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Aerospace Market

Grounded

By on
MCN Editor Dan Markham
Of all the casualties of the novel coronavirus pandemic, commercial aerospace might be the hardest-hit sector of the industrial economy. 

For the makers of commercial aircraft and the extensive and complex supply chain that serves  them, one four-word phrase has led to a decline the industry hasn’t seen in decades: stay-at-home order. 

While all of the major metal-consuming industries have suffered in some way as a result of the COVID-19 pandemic, the damage to the commercial aerospace market is likely to be the deepest and most long-lasting. The initial shelter-in-place orders put an immediate halt to air travel, and fears of sitting in an enclosed tube with hundreds of others for hours at a time continue to curtail activity in the once-friendly skies. 

The pandemic’s effects on the aerospace sector were summed by Boeing President and CEO Dave Calhoun in a message to employees: “The reality is the pandemic’s impact on the aviation sector continues to be severe. Though some fliers are returning to the air, their numbers remain far lower than 2019, with airline revenues likewise reduced. This pressure on our commercial customers means they are delaying jet purchases, slowing deliveries, deferring elective maintenance, retiring older aircraft and reducing spend – all of which affects our business, and, ultimately, our bottom line.” The repercussions will be severe. While some recovery may have begun, the depths to which the market sunk at mid-year will mean it will take years to return to pre-pandemic levels.”
 
“We are seeing numbers the industry hasn’t seen since World War II,” says Richard Aboulafia, vice president, analysis for Teal Group, who analyzes the commercial aircraft and defense markets. “We’re fairly confident we’ll get back to the peak around 2023, 2024, but that means three years where the total requirement for aircraft is half or less what it was. In my 33 years in the business, I’ve never seen anything like it.”

Aboulafia’s expectation the market won’t return to 2019 levels for three years is not an outlier. Though Bob Mraz, vice president of sales and marketing for Exton, Pa.-based TW Metals, expects conditions to slowly improve over the next two years, he’s also targeting 2023 as the year the market fully returns to pre-pandemic numbers. Calhoun said the same in his message to employees.

The devastation to the industry is particularly tough to take given how things were shaping up. “Things were looking fine. There were absolutely no signs of a downturn, and given the seemingly imminent return to service of the 737 Max, people were looking for, if anything, accelerated growth,” Aboulafia says. 

That opinion was echoed by Damien Mancini, vice president, Global Aerospace for Oak Brook, Ill.-based Castle Metals. “It was gangbusters before the pandemic. We came into 2020 with a little optimism the 737 would be back in production. Lead times were going out. It was kind of the perfect storm.” Literally. “You started buffering your inventories in preparation, and then the industry comes to a screeching halt. You’ve got a pipeline of incoming material. You’ve got material on the floor, all of which you have to navigate through with vendors and customers. It was the perfect  situation to create an unprecedented circumstance for the entire aerospace supply chain,” he said. 

That scenario played itself out all over. “We ended 2019 on a high note. We had an excellent backlog and started 2020 on a positive note with substantial new orders in place,” says Jerry Bashir, president and CEO of Falcon Aerospace, Weston, Fla. “Since we support a customer base in Europe, this was the first group of customers looking for cancellations of orders or delivery deferments, and then the wave of U.S. customers started requesting deliveries be stopped or delayed. Thereafter we started seeing the slowdown in the new requirements.

“It became clear the impact of COVID-19 was far larger than 9/11,” he says. 

The effect was immediate. “When the primes stop, everyone needs to stop. Under the terms Airbus and Boeings and the other primes have arranged, when we stop, you stop yesterday, and you’re stuck with the inventory,” Aboulafia says. 

Boeing, for instance, announced a delay in the ramp up of 737 production, now expecting to gradually increase to 31 per month by the beginning of 2022. It also announced plans to reduce its 777/777X production to two per month this year, one lower than originally revealed. Airbus planned a cut in production of its wide-body planes as well. 

Numbers from the International Air Transport Association tell a grim picture. Globally, airlines are expected to lose $84.3 billion in 2020, with a net profit margin of negative 20 percent. Revenues will decline 50 percent to $149 billion.  “Financially, 2020 will go down as the worst year in the history of aviation. On average, every day will add $230 million to industry losses,” said Alexandre de Juniac, director general and CEO of the Geneva, Switzerland-based IATA.

To combat this, companies began taking steps to reduce costs, right-sizing operations and shedding material where possible. Some managed through a little better than others. 

