Surprise commercial orders overshadow defense

FARNBOROUGH (Reuters) - Large commercial airplane orders stole the show at the Farnborough Airshow on Tuesday, with Latin American companies sharing the spotlight with a resurgent leasing industry.

And on what had been expected to be the military day, there was mostly bad news for the defense industry as Italy canceled a tranche of 25 Eurofighters and a British minister said the industry had to cut costs or see programs slashed.

Chilean carrier LAN Airlines ordered 50 Airbus A320s worth more than $4 billion, Flybe signed for up to $5 billion in planes from Brazilian group Embraer, and more substantial orders were expected for Boeing later in the day from aircraft leasing pioneer Steve Udvar-Hazy.

All of those deals renewed the focus on commercial sales, particularly from new markets likely to be growth drivers for the sector in coming years.

"Demand from airliners as opposed to lessors is mainly coming from Asia, South America, Middle East and even Russia, which are all considered growth markets," said Howard Wheeldon, senior strategist at BGC Partners.

"My question is, where are the European and American orders? Will they be here in the next two years? That is unlikely. The airline industry is better than it was but it is still not fit for purpose," he said.

Commercial and military budgets are in sharp contrast -- the private sector is spending more freely than it has in the past two years, while Britain's defense secretary, Liam Fox, came to the show to say the country's defense program were too costly.

"The current defense programs are entirely unaffordable and the unavoidable reality is that change is coming," Fox told reporters, adding later that "the industry will need to help us by cutting costs and improving efficiency."

While that caution has not stopped ostentatious displays of fighter jet capabilities by the likes the U.S. Air Force's F22 air-superiority fighter, it has subdued the tenor of the show more generally.

The Italian news -- aimed at saving up to 2 billion euros ($2.6 billion) -- was also a surprise, even though the Eurofighter combat jet program had been seen as being at risk in the coming wave of European defense cuts.

Italy had placed an order for 121 of the new-generation jets made by a consortium of Finmeccanica, BAE Systems and EADS, which represents Spain and Germany.

The 25 jets make up Italy's share of the remaining production run which has not been funded, known as tranche 3B.

(Additional reporting by Kyle Peterson, Andrea Shalal-Esa and Golnar Motevalli; Writing by Ben Berkowitz; Editing by Dan Lalor; Reuters Farnborough Media Center +44 1252-418188)

($1 = 0.7739 euro)

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