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NEW YORK (MarketWatch) -- Rockwell Collins Inc. said Tuesday that its quarterly profit fell 26%, citing lower demand for commercial aircraft, although it did see higher equipment sales to the United States for the F-15 fighter craft and unmanned aerial vehicles.

The Cedar Rapids, Iowa-based aviation firm also reaffirmed its 2010 profit forecast with its midpoint below the average Wall Street view. But that could prove to be a conservative forecast, as it includes potential narrow-body production cuts among the company's customers, which may not occur if the economy continues to strengthen, Chairman and Chief Executive Clay Jones said in an interview.

For 2010, Rockwell Collins predicts it will earn $3.35 to $3.55 a share -- down from fiscal 2009's $3.73 a share -- on sales of $4.6 billion to $4.8 billion. Wall Street analysts have forecast fiscal-year earnings of $3.55 a share on sales of $4.5 billion, according to an average calculated by FactSet Research.

Shares of Rockwell Collins fell 3% to close at $49.24. In the last 12 months, the stock is up about 36% in anticipation that an economic recovery will spark demand for new aircraft.

Next year's guidance assumes revenues will fall about 7% from fiscal 2009, with sales to equipment manufacturers such as Boeing Co. and General Dynamics Corp.'s Gulfstream to be down in the high single digits. Driving that decline will be lower equipment sales for business jets, Jones said. See full story.

Commercial-jet demand will likely remain depressed as airlines continue to cut capacity and adjust to new demand levels. For the last year, the industry has been posting losses and steep declines in yields, which represent average ticket prices, as carriers lowered ticket prices to attract fewer travelers.

Yield growth "is very important" to returning the aerospace cycle to growth, Jones commented. "We think a couple of things are happening right now: The airlines are still trying to reduce their capacity, and they have to get supply down," he said. "The second thing that has to happen is that demand needs to increase ... and we think that will happen halfway through the [current fiscal] year."

By the end of the second quarter, yields should begin increasing and airlines should begin making more money, providing a modest improvement to Rockwell Collins' aftermarket business.

"It's not a jail break, but it is a general improvement," Jones added. "I think when you look into 2011, and now the economy is beginning to pick back up, you get better GDP growth. ... The cycle begins to repeat itself on the upside."

Jones said he thinks the current fiscal quarter is the low-water mark of this cycle.

In its latest report, Rockwell Collins said it earned $134 million, or 84 cents a share, in its fiscal fourth quarter, down from a profit of $182 million or $1.13 a share in the year-ago period.

Excluding a one-time charge of $21 million related in part to the company's closing of its San Jose, Calif., facility, the company said it would have earned 93 cents a share. Analysts expected a profit of 88 cents a share, according to FactSet Research.

Revenue slipped to $1.2 billion from $1.3 billion last year, in line with the Wall Street consensus.

"Commercial saw a tough quarter, though we think it is notable that management is forecasting this quarter to be the bottom of the cycle, implying that we should see a short-cycle aftermarket recovery coming through next year," said Rob Stallard, an analyst with Macquarie Equities Research. "In government, results were again robust, helped by acquisitions, though the top-line progress is likely to ease as U.S. defense budgets come under pressure."

Revenue on the company's government side is expected to grow by 12% for fiscal 2010, half of which will come from its recent Datapath acquisition.