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    Aerospace

    Dealing with changes to the aerospace industry

    • By Editor
    • July 16, 2020
    • 6 minute read

    There are very few places feeling the impact of the COVID-19 pandemic more than the aerospace industry. As soon as travel restrictions were announced – it was the aerospace sector that felt the impact before all else. As a global industry that is annually valued in the region of US$900bn, aerospace manufacturing is now facing its biggest challenge yet.

    Whilst the manufacturing industry across civil and military sectors may have this colossal value pinned to it, when you add in the impact on airlines, their ticket sales and associated revenue, the airports and hubs, the supply chain that involves everything from catering to cleaning services – nobody genuinely knows what the true impact will be. With airline bookings stagnating with restrictions on travel, the safeguarding of consumer and workforce health is priority number one among businesses and governments around the world. It is forecast that air travel restrictions will persist for a prolonged period, but where is the light at the end of the tunnel?

    During previous crises like 9/11, SARS or the financial crisis of 2008/09, there was a recovery along a V- or U-shaped curve back to the pre-crisis growth path. As COVID-19 is a fully global crisis, we may need to get used to consistently lower levels of air traffic. In the longer term, manufacturers are expected to face cash-flow shortages, production challenges and a cascading effect that may flow throughout the industrial base, impacting complex manufacturing. So, what can we expect in the future, how long will it last and how deep will the crisis be?

    Expert analysts expect defence contractors to witness reduced demand and a slowing of the growth curve as national governments look to control expenses and reduce expenditure. The knock-on effect for manufacturers may be a loss of market share if they fail to deliver or fail to invest in next-generation technology during the downturn.

    For the civil aviation sector, the longer the flight restrictions last, the more airlines will run out of liquidity. This will bring the risk of bankruptcies, government nationalisations or consolidation, hence causing irreparable change in the industrial landscape and customer structure for aircraft manufacturers. It is already reported that Italian flagship Alitalia is earmarked for renationalisation and no doubt more will follow.

    The immediate impact in numbers

    The International Civil Aviation Organisation (ICAO) has already published a preliminary COVID-19 impact report on scheduled international passenger traffic during the first half of 2020. It highlights a reduction of 41 to 51% of seats offered by airlines when compared to pre-COVID schedules. This is an overall reduction of 443 to 561 million passengers, an estimated gross operating revenue loss of US$98 to 124bn for airlines.

    As a timeline, international passenger capacity reduced by 8% in February as the outbreak started to take hold. When the impact went global in March, capacity reduced by 33%; and in April international passenger capacity fell by 85%.

    The manufacturing outlook

    Looking forward, there will be a new landscape for MRO services (Maintenance, Repair and Operations). Demand for MRO is driven by the size and activity of a fleet; and as soon as aircraft are grounded, demand for all flight hour/flight cycle linked maintenance disappears. This makes MRO the first victim of the pandemic.

    As and when MRO providers and spare parts suppliers return to any semblance of normality, airlines will be reconsidering the retirement of older aircraft, instigating potential deferrals or cancellations of current orders. As MRO activity picks up, the MRO supply chain will first consume existing inventory before purchasing new parts. Furthermore, shrinking fleets and aircraft that have been grounded may be disassembled with parts used as spares, further reducing demand from the supply chain.

    Concerning new aircraft orders, it is perceived that there will be a dramatic slowdown in demand and the consequent fleet evolution of airlines. As a pre-pandemic reference point, global aircraft demand for the ten years from 2020-2030 was predicted to be around 21,760 new aircraft. It can only be assumed that as airlines face financial difficulties, aircraft replacement will be postponed, especially as current fuel prices make it more economically viable to continue flying older, less fuel-efficient aircraft.

    In light of this, the challenge for the industry is threefold. Firstly, it must strive to minimise the postponement or cancellation of aircraft orders. The industry also has to survive and ‘bridge the time gap’ until the demand for new aircraft increases while keeping the aerospace supply chain alive and healthy; and finally, there needs to be a ramp-down of the supply chain to a new ‘norm’ whereby a sustainable medium-term production level can be achieved.

