The downturn in the civil aerospace sector is expected to be more severe than previously estimated mainly due to a decline in world air traffic and global gross domestic product, said Goldman Sachs, which downgraded Rolls Royce Group by a notch to sell.

A further double-digit drop in world international air traffic data, which fell 10.1 percent for February -- the worst decline since the current crisis began, could put Airbus and Boeing under pressure to cut production schedules for the second half of 2009 and 2010, Goldman said.

The brokerage also said: We believe further double-digit declines are likely for several more months as consumers and businesses seek to preserve cash in the face of economic uncertainty.

Goldman said it was cautious on the U.S. defense sector and downgraded BAE Systems to neutral from buy on concerns related to U.S. defense spending. BAE gets about 50 percent of its sales from U.S. defense.

Although U.S. defense spending looks healthy in 2009 and 2010, President Barack Obama has made clear his intention to reduce the budget from 2011, the brokerage noted.

We believe he intends to either cut or scale back a number of defense programs and implement defense procurement reform more aggressively than we previously thought.

European defense stocks have outperformed U.S. defense stocks so far in 2009 as the market seems concerned about the longer-term outlook for the U.S. defense budget and faster-than-expected moves by Obama to implement defense procurement reform, Goldman said.

(Reporting by Tresa Sherin in Bangalore; Editing by Himani Sarkar)

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