Like all other industries the aerospace industry is also in deep trouble due to the coronavirus pandemic. The aerospace industry first encountered a major setback when the Boeing 737 Max aircraft were grounded across the world. The industry was still struggling to come to grips with the Boeing 737 crisis when the Coronavirus crisis struck the world. As the whole world came to a stand still the aerospace industry stared at a bleak scenario.
In the face of the Coronavirus pandemic, Airbus SE chief Guillaume Faury warned the employees that the aircraft manufacturer is “bleeding cash” and needs to quickly cut costs to adapt to a dramatically shrinking aerospace industry.
As the airline companies, the customers of the industry, continue to fight for survival and unable to accept new aircraft, Airbus is juggling its delivery schedules while reassessing its long-term outlook for the aerospace industry, Faury told his staff in a letter sent recently. A plan to cut down production by 33 per cent, which was announced earlier this month, may not fully reflect the worst-case scenario, he said.
At the end of March, only days before Boeing was set to hand over a new 787 Dreamliner to one of its most valued customers in the Middle East, the airline’s head of procurement picked up the phone to the US aircraft maker. The deal was off, unless Boeing was willing to increase the 55 per cent discount it had already agreed on the $338m list price. In normal times, an airline would hesitate before threatening to cancel an order at such a late stage.
Cancellation would normally mean heavy penalties and forfeiting the down-payments, which for Boeing’s state of the art twin-aisle model amounted to close to $100m of the agreed $150m price tag. But these are not normal times.
Boeing caved in and cut the price by a further 15 per cent, according to people involved in the deal. The US aircraft maker— which declined to comment on the contract details — saw more value in getting the jet out of the hangar than haggling for a few million dollars more. Despite supplying more than 90 per cent of the world’s commercial aircraft, Boeing and its European rival Airbus do not have much leverage when nearly all their airline customers are fighting for survival.
As international air travel grinds to a halt in the face of the coronavirus pandemic, the global aerospace industry is being forced to confront some hard 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 $1tn at list prices, are looking less certain by the day as airlines push back deliveries and even cancel orders to survive the worst crisis in aviation history.
More than 60 per cent of the world’s commercial aircraft have been grounded as governments quarantine their populations and close borders. And with little or no revenue coming in, airlines are cutting costs, drawing down huge credit lines to bolster liquidity, and calling for billions in state aid. Ed Bastian, chief executive of the world’s biggest carrier, Delta Air Lines, says his company is burning through $60m a day while 600 aircraft are parked on the tarmac and 80 per cent of April’s scheduled flights are cancelled. IATA, the aviation industry’s trade body, has warned that some 25m jobs in both the aerospace and aviation sectors are at risk if governments do not step in with lifelines.
The European manufacturer and its U.S. rival Boeing Co. have been trying to come to grips with a major dip in demand caused by the Coronavirus pandemic that’s practically destroyed a commercial aerospace industry they have been dominating so far. Airbus has jacked up its liquidity by 15 billion euros ($16.2 billion) to weather the crisis, while Boeing is in talks for government aid. Both companies are gearing up for job cuts as they attempt to fathom the depth of the downturn and the pace of recovery.
“I sincerely wish I could predict this would end soon,” Mr Bastian told the employees in April. “But the harsh reality is that we simply don’t know how long it will take before the virus is contained and passengers are ready to fly again.”
Boeing, which is already struggling to overcome the grounding of its 737 Max single-aisle fleet after two fatal crashes, and Airbus, which earlier in April cut down aircraft production by a third, are staring at an enormously changed world. It is a sharp U-turn for companies which even in the recent past had so aggressively increased production that they sometimes struggled to sustain it. Only in February Boeing and Airbus were confidently predicting demand for more than 40,000 aircraft worth roughly $7tn over the next 20 years. In March, even after Italy went into lockdown, Airbus was egging on its European suppliers to invest in accelerating production of the single aisle A320 — the company’s runaway success — says one of its key programme partners, who asked to remain anonymous.
As there seems to be no choice ahead, the airline companies are gearing up for a long span of depressed demand and, having taken substantial debt to survive the crisis, will not be in a great rush for aircraft delivery slots as they were just a few months ago. “Plenty of order cancellations and deferrals are coming,” stated Cai von Rumohr, an aerospace analyst at Cowen Investment Bank, in a note to the clients in the last week of April. “At the moment, we are treading in uncharted waters.” The repercussions of the air traffic shutdown on the aerospace industry worldwide is beginning to become worrisome for the government.
The industry is not going to bounce back any time soon. For example, it is expected to take years for Wales’ aerospace industry to get back to where it was before the coronavirus pandemic, the body representing companies has said. Incidentally, aerospace firms employ 23,000 people in Wales in 160 businesses.
Aerospace Wales, the industry workers’ body, said the drastic reduction in flights was a huge challenge. And this comes as Wales’ single largest aerospace employer Airbus confirmed it was cutting production at its wing factory. In a bid to pare down the workforce, Airbus has already released 500 of its temporary staff at its Broughton, Flintshire and Filton plants in Bristol while the remaining employees were asked to go for an extended Easter break.
These lay-offs were made because of reduced demand for the wings made in Wales for aircraft assembled in Spain, France and Germany. Airbus employs about 6,000 people at the site in Broughton, and the company confirmed it was slashing production by one third because of coronavirus, saying its priority is to protect its people first.
John Whalley of Aerospace Wales, warned: “There will surely be a recovery but it may take a couple of years to get back to where we were only a few weeks ago.”
Mr Whalley said he was basing his estimations on experience with the SARS pandemic and the 9/11 World Trade Centre terror attacks in New York. “However, this is tougher and longer but I think over time air travel will recover,” he said. “Perhaps some businesses will go for more video conferencing but overall people will want to travel. ”
Article by Arijit Nag
Arijit Nag is a freelance journalist who writes on various aspects of the economy and current affairs.
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