How the coronavirus brought aerospace back to earth

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At the end of March, just a few days before Boeing was about to deliver a new 787 Dreamliner to one of its most popular customers in the Middle East, the airline’s purchasing manager picked up the phone with the aircraft manufacturer American. The deal was canceled unless Boeing was willing to increase the 55% discount it had previously agreed on the list price of $ 338 million.

An airline would normally hesitate before threatening to cancel an order so late. The cancellation would normally result in heavy penalties and loss of deposits, which, for Boeing’s state-of-the-art two-aisle model, was close to $ 100 million of the agreed price of $ 150 million.

But these are not normal times. Boeing caved in and lowered the price by an additional 15 percent, according to those involved in the deal. The American aircraft manufacturer – who declined to comment on the details of the contract – found it more useful to get the plane out of the hangar than haggling for a few million dollars more.

Despite the supply of more than 90% of the world’s commercial aircraft, Boeing and its European rival Airbus do not carry much weight when almost all of their airline customers are fighting for their survival.

As international air travel stops in the face of the coronavirus pandemic, the global aerospace industry is forced to face harsh truths about a future it once believed was secure for at least the next decade. Record order books, built on a decade of booming demand and worth more than $ 1 billion at list prices, seem less and less secure today as airlines push back deliveries and even cancel orders for survive the worst aviation crisis in history.

Map and graphs of slopes showing daily international flights have declined 87% since January

Over 60% of the world’s commercial aircraft have been immobilized while governments quarantine their populations and close their borders. And with little to no revenue, airlines are cutting costs, drawing on huge lines of credit to boost liquidity, and claiming billions of state aid.

Ed Bastian, CEO of the world’s largest carrier, Delta Air Lines, said his company was spending $ 60 million a day while 600 planes were parked on the tarmac and 80% of scheduled flights in April were canceled.

Iata, the aeronautical industry’s trade body, has warned that some 25 million jobs in the aerospace and aviation sectors will be threatened if governments do not intervene with the lifelines.

“I wish I could predict that it would end soon,” Bastian told employees in April. “But the reality is that we just don’t know how long it will take before the virus is contained and customers are ready to go. “

For Boeing, already in trouble to overcome the grounding of its 737 Max single-aisle fleet after two fatal crashes, and for Airbus, which earlier this month cut aircraft production by a third, the world has changed dramatically. This is a dramatic turnaround for companies that in recent years have steadily increased their production to the point where they have sometimes struggled to maintain it.

It was not until February that Boeing and Airbus confidently forecast demand for more than 40,000 aircraft worth about $ 7 billion over the next 20 years. In March, even after the foreclosure of Italy, Airbus urged European suppliers to invest in speeding up production of the single-aisle A320 – the company’s overwhelming success – said one of its main program partners , who asked to remain anonymous.

HONG KONG, CHINA - 2020/04/12: An overview of the Hong Kong International Airport with many planes parked. Coronavirus strikes hard around the world, many countries decide to lock. Some airlines are promoting discounts while others are adding flights to help residents abroad get home. (Photo by May James / SOPA Images / LightRocket via Getty Images)

Planes parked at Hong Kong International Airport. Coronavirus has hit the travel industry around the world © May James / SOPA Images / LightRocket / Getty

Airlines today are preparing for a long period of declining demand and, having contracted substantial debt to survive the crisis, will not fight for aircraft delivery slots as they did just a few months ago .

“More cancellations and postponements of orders are coming,” said Cai von Rumohr, aerospace analyst at Cowen Investment Bank, in a note to clients last week. “We are in unexplored waters. “

The impact of the aviation closure on the aerospace industry is beginning to raise concerns at the government level.

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Aerospace companies are not just lifelines for tens of thousands of high-tech suppliers, ranging from large international companies such as Rolls-Royce and General Electric to small family businesses providing low volumes of essential components. They are also strategic companies for their governments. They pay higher than average wages, stimulate innovation and generate strong trade surpluses. In 2018, the sector was responsible for the largest share of EU high-tech exports, at € 94 billion, while US civil aerospace exports amounted to $ 122 billion .

When Boeing had to suspend deliveries of the 737 Max single-aisle aircraft after grounding last year, US economic growth slowed. President Donald Trump said in April he would do “whatever is necessary” to help Boeing, which has requested $ 60 billion in state aid to help the industry and its supply chain cross the border. crisis.

