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News Article

Aerospace Production in Trouble Due to Pandemic

By Alicia Arizpe | Thu, 05/07/2020 - 14:14

The sharp drop in air transportation caused by COVID-19 is hurting the aerospace industry. As a growing number of airlines and lessors defer or cancel their orders for new aircraft, aerospace manufacturers across the world are being forced to reassess their production goals. In some countries, including Mexico, the implementation of containment measures to stop the spread of COVID-19 has led plants to reduce or stop their operations, placing the future of the local industry at risk.

The global COVID-19 crisis has been a blight for the entire aviation industry. Border closures and stay-at-home policies led thousands of potential travelers to stay at home. During March, when policies meant to contain the outbreak intensified and became widespread, global aviation faced its “largest decline in recent history,” according to the International Air Travel Association (IATA). That month revenue passenger kilometers (RPKs), which are the number of revenue-paying passengers per kilometers traveled, fell by 52.9 percent year-on-year, reaching levels that had not been seen since 2006.

The effects of such a sharp drop in demand were deeply felt by airlines. Some of them including Virgin Australia, Compass Airlines and Flybe entered administration or closed down their operations during the pandemic. While these airlines were already struggling, COVID-19 worsened their situation and led to sooner-than-expected closures. Other airlines were quick to implement cash-saving measures including deferring or outright cancelling orders for new aircraft as the low demand for air travel had left most of their fleets grounded. Even then, airlines are forced to pay for aircraft maintenance, storage and other related costs, so it makes sense that they were wary of receiving more aircraft that would go unused.

Just during March, aerospace giant Boeing reported 150 cancellations of its 737 Max, which was once the OEM’s fastest selling aircraft but had been grounded worldwide in early 2019 after two fatal crashes. Others followed suit in April. For instance, GE Leasing cancelled 69 orders and CBD Aviation cancelled 29. Airlines and lessors are reevaluating their long-term strategies as the COVID-19 outbreak is not only hurting aviation now but many expect that the global economic recession threatening economies across the world may put travel out of reach for many. In a recent survey, IATA reported that 40 percent of recent travelers had indicated that they would prefer to postpone travel by at least six months. The International Civil Aviation Organization (ICAO) warned that 1.5 billion people less would travel internationally during 2020.

The heavily reduced demand for new aircraft, which is in sharp contrast to just five months ago when the industry seemed to grow unimpeded, has forced plane makers to reassess their operations and cancel investments in new assembly plants. While French giant Airbus has not faced cancellations so far, in response to current times it cut down its production by one third and cancelled a new assembly line in Toulouse for the A321neo, which was only announced in January.

However, the aerospace industry’s problems are not limited to a fall in demand as lockdowns are also complicating manufacturing. Airbus was forced to pause manufacturing in some plants in order to comply with social-distancing rules meant to curb the spread of the virus. For example, in Spain, a country heavily hit by COVID-19 pandemic, the company had to stop operations for two weeks as the government closed non-essential manufacturing plants to stop the outbreak. While employees are back at work, it is not business as usual for aerospace manufacturers. In order to reduce operational costs as the company was “bleeding cash at an unprecedented speed,” Airbus furloughed about 3,000 of its staff in Wales, almost 3,000 more in France and 1,200 in Spain.

Boeing found itself in a similar economic situation and two months ago it asked the US government for a US$60 billion bailout. While it was not granted, the US Federal Reserve allowed the company to raise US$25 billion from private investors. The company is still analyzing cost saving measures, including cutting up to 16,000 jobs and slowing down production to address the current state of the market. “The demand for commercial airline travel has fallen off a cliff, with US passenger volumes down more than 95 percent compared to last year,” said David Calhoun, President and CEO of Boeing.

To address the drop in demand, Boeing cancelled the construction of a plant in North Charleston and backed down of acquiring 80 percent of Embraer’s commercial jet division. At the end of May, Calhoun told employees that the company would reduce production of its 787 to 10 aircraft per month in 2020 and to seven per month in 2021. Production of 777 and 777X will also be lowered to three per month in 2021. The company also foresees manufacturing trouble ahead as the COVID-19 pandemic affects “production continuity and supply chain stability,” wrote Calhoun.

Furthering the problem, many countries are seeing their aerospace production impeded due to the halt in non-essential activities. A recent survey by Verdict indicated that 79 percent of aerospace companies believed that the outbreak will be very disruptive for the global aerospace supply chain. Disruptions started in China as lockdowns led to many closures for companies including Airbus, Boeing and Safran. Temporary manufacturing stops also occurred in the US, Spain, France and Mexico, among other countries.

Mexico’s aerospace industry is now in a precarious position due to the pandemic. The Mexican government did not classify the sector as essential so production has stopped at the country’s over 300 aerospace companies. This is a significant hurdle for an industry that exported US$9.6 billion during 2019 and a country that was ranked as the 14th aerospace exporter in the world. While it is too early to estimate the full effects of the crisis, as the production halt extends Mexico stands to lose its position as an aerospace manufacturing hub. The Mexican Federation of the Aerospace Industry (FEMIA) reiterated its call for the Ministry of Economy to classify the industry as essential to allow it to resume operations.

Altogether, the global aerospace industry faces significant challenges due to lower aircraft demand and supply chain disruptions. Left unaddressed, the sector might take too long to recover putting thousands of jobs at risk.

Alicia Arizpe Alicia Arizpe Senior Writer