    Boeing President and CEO Dave Calhoun issued a letter to staff estimating that global revenues will fall by US$314bn by the end of 2020, as 2,500 aircraft are idled, and passenger volumes are down by 95% in the US. He went on to state that the industry is a vital pillar of the economy supported by 17,000 suppliers and 2.5million jobs. Emphasising the size and the importance of the sector and in particular, Boeing’s role within the industry is surely a plight to secure as much of the US government’s US$2trn support package as possible.

    There will be a keen eye on Boeing’s next move and how it deals with a new reality regarding the demand for new aircraft. The new reality is not unique to the US manufacturer, as its European peer, Airbus has already announced its plans for the remainder of 2020. Airbus’ ‘Rate-60’ strategy of producing 60 narrow-body A320 aircraft a month has now been revised down to ‘Rate-40’ – not too long ago it was mooted how the company could achieve ‘Rate 90’ to meet the exceptional demand. This clearly shows how the landscape has changed so quickly for the industry. Airbus will also reduce the output of its wide-body A350 by 40% from 10 to 6 units a month with the A330 set to decline from 3 to 2 units a month. Whilst Boeing has not yet announced its plans, it is also expected to reduce output by 30-40%.

    Light at the end of the tunnel

    As with any ‘downturn’, there will be winners and losers. With analysts expecting OEM’s to consolidate their supply chains, this will provide opportunities for many manufacturers. For a supply chain that has already invested in the latest manufacturing technology, principles and strategies; the future will eventually be bright. For those that have not yet streamlined and optimised their process flows and production equipment – now is the time to invest. If you are not currently in a position to invest, ‘breath’, ‘come up for air’ and take advantage of your spare time during the temporary output decline to review your business, look ahead and strategise how you can maximise your opportunities.

    https://cdn.mtdcnc.global/cnc/wp-content/uploads/2020/07/16172046/16-17-shutterstock_483346381-scaled.jpg

    Dealing with changes to the aerospace industry

    There are very few places feeling the impact of the COVID-19 pandemic more than the aerospace industry. As soon as travel restrictions were announced – it was the aerospace sector that felt the impact before all else. As a global industry that is annually valued in the region of US$900bn, aerospace manufacturing is now facing its biggest challenge yet.

    Whilst the manufacturing industry across civil and military sectors may have this colossal value pinned to it, when you add in the impact on airlines, their ticket sales and associated revenue, the airports and hubs, the supply chain that involves everything from catering to cleaning services – nobody genuinely knows what the true impact will be. With airline bookings stagnating with restrictions on travel, the safeguarding of consumer and workforce health is priority number one among businesses and governments around the world. It is forecast that air travel restrictions will persist for a prolonged period, but where is the light at the end of the tunnel?

    During previous crises like 9/11, SARS or the financial crisis of 2008/09, there was a recovery along a V- or U-shaped curve back to the pre-crisis growth path. As COVID-19 is a fully global crisis, we may need to get used to consistently lower levels of air traffic. In the longer term, manufacturers are expected to face cash-flow shortages, production challenges and a cascading effect that may flow throughout the industrial base, impacting complex manufacturing. So, what can we expect in the future, how long will it last and how deep will the crisis be?

    Expert analysts expect defence contractors to witness reduced demand and a slowing of the growth curve as national governments look to control expenses and reduce expenditure. The knock-on effect for manufacturers may be a loss of market share if they fail to deliver or fail to invest in next-generation technology during the downturn.

    For the civil aviation sector, the longer the flight restrictions last, the more airlines will run out of liquidity. This will bring the risk of bankruptcies, government nationalisations or consolidation, hence causing irreparable change in the industrial landscape and customer structure for aircraft manufacturers. It is already reported that Italian flagship Alitalia is earmarked for renationalisation and no doubt more will follow.