Change in number of scheduled flights compared to the previous year (%)

The aerospace consulting firm Teal Group estimates that the total value of the global industry is close to $ 1 billion. According to Aerodynamic Advisory, another consulting firm, more than half of this value resides in the supply chain behind the major aircraft and engine manufacturers.

Many of these suppliers have invested heavily in recent years to meet the demands of aircraft manufacturers, eager to capture the average annual growth of more than 6% in passenger traffic that the industry has experienced over the past five years. While growth in passenger traffic had started to slow before the crisis, particularly for wide-body aircraft, the market continued to grow thanks to demand in countries like China and India.

In 2018, Boeing increased the number of employees in its passenger aircraft division for the first time in six years – hiring 9,000 new employees to bring its total to more than 64,000. Since 2016, Airbus has increased its workforce in its commercial aircraft activity from 7,000 to nearly 81,000 to help it meet its record order book.

Edward Bastian, President and Chief Executive Officer of Delta Air Lines Inc., speaks during an interview in New York, the United States, Wednesday September 18, 2019. Delta does not expect a major impact from the increase fuel prices, said Bastian in Washington. Delta occupies a unique position among American airlines because it owns the Monroe Energy LLC refinery in Pennsylvania, which offers natural cover against increases in fuel prices. Photographer: Christopher Goodney / Bloomberg

Ed Bastian, CEO of Delta Air Lines, says his business burns $ 60 million a day © Christopher Goodney / Bloomberg

But some in the industry believe that the shape of the aeronautical industry will be very different at the end of the crisis, with consequences for the demand for aircraft and the number of jobs in the industry. Much will depend on how and when governments decide to lift travel restrictions and what passengers will expect when they finally decide to travel again.

“Do we really want to fly a few inches from someone? Will we wait for more space on planes in the future? Asks Phil Seymour, president of the International Aviation Bureau, who advises airlines and leasing companies on fleet management. “All of this can potentially be a game-changer for what airlines can offer as a product and what it means for manufacturers.”

Rob Morris of Ascend by Cirium, an aeronautical data consultancy, estimates that seven years of passenger traffic growth could be canceled if Iata’s forecast of a 48% drop in traffic this year is true. “To return to the level of traffic that we benefited from in 2019, we would need nearly 100% compound growth compared to the demand forecast for 2020,” he said. “Achieving this growth even over the next two years seems extremely optimistic.”

According to the Iata scenario, between 12 and 35 percent of the 20,150 commercial airliners in service at the start of 2020 would be in excess of requirements by the end of the year, he added. This represents up to 7,000 aircraft.

The reduction in the number of aircraft in service will also result in lower after-sales service revenues, a significant flow of profits for aircraft manufacturers and engine manufacturers such as Rolls-Royce and GE.

Brian Burridge, executive director of the Royal Aeronautical Society, believes there will be no return to the right period for at least several years. “We think the airline ecosystem will be 50 percent smaller,” he said. Many airlines will shrink and others will collapse. “Many of the nearly 1,000 airlines worldwide are just debt bubbles with wings.”

Boeing has stopped all production of commercial aircraft in its facilities for almost three weeks to introduce safety measures such as new ways of working and social distance to protect workers, many of whom have been victims of the virus.

A Chinese national flag hangs over a Commercial Aircraft Corp. of China Ltd. (Comac) C919 being assembled at the Comac Shanghai Research and Development Center in Shanghai, China on Thursday May 4, 2017. China's first modern passenger jet took off on its first test flight on May 5, giving wings to President Xi Jinping's ambition to make China an advanced economy. Photographer: Qilai Shen / Bloomberg

A Commercial Aircraft Corp. of China (Comac) C919 being assembled at the Comac Shanghai Research and Development Center in Shanghai, China, in 2017 © Qilai Shen / Bloomberg

But no one expects the US aerospace giant – which faces a $ 19 billion bill for the 737 Max crashes – to return to previous production levels when it restarted this week. The company is reportedly considering job cuts of up to 10 percent of the workforce. And it could be forced to delay the launch of its latest wide-body jet, the 777x.

