OREANDA-NEWS. The aerospace and defense (A&D) sector outlook remains stable, but could move to positive during 2016 in view of the healthy market for large commercial aircraft (LCA) coupled with a likely rebound in defense spending in both the U.S. and Europe, according to Fitch Ratings' new outlook report.

The ratings outlook remains stable, with the strong sector dynamics mitigated by moderate risks relating to cash deployment, aircraft program ramp-ups, merger and acquisition integration, as well as emerging markets weakness in some regions.

Fitch expects LCA deliveries from Airbus Group NV and The Boeing Company to rise to approximately 1,440 (up 3%) and 1,550 (up 7.5%) aircraft in 2016 and 2017, respectively. Fitch does not believe these deliveries are excessive, as they fall within a reasonable range given replacement and growth needs.

The order books at Airbus and Boeing reached 12,485 aircraft at the end of November, equivalent to more than 8.5 years of deliveries at projected 2016 rates. Fitch estimates the value of the backlog at $875 billion-$900 billion. The record backlog serves not only as a key driver of the A&D outlook but also as a significant cushion to downside scenarios. Key indicators of aircraft demand, such as global airline traffic, remain positive.

There have been positive defense spending developments in the U.S. and U.K., where spending should rise in 2016. International demand continues to be healthy, and the global threat environment is a tailwind. The U.S. fiscal 2016 defense budget is still being finalized, but there is a chance of a substantial increase in modernization spending. Program details remain key to the analysis of specific credits.