    The immediate impact in numbers

    The International Civil Aviation Organisation (ICAO) has already published a preliminary COVID-19 impact report on scheduled international passenger traffic during the first half of 2020. It highlights a reduction of 41 to 51% of seats offered by airlines when compared to pre-COVID schedules. This is an overall reduction of 443 to 561 million passengers, an estimated gross operating revenue loss of US$98 to 124bn for airlines.

    As a timeline, international passenger capacity reduced by 8% in February as the outbreak started to take hold. When the impact went global in March, capacity reduced by 33%; and in April international passenger capacity fell by 85%.

    The manufacturing outlook

    Looking forward, there will be a new landscape for MRO services (Maintenance, Repair and Operations). Demand for MRO is driven by the size and activity of a fleet; and as soon as aircraft are grounded, demand for all flight hour/flight cycle linked maintenance disappears. This makes MRO the first victim of the pandemic.

    As and when MRO providers and spare parts suppliers return to any semblance of normality, airlines will be reconsidering the retirement of older aircraft, instigating potential deferrals or cancellations of current orders. As MRO activity picks up, the MRO supply chain will first consume existing inventory before purchasing new parts. Furthermore, shrinking fleets and aircraft that have been grounded may be disassembled with parts used as spares, further reducing demand from the supply chain.

    Concerning new aircraft orders, it is perceived that there will be a dramatic slowdown in demand and the consequent fleet evolution of airlines. As a pre-pandemic reference point, global aircraft demand for the ten years from 2020-2030 was predicted to be around 21,760 new aircraft. It can only be assumed that as airlines face financial difficulties, aircraft replacement will be postponed, especially as current fuel prices make it more economically viable to continue flying older, less fuel-efficient aircraft.

    In light of this, the challenge for the industry is threefold. Firstly, it must strive to minimise the postponement or cancellation of aircraft orders. The industry also has to survive and ‘bridge the time gap’ until the demand for new aircraft increases while keeping the aerospace supply chain alive and healthy; and finally, there needs to be a ramp-down of the supply chain to a new ‘norm’ whereby a sustainable medium-term production level can be achieved.

    Boeing President and CEO Dave Calhoun issued a letter to staff estimating that global revenues will fall by US$314bn by the end of 2020, as 2,500 aircraft are idled, and passenger volumes are down by 95% in the US. He went on to state that the industry is a vital pillar of the economy supported by 17,000 suppliers and 2.5million jobs. Emphasising the size and the importance of the sector and in particular, Boeing’s role within the industry is surely a plight to secure as much of the US government’s US$2trn support package as possible.

    There will be a keen eye on Boeing’s next move and how it deals with a new reality regarding the demand for new aircraft. The new reality is not unique to the US manufacturer, as its European peer, Airbus has already announced its plans for the remainder of 2020. Airbus’ ‘Rate-60’ strategy of producing 60 narrow-body A320 aircraft a month has now been revised down to ‘Rate-40’ – not too long ago it was mooted how the company could achieve ‘Rate 90’ to meet the exceptional demand. This clearly shows how the landscape has changed so quickly for the industry. Airbus will also reduce the output of its wide-body A350 by 40% from 10 to 6 units a month with the A330 set to decline from 3 to 2 units a month. Whilst Boeing has not yet announced its plans, it is also expected to reduce output by 30-40%.

    Light at the end of the tunnel

    As with any ‘downturn’, there will be winners and losers. With analysts expecting OEM’s to consolidate their supply chains, this will provide opportunities for many manufacturers. For a supply chain that has already invested in the latest manufacturing technology, principles and strategies; the future will eventually be bright. For those that have not yet streamlined and optimised their process flows and production equipment – now is the time to invest. If you are not currently in a position to invest, ‘breath’, ‘come up for air’ and take advantage of your spare time during the temporary output decline to review your business, look ahead and strategise how you can maximise your opportunities.