A Mid-Year Outlook for Aircraft Manufacturers
Portions of this article originally appeared in Industry Week.
The last two years have been the most volatile period in the history of commercial aviation. In 2018, Boeing and Airbus hit a combined 1,860 aircraft deliveries, with a continued expectation of an increase in production. In contrast, global passenger demand dropped by nearly seventy percent at the onset of the pandemic in 2020, according to IATA. This marked the largest year-over-year decline.
The evaporation of global passenger demand sent the industry into turmoil. A bifurcated recovery occurred in 2021 with passenger demand surging in large domestic markets such as China, Russia, the United States, and Brazil. Such an uptick was fueled by pent-up demand. Meanwhile, long-haul international travel remains in the doldrums with passenger demand still down 68% in late December 2021.
The pandemic has challenged all the recent norms and forecasting capabilities of the aerospace industry. From 2004 until 2018, aerospace manufacturers enjoyed nearly continuous production rate increases and new program introductions. Early in the pandemic, the V-shaped recovery and quick recertification of the Max were the darling headlines of the industry journals. This signaled the trends hoped for by many analysts and market players. Boeing and Airbus both kept their options open by maintaining production rates within the supply chain, consciously allowing their balance sheets to balloon, maintaining supply chain cohesion, and positioning themselves to recover as soon as the world returned to normal. At the same time, every approach has its limits. For example, when COVID restrictions resurged at the onset of the Omicron variant, the industry had to once again navigate the imposition of travel restrictions, lockdowns, and flight cancellations.
Looking toward the second half of 2022, predictions continue to be tentative. At the same time, here are prevailing themes that can frame expectations:
Liquidity in the supply chain will inhibit production rate increases.
One restructuring professional’s take on the current climate:
“As a professional who spends most waking hours helping clients work through liquidity enhancement and performance improvement opportunities, the relationship between liquidity and production presents one of the least-covered stories of the pandemic.
David Nolletti, Managing Director, Riveron
A large share of press coverage is centered around larger companies such as aircraft OEMs and Tier 1 suppliers. At the same time, the industry’s annual component and assembly requirements are mostly made up of middle-market, privately-owned, or private-equity-backed, component manufacturers. Companies like these have made it through the pandemic because of supplementary provisions: continued procurement by the OEMs and Tier 1s, government liquidity infusions, and whether lenders are willing to move on non-performing loans.
Such sources of liquidity have run dry, leaving many companies with high leverage ratios and little access to working capital, to fund production rate increases. These factors will cause industry-wide recovery to drag.
Supplier demand for Airbus’s narrow-body aircraft will closely mimic aircraft production rates.
Airbus has endured the pandemic with its inventory condition in a good position. The company’s total inventory and inventory per aircraft delivered is similar to its peak production back in 2018. As Airbus ramps up production in Toulouse, the company has a stated goal of producing A320-family aircraft at sixty-four per month by Q2 of 2023. Suppliers will likely see demand grow in a relatively linear fashion, after taking component manufacturing lead time into account (i.e., suppliers will see demand increase ahead of aircraft production).
Boeing narrow-body supplier demand will be substantially lower than production rates for the remainder of 2022.
Boeing announced its intention to increase production rates of the B737MAX to thirty-one per month in early 2022. Previously, the company produced in the upper-teens, but Boeing and some of their key suppliers, like Spirit AeroSystems, saw its balance sheet expand to unsustainable levels through 2020 and 2021 in an attempt to keep lower-tier suppliers healthy. As a result, supplier demand will lag production rate increases for most of the year as the Max supply chain inventory position slims back down to fighting weight.
Wide-body aircraft production rates will see very modest production rate increases from both OEMs in 2022.
While commercial passenger demand declined during the pandemic, the long-haul international segment seemed positively starved. Many carriers quickly retired their largest wide-body models and, with demand remaining severely depressed, both Boeing and Airbus responded with massive wide-body aircraft production rate cuts. Boeing closed its Seattle-based 787 line and is consolidating production in Charleston, SC. Aiming to increase production from one aircraft to two aircraft per month, modest improvements are likely to occur. With so much underutilized capacity in the market, B787 and A350 production rates are unlikely to start making material progress towards pre-pandemic levels until late 2023 or 2024.
Main deck freighter conversions will continue, well above historical norms.
Perhaps the one bright spot throughout the pandemic has been the air freight market. In normal times, around 60% of air cargo is carried in the belly of wide-body passenger aircraft, and as the passenger market continues to struggle, the dedicated freighter market has experienced a surge in demand resulting in strong aircraft utilization and pricing power. As a result, the demand for main-deck freighter conversions is soaring, and operators are seeking to fill the gap and reap the financial rewards.
For all the good news coming out of this sector, experts are encouraging business leaders and investors to be judicious with investments, recognizing that the freighter conversion trend is likely short-term and may end when long-haul travel recovers. From a longer-term economic perspective, main-deck freighters cannot compete with freight carried in passenger aircraft. Passenger ticket sales, checked bag fees, and other profit-generating opportunities offer enough revenue to operate the flight profitably. Freight is incremental revenue that drives profitability on a flight full of paying passengers.
These five themes continue to be important for the state of commercial aviation in the second half of 2022. The good news is that the industry can expect increased demand for most aircraft in the coming quarters. The bad news is that financing that growth may be challenging, as the timing and trajectory of the recovery are still unknown. In the current business climate, professionals must remain adaptable as they strive to bring clarity to their business strategies and respond appropriately to the market.