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Aerospace Report

Waiting for Take Off

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MCN Editor Beth Gainer Although the aerospace industry is recovering from the pandemic, it will take a while before the industry goes full throttle.

Last year, the pandemic left flights at a standstill and essentially “brought the airlines and aerospace manufacturing sector to its knees,” according to Jerry Bashir, president and CEO of Falcon Aerospace, Weston, Fla.

However, this year’s uptick in U.S. travel has helped the domestic aerospace industry recover, albeit slowly and not at pre-pandemic levels. International travel, on the other hand, “is just nowhere,” according to Richard Aboulafia, vice president, analysis for Teal Group Corporation, Fairfax, Va. “There are still major concerns with the commercial passenger market, particularly for the larger wide-body jets that serve international routes.”

Today’s increasing vaccination numbers in the U.S. have bolstered the domestic aerospace industry, according to Bashir, who adds that domestic flights have surpassed 750,000 travelers per day. He hopes that this number reaches 1 million daily travelers within the next two or three months. 

Aboulafia points out that the air travel ramp up is good, but offers a caveat: “Domestic markets, particularly in the U.S. and China, have made a nice increase,” he says, “But we’ve had a slow recovery. We’re still more than halfway down from where we should be.” Sean Evans, vice president of Tailwind Aerospace Solutions, Inc., Corona, Calif., also notes that commercial aerospace is “doing better but not at pre-pandemic levels. It’s definitely slow to rebound.” 

However,  Tom Kennard is more optimistic, saying domestic air travel has “ramped up significantly. I would hope that we’re over the hump when it comes to COVID’s impact on air travel.” He is executive vice president of Birmingham, Ala.-based O’Neal Industries’ High Performance Metals Group, which supplies metals to aerospace through its TW Metals and United Performance Metals groups.

But the aerospace industry is contending with the fact the pandemic is a far cry from over, as the Delta variant continues to pose a threat. “The numbers are extremely isolated to the American South, so we don’t know,” Aboulafia says, adding the EU recently removed the U.S. from its list of safe places to travel. 

Kennard also worries about the variant. “We need to take this Delta variant very seriously. I just think COVID is something we’re going to have to live with for a long time,” he says. Evans concurs. “Any [variant] that’s trending in the news is going to make some people more cautious to travel, so as long as we have closures and breakouts happening in the news, it’s going to continue hampering commercial air travel and make other countries nervous and cautious about coming here or letting us go there, as well.”

Thus the pandemic has ushered in a new normal – one where travel and manufacturing ramp-up timelines remain uncertain. Evans notes that some experts believe air travel will hit pre-pandemic levels in 2024, but he’s not so sure. Aboulafia cautiously predicts U.S. travel to be ramped up sufficiently by late 2022, depending on a couple of big ifs: if the Delta variant does not spread and if vaccinations are still on the upswing.  If these happen, “then I don’t see any reason why we don’t get back to where we were by the end of next year because the economics are fine,” he says. “This is a vaccine issue. It’s not a recession issue. It’s not a fear of terror issue; this is purely a COVID-19 issue.”

In terms of manufacturing activity, however, he predicts, “We don’t get back to [2019 levels] in jetliners until 2024 or 2025. For single aisles, narrow bodies probably 2023 or 2024. Wide bodies, that’s a long way out.”

And aerospace experts acknowledge it will take time for the aerospace sector to hit the highs it enjoyed before the pandemic ravaged the industry. “We are optimistic that a return to 2019 levels will take place in mid-2023, providing there are no sequestrations in the defense budgets,” says Bashir.

In fact, the defense sector did well in 2020 despite the pandemic. This sector’s future, however, is also relatively uncertain.

On the Defense
Of all the aerospace sectors, experts agree the defense sector remains the strongest. “The defense industry had a good run and really offset the difficulties in the commercial markets – not to a great extent – but it propped us up for sure,” says Kennard. “And that will obviously continue to be a consistent contributor as the commercial industry battles its way back.”

Aboulafia says the pandemic has not affected the defense sector the way it has for commercial air travel. “Defense is doing great. You’ve got very high procurement budgets that are only getting higher, and you’ve got strong and new legacy production programs,” he notes.

Evans agrees, saying although its military and defense customers delayed or pushed back some contracts, this sector is still solid. “From my perspective, it’s been fairly stable compared to almost any other sector in aerospace.”

But while 2020 was kind to the defense sector, there is no guarantee that defense will remain strong in the future. “U.S. engagement on a direct basis in Afghanistan is over after 20 years, with the cost exceeding $2 trillion. This costly war had its positive impact on the defense spending that may be in question now,” says Bashir, adding that the Biden administration wants to reduce overseas military engagements. “This move will likely impact our defense spending and perhaps may lead to canceling or reducing existing and future programs,” he says, acknowledging, however, that Taiwan’s conflict with China may lead the U.S. to justify defense spending after all. 

