What’s Next for the Mexican Aerospace Industry?By Carlos Robles | Mon, 06/07/2021 - 13:05
It has been just over a year since COVID-19 appeared and impacted Mexico’s activities and economy. I must admit that a year ago, I thought the emergency was going to last for a shorter period than it did. The impact for the aerospace industry in Mexico has been huge.
FAMEX, the biggest airshow in Latin America, was postponed and as a result, many of the business encounters promoted there did not happen. The good news is that in September 2021 we will host FAMEX in Queretaro and all those business meetings will finally occur. It will also be a checkpoint to see who survived and how we did it.
Certainly, some airlines struggled to survive while others even disappeared. The same is true of big and small companies that first had to stop activities and then had to redesign their entire operations for the new normal as they worked to survive in the best of scenarios. Those companies did not only face COVID-19 but also the stoppage in the production of the Boeing 737 MAX, for which many of us are suppliers.
Markets changed their directions and strategies and today, I am curious to see the first post-pandemic market forecasts. There has not been a more difficult time in decades to predict market behavior. Probably, the only comparable period was post-war.
Supply chains were severely impacted and disrupted. I know other industries faced the same scenario but the supply chain in aerospace was already fragile and unbalanced and it will take more time to recover, or at least to come back to the point it was before.
By no means do I consider the pandemic over; this is just a small summary of the more relevant impacts for the industry. The appearance of a vaccine and the trends in new cases in North America so far suggest we should be starting to witness a control phase, which allows me to reflect on what’s next for the Mexican aerospace industry.
We have been hearing a lot about reshoring and nearshoring strategies in the sector. I believe everybody has a clear idea and strategy and many companies should be anxious because they do not see the contracts being signed; however, I still believe the markets are being cautious, first to see if a new wave of COVID cases appear or not and second, ahead of the Mexican June mid-term elections. Although I still think the trend is unstoppable, we must also recognize that our government is not helping by not offering any guarantees for new businesses and investments in the country. The facts prove that any rule or law can be changed or bypassed. That equals uncertainty. The June elections will determine whether or not the majority in the chambers is maintained and from there, how the law might be respected or destroyed. I think the manufacturing strategy is clear: companies in North America should be doing more in Mexico, but political factors are stopping or at least slowing down the decision. Nevertheless, I am still waiting for contracts to be moved, mainly from Asia to Mexico, and based on contacts I know we are working on, that is closer than we may have thought.
The pandemic brought lots of challenges, but it also accelerated or highlighted the need to strengthen our relationships and reinforce our networks. The communication with the national associations of aerospace companies in the US and Canada (AIA and AIAC, respectively) was acceptable but became truly strong when together we lobbied and put pressure on the government to declare aerospace an essential activity in Mexico. From there, the communications channels broadened and have accelerated collaboration in various projects that will bring new capacities to the region.
The same thing has happened internally, where the main state clusters are working together to share resources, highlight, exploit and maximize strengths in each region, while sharing agendas and strategies. This is a huge step, which talks to the maturity of their leaders, but that COVID accelerated. A few months before COVID, everybody was willing but there was not a clear path toward achieving it. Finally, it seems we are not competitors. Each region has strengths and capabilities and together as a country we need to compete in the global arena where real challenges and competitors are.
Air Safety Downgrade
Airlines saw their operations and therefore their revenues stop during the pandemic. Some like Volaris and VivaAerobus seem to be in better shape than before thanks to their flexibility, discipline managing costs and increasing margins. Interjet was already in agony and this past year just accelerated the unavoidable. Aeromexico went into chapter 11 and so far, seems to be doing OK with the strategy. However, for all of them, the FAA downgrading of Mexico’s Air Safety Rating to category 2, questioning the ability to execute all the safety rules of OACI, will be another challenge directly impacting operations and margins. Sadly, airlines have been recovering and are close to 80% of the transit before COVID, but now they will not be able to share codes with US airliners or increase or open new destinations.
I will not go any deeper on this but it is a shame and talks to the knowledge of the authorities running the country at this time. This was not “aerospace science,” it was just about following rules and principles that are well known … unless you have no clue!
With airline operations slowly returning to normal levels, MRO operations will follow. The name of the game for MRO operations is flexibility and adaptation. How fast can they flexibly adapt operations from storage to conversions to cycle maintenance to full operations? It will not be easy because all needs are different but necessary as the operators decide what is best for their fleets.
If you were not aware, during this time, the 737 Max of Boeing has been recertified and granted restart of operations and manufacturing. That is great news, but the question now is: What is the demand for it? Most commercial producers reduced production between 30% and 40%. But that was mostly based on immediate forecasts. The algorithms for those forecasts were everything but accurate as uncertainty has dominated the landscape. Was it too negative or too positive? We still do not know, but the answer is closer as markets are finding some stability.
Once we can create accurate forecasts the next step will be to translate it into production schedules. The companies in the manufacturing environment are eager to know what the demand will be. Some cut many employees and will need to re-hire. Others with stronger financial muscle retained employees but need demand to rise to justify that move. We need to know with certainty in the manufacturing environment what demand will be like in order to stabilize operations and be able to manage inventories, pricing, level of employment and in many cases, redefine organizational and operational modes.
One year after the heavy burden of the COVID-19 pandemic started, I still believe there are many questions to be answered. Sadly, many businesses could not survive, but those that did are now looking for better times to come. I like to think we have better times coming and we need to be ready for them. Hopefully (and sadly, I am asking to hope) we can start seeing positive trends and a recovery to the level of growth we had pre-pandemic. It will take three to four years, but if we can sustain the character, innovation, strength and passion that brought us here, it will have been a worthy journey.