trade Agreement limits such measures, but governments can claim exceptions for national security reasons. "The Americans do use that," Mr. Dale says, "I think rightly so."

Mr. Boag agrees, saying Canada has not been as aggressive as it could be in pursuing exemptions from trade agreements for defence procurements. The federal government has done no major procurements in the air defence realm for some time, he says, adding his association welcomes the decision to replace the military's aging Sea King helicopters "after many painful years".

But while buying Canadian could help domestic suppliers, Steve Hall, president of Celeris Aerospace International Inc. in Ottawa, says selling to the federal government can be more trouble than it is worth.

"They make it difficult to award contracts because they want to put in checks and balances," he says. "It just becomes too absurd and too cumbersome."

That had started to change, he adds – "They were opening up and giving people more responsibility" - but he fears fallout from the sponsorship scandal will reverse the trend.

And not all aerospace-related companies are looking for assistance from government. "That's something I really haven't thought much about, to be honest," says Mr. Tobin at MXI. "We've gotten as far as we've gotten ourselves, without invoking any help from the government."

By Grant Buckler

special to the Ottawa Business Journal