The COVID-19 pandemic has plunged the global airline industry into an unprecedented crisis as airline bookings plummet in response to regulation, and business restrictions on travel increase. Safeguarding consumer and workforce health is priority number one among businesses and governments. Toward that aim, continued reduction in air travel will most likely (and necessarily) persist for a prolonged period.
The crisis raises a number of unique challenges. In PwC’s inaugural COVID-19 CFO Pulse Survey, finance leaders in the United States and Mexico shared their top concerns.
Uncertainty surrounding the duration — or even a deepening — of these conditions adds to a clouded view of how a recovery could play out for the industry. Indeed, the airlines and aircraft manufacturers will likely need swift government support. Plans for that are already afoot, not only in the US, but also globally. Indeed, a nosedive in revenue and cash flow seems imminent for most airlines — as well as for original equipment manufacturers (OEMs) and their suppliers in the aircraft production ecosystem. The International Air Transport Association estimates the industry will require a cash infusion of up to $200 billion, as well as loan guarantees to weather the economic buffeting. Furthermore, a reduction in commercial aircraft orders (especially widebody aircraft that service Asian hubs) is a likely knock-on effect of the global pandemic.
Unfolding plans for government support (i.e., the CARES Act) will likely provide greater visibility into the future viability of many companies in the aerospace and defense sector — especially the commercial airlines.
On the defense side of the industry, the situation appears less dire, with demand protected by budgeted government spending and a supply chain with minimal exposure to hard-hit jurisdictions such as Asia. However, events outside the US are affecting the US defense industry, as some US military partner nations may experience challenges in military readiness and ability to maintain equipment. Additionally, some defense companies may be financially weakened, but most likely to a lesser extent compared to consumer-facing aerospace companies.
Most companies already have business continuity plans, but those may not fully address the fast-moving and unknown variables of an outbreak such as COVID-19. Typical contingency plans enable operational effectiveness following events like natural disasters, cyber incidents and power outages, among others. They don’t generally take into account the widespread quarantines, extended school closures and added travel restrictions that may occur in the case of a health emergency.
The coronavirus (COVID-19) outbreak is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. The situation is fast moving with wide impacts. We’ve prepared some general guidance on COVID-19: What US business leaders should know: crisis management and response, workforce, operations and supply chain, financial reporting, tax and trade, and strategy.
Here’s our take on some additional issues that companies in your industry may face:
Airlines will likely face a continued downturn in commercial travel and revenue. They will also likely face cash-flow liquidity challenges and difficulty managing debt obligations. Some airlines may struggle to recover — and even declare bankruptcy — depending on the effectiveness of government intervention, and how long the COVID-19 crisis lasts.
The tumult in the commercial airline industry may well have secondary and negative effects on producers of aircraft via a decrease in new aircraft orders — or canceled existing ones. Reduced demand for materials and components will likely affect not only the OEMs, but also likely ripple throughout the supply chain to suppliers.
Given the unknown variables in how the COVID-19 pandemic will play out and when containment will be achieved, the commercial airlines should expect to brace for a trying period and plan for a recovery that may not arrive for at least one year, given prior crises the industry has experienced.
While demand for the products of US defense companies may be protected by government purchasing, they may nevertheless experience supply chain disruptions due to financial impact on partners and suppliers that may have to slow or halt production as in the case of two F-35 facilities in Italy and Japan that paused production.
A&D companies are likely to need to establish immediate and contingent safety measures for their employees and decide which functions can be carried out remotely should an outbreak occur within their ranks.
The sector should also expect a prolonged economic downturn that may require staff reductions and related measures.
In the event that widening outbreaks of COVID-19 affect workers, A&D companies may need to outsource some corporate functions (e.g., moving IT to the cloud or shifting internal non-core operating functions to contractors). Such changes can lower operating costs as well as eliminate maintenance capital expenditures.
Commercial aircraft producers should expect continued weakening links in their supply chain, as some vendors and suppliers will likely face operational or financial struggles of their own. Brace for continued supply chain bottlenecks, both nationally and internationally.
Because of existing regulations and controls, US defense companies can expect their supply chains to be less vulnerable to global disruptions compared to producers of commercial aircraft.
As in previous downturns, the industry will likely move quickly to cut discretionary and capital spending to support operations. A key question for all A&D companies will be: Do you have the financial reserves to successfully ride out — or even capitalize on — the tumult in the industry?
If governments don’t provide support to commercial airlines to offset the economic hit they’ll take from COVID-19, they’re likely to face an A&D financial crisis on top of the public health emergency. Expect companies to be working hand-in-glove with both the IRS and foreign tax jurisdictions to mitigate the financial toll tax obligations could place on an already beleaguered industry.
After 9/11, the US government supported commercial airlines with a $5 billion aid package and $10 billion in loan guarantees. This time around, the A&D industry is not only facing a more prolonged crisis, but also some uncertainty about how the government will provide financial assistance. In light of the uniqueness of this crisis, however, the government may explore options such as extending lines of credit, reducing infrastructure costs, short-term funding, lowering the tax burden and offering supply chain assistance.
Multinational companies should expect potential cash flow constraints from overseas operations — including cash repatriation complications and irregularities. Cash could also be bottlenecked when goods are paid for but not supplied (due to being delayed and stranded). Such cash bottlenecks will likely occur in geographies most affected by COVID-19.
Disruption in the sector will lead to numerous financial disclosure implications. While no sector will likely be unaffected by COVID-19, the impact on A&D could be especially punishing. Stakeholders are making it clear they expect transparency from the industry and disclosures about actual and anticipated impacts and, most important, the risks and vulnerabilities to their business.
As the COVID-19 pandemic deepens and widens, companies in the A&D sector — especially the commercial airlines — are facing an unprecedented period of uncertainty, perhaps greater and more volatile than what they faced in the wake of 9/11. How and when this period of upheaval recedes depends on fast-changing variables, from geopolitics to the global containment efforts of the virus. Meanwhile, for many companies in the sector, it will mean taking every measure possible to survive. For others, there will likely be opportunities en route to a recovery by protecting their cash flow and making acquisitions of undervalued companies, for example.
At the outset of any major commercial disruption, companies will be looking for immediate measures — keeping their workforces safe and their businesses solvent. But companies should also be planning with an eye toward the future. What assets, people and capabilities will you need or want then?
Most companies in the sector will likely be confronted with taking remediation measures. Some will be austere. So, be surgical with cuts while balancing short- and long-term needs. Keep in mind that austerity measures should be tempered to preserve long-term objectives. While moving quickly can certainly create an advantage, knowing where you’re going makes your moves more impactful.
Global Aerospace & Defence Leader, Partner, PwC US
Tel: +1 (314) 378 8802
Aerospace and Defense Leader, PwC US
Aerospace and Defense Advisory Leader, PwC US