The pressure on Boeing is particularly serious as customers are now canceling orders for the Max – which was supposed to be the company’s best-selling model – and there are doubts about the number of 400 jets the company has already assembled given to airlines. who no longer need the capacity. The production of the Max, when it obtains complete security from the authorities, will also be much lower than what was initially planned.

“The last thing any airline wants right now is for the Max to be recertified,” said a consultant to several major carriers. “The industry does not need new planes.”

Bernard Delvaux, managing director of the Belgian aerostructures group Sonaca which supplies both Boeing and Airbus, says that all his hopes for a rapid recovery have evaporated and that job losses are inevitable. “It is becoming increasingly clear that there will be a very significant impact not only on 2020, but on 2021 and 2022 for the whole industry,” he said. “We will have to reduce the size of our operations and do it quickly.”

Major aerospace suppliers such as GE Aviation, Spirit and others have already announced significant job cuts. Others will follow after emergency payroll support offered by many governments during the crisis ends, according to several aerospace executives.

Line diagram of the one- and two-lane passenger fleets (thousands) showing that the fleets of aircraft in service have not been as small since 1991

Manufacturers such as Boeing and Airbus, as well as engine manufacturers General Electric, Rolls-Royce and Safran, are fully aware of the risks of supplier disruption. Unlike the automotive industry, the aerospace supply chain is highly regulated, with each supplier being certified to supply parts or systems. Yet many are small businesses, sometimes with only a few dozen employees, and many are struggling to cope with both the impact of the virus on workers’ health and changing demand prospects, which depletes already scarce cash.

“Many of our suppliers will not survive,” said a senior executive at a large engine manufacturer. “They have invested a lot and their sales will no longer bear these fixed costs.”

Some manufacturers may be forced to bail out key suppliers, he said. “We are planning to certify new suppliers, [to safeguard supply] but it takes time. So we may have to buy some. “

Other executives fear the crisis could accelerate competition from new entrants to the commercial aerospace industry, such as Chinese company Comac, which builds the narrow-body C919. Chinese companies, strongly supported by the state, have already acquired a number of small and medium-sized aerospace suppliers in Europe and the United States.

“I fear that the Chinese buy at very low prices. . . a lot of expertise and know-how, “says a manager.

A man passed through an empty San Francisco International Airport in San Francisco, California on Tuesday April 7, 2020. Air traffic was virtually stalled due to the coronavirus pandemic. (Jane Tyska / Digital First Media / East Bay Times via Getty Images)

Man walks through deserted San Francisco International Airport on April 7 © Jane Tyska / Digital First Media / East Bay Times / Getty

Richard Aboulafia, vice president of Teal Group, says there is an even greater risk if the current crisis leads to heightened tensions between west and east. As the fastest growing aviation market, Chinese demand is essential to the success of the existing global aerospace industry.

“Do Chinese planes have a chance on the world market?” No, not for a while, ”he says. “But is there a chance that China will become its own market? Yes. You could satisfy a huge amount of Chinese demand from around 2030 with the C919, then you deleted [between] 25 and 30 percent of [global] request for a narrow body. One of the biggest risks is foreign policy. “

According to the leaders, the key for Western companies is to stay ahead of the technology. But it becomes more difficult when cash is scarce, customers are unable to buy, and banks are more reluctant to lend.

Boeing and Airbus have set aside non-core investments for the time being, and that seems to include any plans for a new midsize aircraft as proposed by the American aerospace company before the Max crisis. This has now been delayed for several years, say the suppliers of the two companies.

“A new plane? For which market? Asks Charles Champion, former director of engineering at Airbus and now director at Akka Technologies, the technology consultant. “We don’t know what this market will look like in the short term and who will be able to commit to a new program. “

Meanwhile, many industry players are fighting for their survival. “Travel is going to be hit hard and the backlog [of orders] could shrink very quickly, “said a senior aerospace banker. In this context, Boeing’s decision to receive more than $ 20 million from the sale of a single 787 Dreamliner seems less extraordinary.

Methodology for flight cards: of the 166,924 international and domestic flights of January 7 and April 7, for which data on the airports of origin and destination were available, 1,684, or 1%, were excluded for the reason that the airport of origin and / or destination could not be matched, using Iata codes, with the country OurAirports and / or coordinates the data. Of the remaining 165,240 flights, 44,350 were then identified as international.

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