Restructuring in the aviation industry: what does the future hold?
What is the current state of play?
recovery will be prolonged, with analysts predicting it will take until at least 2024 before the industry rebounds to pre-COVID levels. But it’s not all doom and gloom. The defence sector has so far not been affected in the same way as civil aviation, with the government continuing to invest in defence procurement programmes, albeit there have been calls from the industry for these plans to be accelerated. Added to this, the freight sector has seen growth during the pandemic, partially due to the fact that passenger flights would have normally carried a proportion of global freight business and the luxury private jet market is seeing growth both in demand for new aircraft and charter of private jets.
For civil aviation, these are turbulent times. Recent events have hit the sector hard, with border closures and travel restrictions forcing leading manufacturers like Rolls-Royce and Boeing to suspend operations, close production sites and cut thousands of jobs worldwide. Major cutbacks and demands for price reductions from the big players have had wider ramifications for the supply chain, such as *Rolls-Royce demanding price reductions of between five and 15 per cent from 700 global suppliers in May 2020. Manufacturers, engineers and suppliers of all sizes, already operating on low margins, have faced significant challenges in recent months. Companies are operating in crisis mode and we have started to see cost cutting and cash preservation measures, including deferral of capital expenditure projects, deferred maintenance and, unfortunately, a series of redundancy programmes across the industry. The financial strength and liquidity of many businesses will be severely tested across the supply chain with the fall-off in orderbooks for new aircraft and the reduced engine-hours of existing aircraft. Companies are depleting existing stocks and suspending projects in progress, while many employees have been furloughed. Additionally, the significant over-supply in the marketplace is driving many order cancellations or order delays, frequently in excess of a year. Businesses are already putting measures in place to address the issues they’re facing; be that looking at headcount or deferring capital expenditure but, for some, the main concern will be about their ability to win replacement work for next year and further ahead.
How are these challenges affecting the wider industry?
The speed and size of the contraction in civil aviation has sent shockwaves through the supply chain, with large manufacturers unable to cushion the lower tier suppliers, due to their own liquidity pressures. In recent months, we’ve seen cost savings, redundancies and strengthening of balance sheets at global businesses including Airbus, Boeing, Rolls-Royce and Safran among many others. This sudden drop-off in requirements, coupled with the inevitable post-Brexit changes to the UK’s global trading relationships, will inevitably impact the entire sector. The aviation industry is heavily regulated and inherently risk-averse. Requisite industry and customer accreditations take time and significant investment to achieve. Therefore any changes in the supply chain, no matter how small, are generally undesirable. Plans are afoot to introduce rapid result testing at airports. However, until this is in place, ongoing uncertainty of where people can travel to and from without having to quarantine, will continue to keep demand low for an extended period of time. The combined impact of these factors may lead to a future characterised by Darwinian theory, particularly as government support measures fall away.
How has the COVID-19 pandemic impacted the sector?
The COVID-19 pandemic has had an unprecedented impact on the aviation industry. Whilst civil aviation has seen a partial recovery in demand from its initial post- COVID low point it remains at only 50-60 per cent of pre-COVID demand, and the expectation is that the
Notes
* Financial Times, Rolls-Royce increases price-cuts pressure on suppliers <https://www.ft.com/content/cdb0aa8c-3476-4871-b9c9-a8907c6f592e>, 25 May 2020.
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