Poor 1Q20 Results Forecast Troublesome 2020

While the aerospace industry began 2020 with a positive outlook, low demand for aircraft and supply chain disruptions caused by the COVID-19 outbreak have set the sector back. In their 1Q20 reports, aerospace giants Airbus and Boeing both cite the outbreak as a key contributor to industry’s woes. While it is still too early to measure the full effects of the pandemic, its impact might be felt across the entire aerospace supply chain.

In its 1Q20 report, French plane maker Airbus indicated that 2020 set off to a solid start. The company ended 2019 with 768 new orders and 863 deliveries. Its 7,482-unit backlog led the company to consider serious investments to optimize its production, including a new assembly line in Toulouse for the A321neo. These plans were shelved as COVID-19 brought demand for new aircraft down as airlines across the world grounded their fleets due to low ticket sales. To address order deferrals and cancellations, Airbus cut down its production by one third, reducing it to 40 A320, two A330 and six A350 per month. During the first three months of 2020, Airbus’ consolidated revenues fell by 15 percent for a total of €10.6 billion (US$11.59 billion). “We are now in the midst of the gravest crisis the aerospace industry has ever known. We are implementing a number of measures to ensure the future of Airbus,” said Guillaume Faury, CEO of Airbus.

Boeing has been similarly hit by the outbreak, although the company already faced a complex scenario due to the global grounding of the 737 Max. While the US company remains the largest aerospace company in the world by revenue, the 737 Max placed it in an increasingly uncomfortable position with clients as the airplane’s return to the skies kept being postponed. 2019 was the first year in three decades that the company had more cancellations than orders. The OEM also reported only 380 deliveries in the year, less than half compared to the previous year and much less than Airbus’ 786 deliveries. Boeing began 2020 with a strong 5,049-unit backlog, which included 4,079 orders for the 737 Max.

Later, the COVID-19 crisis would worsen an already bad situation. Just in March, Boeing had 150 cancellations for the 737 Max, which was once its best-selling airplane, and requested support from the US government to face its economic crisis. In 1Q20, Boeing reported a 26 percent loss in revenue in comparison to the previous year for a total of US$16.9 billion. "The COVID-19 pandemic is affecting every aspect of our business, including airline customer demand, production continuity and supply chain stability," said David Calhoun, President and CEO of Boeing.

To address the shrunken demand caused the 737 Max crisis, Boeing cut down production of the controversial plane at the beginning of 2020. Later in April, as COVID-19 worsened, the OEM announced the cancellation of a plant in North Charleston and cancelled the acquisition of 80 percent of Embraer’s commercial jet division, saying that the latter company did not satisfy the necessary conditions to continue the deal. Embraer answered that it had fully complied with the terms and claimed that Boeing was trying to back out of the deal due to financial problems caused by the 737 Max crisis. The Brazilian company began an arbitration process against Boeing on April 27.

The crisis affecting the aerospace sector is expected to outlast the COVID-19 outbreak. The International Air Transport Association (IATA) warned that flight demand might be sluggish for the rest of the year as passengers avoid travel due to fear of the virus or due to the bad economic situation caused by the economic slowdown. “As the pandemic continues to reduce airline passenger traffic, Boeing sees significant impact on the demand for new commercial airplanes and services, with airlines delaying purchases for new jets, slowing delivery schedules and deferring elective maintenance,” indicated Boeing’s 1Q20 report.

The hit taken by the two largest manufacturers of commercial aircraft might reverberate throughout the entire aerospace supply chain. Major aerospace suppliers are also reporting a hard 1Q20. French engine manufacturer Safran reported that it had begun to feel the impact of COVID-19 in March, mainly due to shrunken demand in services and aircraft interiors retrofitting caused by the drop in air traffic and cash-saving policies from airlines. The company reported a 6.9 percent drop in revenue for a total of €5.4 billion (US$5.91 billion) in 1Q20. Safran also expects a hit from deferred airplane orders and warns that these trends were stronger in April and could continue throughout the year. GE, another top engine supplier through its Aerospace division, reported an 8 percent fall in revenue in 1Q20 due in part to the outbreak and warned that the worst was yet to come.

The impact of these manufacturing drops in Mexico’s aerospace industry is yet to be determined. However, government policies to fight COVID-19 led to closures or reduced operations at several non-essential sectors including some aerospace companies. To avoid production stops, the Mexican Aerospace Industry Federation (FEMIA) called for the federal government to classify the sector as essential due to its importance in the production of aerospace components for the Army, the National Guard and Civil Protection and for the maintenance of commercial and cargo fleets. So far, the sector has not received an answer.

The global aerospace industry is intricately connected, so production stops in one country might delay production throughout the entire supply chain. While it is too early to determine the full effect of the COVID-19 crisis in the aerospace industry, signals point to a complex 2020.