“As a start-up company, it hasn’t been as bad on us as some of the larger companies that are a little more invested in their customers and inventory positions,” says Sean Evans, vice president of Tailwind Aerospace Solutions, Corona, Calif. “As a growing company, our sales are about the same as they were last year, which, in my opinion, is pretty good. We were growing at a faster rate before.”

Falcon Aerospace credits its conservative nature with helping it through the worst of the downturn. “Working on mostly transactional opportunities instead of forecast-based LTAs has helped us in managing and keeping our inventories on the low side. However, we have seen a drop in new orders intake for the last six months.”

Mraz says while there was a “fair amount of destocking, there were selected areas, hot spots, that kept emerging. While the major airframers were pretty much down for those months, a lot of the components people were still very active. Because we have quite a bit of JIT business, and they weren’t sitting on tons and tons of material, even the slightest increase in demand immediately reflected more orders for us.”

Beyond commercial, the picture is a little better. Defense aircraft spending remains solid. “There’s absolutely no weakness there. Compared to the last commercial downturn, the defense budget is three times as big. That’s a big consolation prize,” Aboulafia says. 

Likewise, there’s an aspect of aerospace that is gaining traction at a nice clip – space. “The space production sector has remained vibrant,” says Bashir.

Mraz concurs. “Our space business is just fantastic. United Launch, Blue Origin, Space X – they are so busy with new programs, new speeding, R&D launches.” 

He says the companies in the space market operate a little differently, preferring to latch on to a handful of good suppliers and leaning on them to provide most of their needs. “If you’re their raw material supplier, they want to buy plate, sheet, tubing, extrusions. They want to buy as many things as they can from as few people as they can,” he says. There’s also the possibility the coronavirus pandemic could lead to a better market for private jets, as nervous executives look to fulfill their travel objectives through smaller, less-congested aircraft. 

“I can’t say we’re feeling that, but I think the logic is certainly sound. The people who can afford those aircraft have been less impacted by the pandemic than others. And businesses may start to decide that having a company jet is better than using commercial airliners,” Mancini says. 

Aboulafia says private aviation has, and will continue, to recover faster than commercial aircraft, though it too was depressed through the shutdowns. “We’ve got our business jet forecast recovering very nicely around 2022.”

The problem, of course, is the potential market for private aircraft remains a small percentage of the population. “People are trying to bridge the cost gap, but it’s still a very elite group. It certainly bolsters the case for it on a corporate level.”

One oft-overlooked market that is likely on the rise with the struggles of the commercial sector is fleet conversion, where passenger jets are taken out of stock and modified for usage by delivery companies. That market is dictated by the state of the commercial industry, rather than the needs of air freight companies, with some years offering few planes for conversion.

That isn’t the case now. The pandemic has only accelerated the use of online purchasing, while the major airlines will have plenty of planes they’re willing to remove from inventory.

“We’ve been involved in the freight conversion market for years,” Mancini says. “Now you’ve got a situation where air freight requirements have all been on the rise and a lot of excess aircraft out there that can create some liquidity for the airlines.”

While strength in these other markets can provide a little buffer, the industry will continue to be driven by the commercial side of the business. And the executives are very interested to see how this unprecedented downturn affects the overall supply chain.

One immediate change, many agree, is the likelihood that contract language will be tightened up. The subtle negotiation that settled previous areas of dispute will no longer be the rule, as companies have leaned hard on precise contract language in the challenged environment. 

“A lot of people feel their contracts just kind of went up in smoke. It’s going to make a lot of people take a second look at some of these contracts and tighten down on a few things that don’t allow for push deliveries and late payments,” says Evans.

Mancini agrees. “Contracts will probably be more clear, where accountability is and where liabilities are. We’ve had to fall on the contract language more than we used to.”

The downturn will almost certainly collect some victims, even with the programs used to get them through. 

“I think a lot of companies, small and large, in metals distribution have taken advantage of the PPP opportunity to mitigate the downturn. Some companies have adjusted the salaries and adopted a shorter work week,” Bashir says. “However, some companies that lack liquidity, flexibility and strategy to deal with a long pause may find it hard to survive.”

“One of the key things we’re seeing is for the major customers, when this first happened, their biggest concern was what will happen to their supply chain,” Mraz said. “Will everybody still be there?” 

Photo Caption: Airbus and Boeing have both slowed production in response to the pandemic and its dramatic impact on passenger travel. (Photo courtesy Airbus.)