COVID-19 and the Aerospace Industry
The commercial aerospace industry is experiencing the largest upheaval in its history as a result of the pandemic. Global passenger demand is currently down ~90+% resulting in 65% of the active commercial fleet being placed into storage. This shift heavily impacts airlines and aircraft lessors (and their support companies, e.g., catering), maintenance, and aircraft manufacturing, many of which are co-dependent on each other. As a result, we expect widespread insolvencies will occur throughout the industry in the coming quarters.
Impact by sector
The first to realize implications are the airlines, with a typical 90-day cash on hand and demand dropping precipitously, airlines are shrinking their fleet, laying off employees, and preserving liquidity. Regional airlines are most at risk because of their more limited access to capital.
Maintenance Repair & Overhaul These companies will be impacted as scheduled and unscheduled shop visits slow due to fewer aircraft flying. After 15 years of high growth, analysts expect MRO demand to drop 30-40% this year leading to significant levels of distress, bankruptcies, and consolidation in part due to private equity activity in the sector, which has driven business valuations and debt levels up.
With reduced global demand, the aircraft manufacturing sector and their respective supply chains will experience the most pronounced and longest-term disruption, with an estimated 25% reduction in global demand through 2025. Consolidation of supply chains and statements of work with suppliers who have critical expertise, financial stability, and an ability to scale will become vital triage measures.
Key focus areas
The following priorities are fundamental for effective crisis management and business continuity planning:
- Modify work procedures and deploy personal protective equipment to ensure the health and welfare of employees, customers, and vendors
- Implement reduction in capacity plans
- Take measures to preserve liquidity through inventory, AP, and AR management as well as amendment of credit facilities and leases
- Secure incremental bank funding and/or government aid via the CARES Act
- Preposition raw material and WIP inventory to ensure smooth restart of operations
Regardless of the type of aerospace company, it is imperative to take swift and decisive action before an impending problem becomes a full-fledged crisis. Companies should make an objective evaluation of their business circumstances and take action now to increase the likelihood of weathering the storm and prepare for the opportunities the new normal post-pandemic will provide.