Aerospace Manufacturing at Risk from COVID-19 OutbreakBy Alicia Arizpe | Thu, 04/16/2020 - 12:24
The global aviation industry has gone down in response to COVID-19 and it is taking its suppliers with it. The aerospace manufacturing chain is now grappling with deferred and cancelled airplane orders, raising concerns among suppliers at all levels for the long-term future of the sector.
A glimpse into the aerospace industry in early 2020 would have revealed an optimistic sector mostly concerned about improving sustainability and optimizing supply chains to address a growing demand for aircraft. In its Global Market Forecast 2019-2038, Airbus predicted that air traffic would double in only 15 years and the high demand for travel would translate into a demand for 39,210 new aircraft during the coming 20 years. Four months into 2020, the sector has been thrown into complete disarray as a global pandemic has paralyzed the aviation industry leaving airlines with more aircraft than they can use.
The spread of COVID-19 has led to an unprecedented level of flight cancellations. People are wary of risking their health and thus they are following recommendations from public officials to stay home. Even if they wished to travel, they would be unable to do so as many travel routes have been temporarily cancelled due to governments closing their borders to halt the spread of the virus. These cancellations have sent the aviation industry plummeting and risked the survival of many airlines. The International Air Travel Association (IATA) warned that the COVID-19 outbreak might cost the aviation industry US$314 billion in lost revenue during 2020, which is over half of what the industry made in 2019. Moreover, the association warns that many airlines are not in a position to weather the crisis since airlines in average only keep three months of liquidity in savings, placing them in a worrisome position should the outbreak be extended for much longer. IATA expects that airlines may run out of cash reserves, which amount to US$61 billion, by the end of 2Q20.
Airlines are now in a precarious position due to little cash flow, few flights and the need to maintain their fleets even though they may not be using them. The cost of keeping an airplane grounded is not little as parking and maintenance fees ramp up. Airlines, concerned about saving money to weather the crisis, are analyzing what to do with the grounded aircraft and have requested local authorities for support in this period. Whether they receive it or not, some airlines have been clear that they do not want to handle even more aircraft that will only cost them money and stay on the ground. In late March, Airbus warned that airlines were looking to defer or outright cancel deliveries for new aircraft and the OEM received several cancellations from major clients including LATAM airlines and SaudiGulf airlines. Its rival Boeing, which was already dealing with an internal crisis caused by the grounding of its 737 Max after two deadly crashes, was hit with 150 cancellations that same month. The cancellations of the once best-selling aircraft add to Boeing’s woes as the OEM struggles to lift the global grounding that has left hundreds of 737 Max unused for a year.
The overall pessimistic environment has led OEMs to drastically adjust their manufacturing capabilities. Airbus cut down production of its A320 from 60 to 40 jets per month and of its A350 from 10 to six. The OEM also cancelled the construction of a new assembly line in Toulouse, of which it had proudly boasted just a few months before when its main concern was meeting demand. Boeing had been juggling production halts for months as the return to the skies of the 737 Max kept being postponed. In January 2020, the OEM cut construction of the controversial plane and in early April, it announced that it will also shut down construction of 787s at its plant in North Charleston.
Cancellations of aircraft orders and a reduction of new orders are not the only problems affecting manufacturers. Governments seeking to halt the spread of COVID-19 are also placing restrictions on the manufacture of non-essential goods. Canadian OEM Bombardier is temporarily shutting down production of private jets and railways at its facilities in Ontario and Quebec to comply with local regulations designed to slow down the outbreak.
While the full effect of COVID-19 in the aerospace supply chain is yet to be determined, research firm Oxford Economics warned that supply chains disruptions, plant closures and less demand caused by the economic slowdown might cause aerospace production to shrink by 5 percent during the first half of 2020. While these circumstances will have an impact in the entire manufacturing chain, smaller suppliers with limited cash reserves are at higher risk should the crisis last too long. PwC’s report “COVID-19: What it means for the aerospace and defense industry,” warns that aircraft manufacturers “should expect continued weakening links in their supply chain, as some vendors and suppliers will likely face operational or financial struggles of their own.” The report urges companies to prepare for supply chain bottlenecks from national and foreign suppliers.
In Mexico, the aerospace industry has not been hurt by the outbreak so far, explained Luis Lizcano, Director General of FEMIA. Companies are taking preventive measures to protect their workforce and operations but the industry is concerned about the long-term impact of lower demand for aircraft, added Lizcano. While the full effects of the crisis in the aerospace industry are still to be seen, this, and many other industries, are concerned. PwC’s COVID-19 CFO Pulse Survey revealed that 75 percent of leaders from Mexico and the US were concerned about the financial impact of the crisis, 41 percent feared that the epidemic would have a negative effect on their workforce or productivity and 21 percent feared supply chain disruptions.