The initial stages of the COVID-19 outbreak led to the biggest contraction in the commercial aerospace sector’s history. After a near-total shutdown of air travel, most airlines around the world scaled back or cancelled orders. That period was followed by an equally historic rebound in the stocks of major OEMs between March and June 2020.
It’s too early to tell whether the coronavirus pandemic is a meteor-type event that threatens the viability of the commercial aerospace industry or a manageable bump in a decade-long expansion. But it’s already clear that many low-cost airlines, which represented much of the growth in airframe customers over the past decade, are likely to shut down in the coming six to 12 months.
Larger carriers will likely survive with government support — or through another round of bankruptcy restructurings — but even they must grapple with how to help passengers feel safe enough to fly. The International Air Transport Association (IATA) projects that global airline revenue will drop by about half in 2020, to US$419bn, and the overall industry will post losses of more than US$84bn. The IATA has also predicts that domestic revenue passenger kilometres (RPKs) won’t get back to 2019 levels until 2022, and international RPKs until 2024.
Most OEMs and suppliers have already taken immediate steps to deal with the short-term impacts of the coronavirus, primarily by cutting costs and temporarily shutting down manufacturing plants. In 2019, Airbus set a new annual record for the industry, delivering 863 jets; for the first four months of 2020, it delivered just 136, running at about half of the prior year’s pace. For Boeing, the pandemic has compounded the production issues brought on by the grounding of the 737 MAX. Embraer, meanwhile, suspended its financial forecast for the year due to uncertainty about the economic impact of COVID-19.
Yet viewed in the right context, the state of the aerospace industry could represent an opportunity for commercial OEMs and suppliers to make needed changes. The next six to 12 months are a critical period in which to prepare for the recovery. Rather than simply focussing on cuts, we believe that OEMs and large suppliers should also make needed investments in the future, in five key areas: using technology as an accelerator, stabilising the supply chain, streamlining the workforce, focussing on sustainability and making a coordinated pitch for government support.
Overall, commercial aerospace lags some other industries in terms of applying digital to create value. A few applications, such as 3D printing, are in wide use in the industry, but larger-scale digital transformation is relatively rare. Accordingly, OEMs and major suppliers should invest in digital throughout their organisation. The most relevant need is in upgrading how companies design and develop new aircraft. Digital tools such as data analytics and artificial intelligence can dramatically accelerate the development process — making organisations more agile and responsive in dealing with dramatic changes in order volumes.
In addition, digital investments will enable decision makers to capture data and derive insights from it, leading to better decisions. Data applications can improve performance both internally — for example, in areas such as operations, production, assembly, and maintenance, repair and overhaul (MRO) — and in new business models that improve customer performance after airframes have been delivered. The array of applications is wide, and the case for making digital investments is clear.
Tier 1 suppliers such as General Electric, Rolls-Royce, Safran and MTU have reduced capacity by up to 30%, but they all are part of larger, diversified organisations and will likely survive. Below them sit thousands of smaller, aerospace-exclusive suppliers that have, in many cases, rewired their organisations to support a single OEM — or even a single airframe. Without significant support, they are likely to go under and trigger ensuing risks and vulnerabilities up the supply chain. The financial struggles of these smaller suppliers may also force long-anticipated and much-needed consolidation within the lower tier supply base.
For OEMs, the challenge in the short term is to support these suppliers to the extent possible, in part by working with governments and industry associations (such as GIFAS in France and BDLI in Germany). Internally, OEMs and Tier 1 suppliers should conduct a diagnostic of all suppliers for a given airframe or component, and rank them based on their relative risk. Assembling this information in a dashboard can ensure that everyone’s view of the status of suppliers is always current despite changes in the environment.
For at-risk suppliers, companies can step in with mitigation measures such as redesigning operations, offering financial or legal support, or assisting with government stimulus programmes. In the longer term, OEMs and Tier 1 suppliers must build a more resilient supply chain to support production when it ramps up again. The central objective should be to increase transparency, agility and resilience to large external shocks.
The IATA reports an estimated 25m jobs supported by air travel are at risk as a result of the crisis. Many organisations will shrink and become more distributed in the coming year, and leaders should ensure that they are adjusting the size and skills of their workforce accordingly, to become more efficient and better equipped with the digital skills needed to survive in a more challenging and virtual future. Manufacturers are also moving quickly to innovate ways of streamlining the workforce such as changing shifts, stepping up automation initiatives and re-imaging worker movement on the floor to keep employees safe and production going with less.
For core functions, companies will need to launch targeted and intentional upskilling programmes — not as one-time initiatives but as part of a sustained culture change that adopts new ways of learning to keep pace with technological change. Now is also a prime opportunity to improve non-core employees’ digital fitness (for example, upskilling in digital technologies that introduce data modeling, design thinking and automation). This type of digital upskilling adds to an individual employee’s capacity to be agile and remain relevant in these disruptive times. For these non-core areas — including support functions such as legal, finance, HR and even operational support such as engineering oversight — companies should clearly define key capabilities to retain and train, and to strategically outsource to external organisations.
Even before the crisis, there was growing pressure on the aviation industry to become more sustainable, particularly with regard to reducing CO2 emissions. Accordingly, the OEMs and engine manufacturers had already launched programmes to develop lower-consumption aircraft and engines, to experiment with new fuels and to enter into electric flying.
The trend towards increased sustainability will intensify after the crisis. People are already skeptical about flying during the pandemic — which increases their sensitivity to other critical issues affecting the industry, such as sustainability. In addition, government aid programmes often set targets for accelerating CO2 reduction. Airbus, for example, is being encouraged by the German and French governments to release its next-generation single-aisle aircraft several years earlier than planned. Despite government support, the billions of dollars required for these development projects are an additional burden for an industry already in financial distress. Still, the industry can emerge from the crisis stronger and more competitive if it works to push sustainability to the next level now.
Commercial aerospace companies should understand the dynamics of economic stimulus packages, and how they might benefit. Many governments recognise the critical importance of maintaining their manufacturing base despite the economic fallout from the coronavirus pandemic. And many will seek to support large players in the industry. However, aerospace companies are carefully considering how much government aid they need and under what conditions to accept it, as they are skeptical about the increased influence of the state on their business activities. For example, Boeing and Airbus have decided to initially raise liquid on the capital market instead of accepting state aid. But of course, this path is not open to all companies at the moment.
Companies that seek governmental aid must first take the hard but necessary internal steps to reduce costs and improve operational performance. Second, they should develop a detailed, quantifiable case for support in key areas, rather than simply asking for a blank check. Last, they should ensure that they are aligned with national economic and societal objectives. For example, they will make a stronger case for support if they highlight innovative, environmentally sustainable designs, instead of continuing to produce airframes with existing technology.
The coronavirus has had a devastating impact on the commercial aerospace industry, but it can also be a catalyst for needed change. When the recovery finally comes, the winners will be those businesses that capitalised on this window and took the steps necessary to emerge stronger from the crisis.
Global Aerospace & Defence Leader, Partner, PwC United States
Tel: +1 (314) 378 8802