New Report Predicts Slow Recovery for Civil Aerospace

 - July 22, 2020, 6:33 AM
Airline capacity in China, which had fallen 80 percent year-over-year in early February, has recovered to about a 30 percent deficit this month compared with 2019 levels.

Airline capacity may not return to 2019 levels until 2024, as a possible “new normal” level of revenue passenger kilometers (RPKs) reaches no more than 80 percent of last year’s numbers by around the summer of 2022, according to the latest projections from aviation consultancy Roland Berger. Presenting its updated projections at the FIA Connect event on Wednesday, the company predicted that the traffic declines will result in demand for new airliners falling by as much as 43 percent over the next 10 years.

“It is now clear that this [the Covid-19 pandemic] is not a temporary crisis, it’s a structural crisis,” said Roland Berger senior partner Manfred Hader. In its latest report, the company has rejected as unrealistic two earlier scenarios that it considered: the first being a return to 2019 airline capacity by the end of 2020 and the second a recovery by the summer of 2021 and at 90 percent of 2019 capacity.

Ahead of the anticipated decline in new aircraft orders, Roland Berger warned of a more immediate dip in demand for maintenance, repair, and overhaul (MRO) services. In 2020, it expects airlines to spend between 60 to 75 percent less on MRO for large airliners due to the steep decline in long-haul flights.

One significant anticipated medium-term outcome from Covid-19 is that major OEMs will slow plans to launch new aircraft as they cut back on investments, expects Roland Berger. Hader said he now does not expect to see the next single-aisle airliner until the mid-2030s, pointing to recent statements from Airbus that imply its next major new product could be a carbon-free aircraft in around 2035.

Roland Berger also predicts greater pressure for consolidation in the civil aerospace sector. Furthermore, it anticipates a trend for companies to keep production closer to home, reversing, or at least slowing, the shift to increased globalization of the supply chain over the past couple of decades.

“If you lose 30 to 50 percent of [market] capacity, [a correction] has to come from somewhere to maintain prices,” Hader said. “It only works if you reduce capacity and overhead, and this means we will see more job losses and more bigger companies.”

One group of winners in the post-Covid realignment of the industry, Roland Berger predicts, will be Chinese OEMs, which it feels are better placed than Western rivals to take advantage of areas where demand might recover. “Airbus and Boeing are now losing time since [their main markets] are not developing,” Hader said. “But Comac and Avic are accelerating and they will be ready with new aircraft by the time the crisis is over. They will have caught up and so we will see a quicker drive towards the ‘Chinese decade’ at the latest in the 2030s.”

At the same time, the Roland Berger team concluded that the industry will have no choice but to maintain investments in technology to make aviation more environmentally sustainable. “Demand for sustainability will not disappear because more people will now want the improved air quality that they have enjoyed [during the Covid reduction in flying],” Hader commented.

The company also sees the need for continued investment in the increased automation of aircraft. However, in its view, such spending might slow in the near term as priorities shift.

The new Roland Berger report titled “The New Normal Emerges: How the Aerospace Industry Can Weather This Perfect Storm” concludes that the initial crisis-management phase is now largely complete. This saw most companies acting quickly to preserve financial liquidity through aggressive downsizing.

It expects the next phase of transition to run through the rest of 2020 and into 2021, as companies prepare for an “efficient restart after the crisis” through, possibly, further changes to the size and efficiency of operations. Roland Berger adopted the term “transition” after rejecting “recovery” on the grounds that it does not expect the industry to get back to 2019 levels during that phase.

Roland Berger principal Neranjana de Silva told the webinar that the “new normal” will come beyond 2021 and will require companies to ready themselves to reshape their supply chains and operating models. “We are in unchartered waters, and strategies will need revisiting even for those companies who did this as recently as last year,” she concluded.

According to Roland Berger managing partner Robert Thomson, the effect of Covid-19 on civil aerospace will prove at least as bad as the SARS outbreak, which was effectively confined to Asia. “This truly is a perfect storm compared with previous shocks,” he concluded, on the grounds that it involves a convergence of economic downturn, a public health crisis, fear of travel, and government restrictions on travel—and all on a global level.

On the brighter side, he reported that airline capacity in China, which had fallen 80 percent year-over-year in early February, had returned to about 30 percent down on 2019 levels by early July. He noted that airlines in North America and Europe have achieved increased capacity in recent weeks, but predicted that even by the fourth quarter of 2020 overall industry capacity might return to no more than 50 percent of 2019 levels.

Roland Berger reported that, on average, aerospace companies have so far cut jobs amounting to between 10 to 20 percent of their workforces in response to Covid. Companies with greater involvement in less-affected sectors like defense and business aviation have needed to make smaller cuts. By contrast, GE Aviation, in part due to its heavy exposure to the halt in production of Boeing’s 737 Max narrowbody, had to cut as much as 27 percent of its workforce, losing 13,000 positions.