TORONTO — For the first time in CAE Inc.’s history, its military division is growing at a pace that’s in line with its civil aviation business, and the company expects orders to soar as defence departments trim their budgets by training pilots with simulators.
“If you look at the growth of our defence business over the last two or three years, we’ve been growing at over 20 per cent year over year,” CEO Marc Parent said after the company’s annual meeting in Toronto.
“For the first time in CAE’s history we now see our military business also growing and executing similar margins (compared to the civil sector).”
In an era of government restraint and military budget cuts — even the U.S. Pentagon is looking to pare billions of dollars from its operating budget — flight simulators will become increasingly attractive options because they can train pilots at one-tenth the cost of operating an actual aircraft, Parent said.
“Governments are looking at that and they’re saying why aren’t we using (flight simulators),” he added.
CAE (TSX:CAE) expects about 10,000 helicopters and airplanes will be delivered to the world’s militaries over the next five years, driving calls for a number of new pilots who need to be trained. CAE anticipates that will create demand for 300 new flight simulators.
Meanwhile, CAE estimates that less than half of current military pilot training involves flight simulators.
“There’s a pretty substantial increase in the use of simulation based training that could be done (which is) good for our business and good to lower military training costs. And in an era of budget consciousness, that’s a natural,” Parent said.
Parent is optimistic after CAE received a number of new defence contracts during its first quarter of fiscal 2011.
But he noted that the company’s earnings and stock value more closely mirror cycles in the civil aviation sector.
The Montreal-based company reported Wednesday that it earned $39.4 million or 15 cents per share in the quarter, ahead of earnings of $27.2 million, or 11 cents per share, in the comparable 2010 period. The prior-year quarter included an after-tax restructuring charge of $18.9 million.
Revenue dropped four per cent to $366.7 million from $383 million.
CAE also announced it would increase its quarterly dividend to four cents per share from three cents, paid on Sept. 30.
UBS Investment Research analyst Tasneem Azim said the company’s earnings were in line with consensus estimates, but its civil segment turned in a better than expected performance.
The company struck a number of new agreements during the quarter, including with Mitsubishi Aircraft Corp. to develop a training solution for the new Mitsubishi regional jet. It also sold four flight simulators to various customers.
New orders CAE’s military segment won during the quarter are estimated at $276 million, while new civil aviation orders are valued at $81.8 million.
“We are entering into a new cycle now, we’re seeing the signs of a market recovery. We’re cautious because, yeah there’s more orders, but there’s still storm clouds ahead,” Parent said.
The company’s civil aviation division is poised to benefit from a recovery in the airline industry in the short-term and long-term from a global pilot shortage, in which he estimates will result in as many as 18,000 new pilots needed per year, he said.
“If you look over the next 20 years the industry’s going to double, even by the most conservative estimates,” he said, adding the number of pilots required will increase from 200,000 to 400,000.
CAE is a world leader in simulation technologies and training solutions for civil aviation and defence forces and employs more than 7,000 people. It has annual revenues exceeding $1.5 billion.
The company plans to expand its 11 flight training centres around the world, including in strategic emerging markets in China, India and Brazil, where demand for new pilots is strongest.
Its longer term growth plan includes penetrating the emerging healthcare simulation market, as well as the mining sector.
Shares of CAE dropped 10 cents to close at $9.96 Wednesday on the Toronto Stock Exchange.