Precious Cargo
According to Evans, the freight movement has been “booming a little bit” because it is a more cost-effective way of shipping than in containers. “The cost of a container from China to the U.S. is $13,000 to $15,000 right now. It was some $3,000 just two years ago,” he says. “It’s causing a lot of companies to go to air freight because the cost difference isn’t as large as it was and on top of that, the lead time delays on cargo can be really long right now.”

And the online shopping boom resulting from stay-at-home orders and quarantining has had a major impact on shipping as well. Consumers have been clamoring for goods, resulting in a huge demand for cargo aircraft. While the lack of passenger air travel grounded or retired aircrafts, the need for shipping cargo ramped up, according to Bashir, thus bringing these aircrafts into use again, while converting some into cargo aircrafts. “Amazon is a big player in a lot of these conversions and purchasing aircraft for more delivery,” says Evans.

According to Kennard, “There’s a lot of freight movement right now, and I think that will continue to be a big positive for our industry.”

However, Aboulafia points out that, although shipping cargo is performing well, “it’s really a small sector compared to commercial passengers. Two-thirds of it is conversions. Even though it’s good, it’s not enough to move the needle.”

Another thriving segment is the domestic business jet sector. “Business jets are pretty much back to where they were [pre-pandemic]. That’s been a very happy story,” he says. “A lot of business travelers will pay to avoid crowded air terminals.” He emphasizes that if other countries’ borders were open, international business travel would be much stronger t.

Although many individuals depend on travel to do their business, some businesses are suffering due to the shortage of labor and raw materials, as well as increased lead times.

Like most industries, the aerospace industry is experiencing labor shortages, which is especially ominous since aerospace is expecting a significant uptick in business. “We keep hearing that Delta, United and others are ramping up capacity. The big OEMs are out asking us to prepare for this ramp up, and we really don’t quite understand exactly when it’s going to happen,” says Kennard. “We’ve got to hire in an economy where it’s really hard to find people.” Bashir also acknowledges the dearth of skilled labor: “As a developed nation, we have a shortage of engineers and skilled labor.”

During the pandemic, employers panicked and companies laid off skilled workers. “As the aerospace industry rebounded faster than anticipated, now there’s panic in retrieving the laid off workers who found employment with up and coming space pioneers with the likes of SpaceX, Blue Origin and many others,” he adds. “Due to restrictive changes in immigration policies, the industry is unable to bring skilled workers from outside the U.S.”

In fact, every facet of doing business is facing a price increase – from inventory to labor to the cost of raw minerals. According to Bashir, “There has been a shortage of raw materials to make critical alloys that are in the aerospace industry.” And pricing has increased dramatically since the pandemic. “We’ve seen price increases from all the mills, from all the freight companies and then our labor costs – people are demanding more dollars per hour at the lower end of the pay scale,” says Evans, “and there are other administrative costs that companies are dealing with.”

Metals pricing is also through the roof. “At some point we’re going to have to reach the peak [for metals prices] and see what happens from there,” he says, adding that he believes these high prices will continue into the foreseeable future. “But I think a lot of metals companies right now are trying to figure out where the top is, and it’s a big decision of whether you invest into your inventory now, with low demand and high prices, or if you wait until the demand is even higher, and metal prices could go down, but it doesn’t seem likely.”

“All your raw mineral LME base metals are at record levels across the board,” he continues. “At this point, the freight costs and aluminum LME costs have not shown much of a sign that they’re going to come back down.”

Evans says that as commercial aerospace is ramping up, mill lead times are increasing. Six to eight months ago, most of the domestic mills were running six to eight weeks, he explains, but now they are running 12 to 16 weeks or further. 

Despite all its recovery efforts, aerospace manufacturing still has an Achilles’ heel.  “We got through the worst of it by doing everything possible: firing, furloughing and laying off workers, selling everything that wasn’t nailed down, loading up on debt,” says Aboulafia. “That means that if there’s another dip, this industry is quite vulnerable.” 

Yet the industry is still managing to successfully navigate its way through the pandemic. “For many, many years, we’ve been the most consistent performing industry in the U.S.,” says Kennard. “In 2020 with COVID we were dealt almost a fatal blow but the tree survived well. I think we’re really preparing to thrive again.”

“Domestically [air travel] is coming back,” says Evans. “It’s been good to see the adaptability from our staff, as well as from other people in the industry – vendors and customers who understand dealing with these situations and really try to work with you to get a solution where everybody is happy.”

Bashir echoes this sentiment. “This year has been a positive surprise to see the return of the aerospace industry – sooner than anticipated.” 

The domestic aerospace industry is slowly recovering, although not at pre-pandemic levels. 
(Photo courtesy of  TW Metals)