COVID-19 Impact on the Aerospace Industry

The impact of COVID-19 is evident, everywhere. Entire countries
were and are still in lockdown, the social life has slowed down, with some
countries starting to open up again recently. The world economy stagnates, with financial markets partially plummeting by even more than ~55% compared to January 2020 levels. Stock prices of airlines and aircraft manufacturers are dropping and so are the prices for kerosene, while the oil price for Crude Oil WTI even reached an all-time low. All these aspects have severe impacts on the aerospace industry which we structured along the following four dimensions:

1. Airlines
2. Airports (and Airport Operators)
3. Financial Markets
4. Market Disruption

1. Airlines

In April 2020, international passenger capacity has dropped by ~91% vs. original plan, with Europe and Asia Pacific as most affected regions. Only China is meanwhile reporting increasing passenger numbers, recovering from a capacity reduction of 95%. Still, the question remains if and when the demand for air travel recovers to prior levels, as international routes dropped by ~US$28b globally in May with >70% impact on revenues from Europe and APAC as departure regions. The average market capitalization for airlines has sharply dropped by over 45% vs. 52 weeks highs.

For the full year 2020 experts expect a massive revenue hit of ~US$300-400b for international and domestic passenger operations associated with a reduction of passenger capacities down to ~1.8-2.6b vs. the 2020 baseline of 4.8b passengers. Deloitte’s point of view outlines three potential recovery scenarios regarding the effects on revenue of airlines worldwide. These scenarios depict that the crisis period and shape is uncertain with potential monthly revenue losses of ~US$10-45 b for airlines in H2/2020. Depending on the further market development the profiles may still assume a ‘V’, ‘U’, ‘L’ or even ‘W-shape’, while major impacts are expected for Asia Pacific (~33% of global impact), Europe (~27%) and North America (~23%).

Additionally, Deloitte has examined the liquidity situation of international airlines to generate a broader perspective regarding their resilience. Despite the heterogeneous pattern with regards to debt-to-equity and current ratios many major airlines have already requested financial assistance by governments to counteract the decreasing liquidity reserves. 

2. Airports (and Airport Operators)

Besides international airlines, airports and airport operators are also severely affected by the current developments. For instance, global airports are expected to suffer from a ~US$100b revenue hit in 2020 with the loss impacting Europe and APAC the most (~US$67b). The revenues of large airport operators such as Fraport, Heathrow and Aena (operating airports such as Barcelona & Madrid) already showed a decline of more than -12% in Q1 and are expected to drop even more in Q2, since passenger flights have nearly come to a complete halt (-95%). Operators are already counteracting with impact responses to the crisis. As an example, Heathrow has initiated substantial cost reduction measures while Fraport announced to reduce personnel costs based on a short-time work program (source).

3. Financial Markets

Furthermore, the current crisis has already spread beyond airlines towards aircraft manufacturers and other industry sub-sectors. While the MSCI World Aero & Defense index (an average mix of aircraft, aero & defense system manufacturers and suppliers) dropped by ~21% since January, aircraft manufacturers as Airbus and Boeing are facing declines of  ~43% and ~36% respectively, in line with the NYSE Global Airline index. For kerosene prices the impact reached a drop of almost 80%, where the price went down from ~US$1.93/gallon in early January to ~US$0.40/gallon at the end of April. Spot prices are floating between ~US$0.75/gallon and ~US$0.95/gallon since mid-May.

4. Market Disruption

More than 50% of the global commercial jet fleet is (still) not operating, with a potential risk of larger disruptions in the event of second-hand aircrafts flooding the global market. According to industry experts, the possibility of a long-term decline of the passenger aviation business, resulting in strategic and structural effects for the entire industry, should be considered. This may also influence the demand pattern for wide-body vs. narrow-body aircraft types and also result in an early withdrawal of older, less efficient units. Finally, aircraft manufacturers may bear the risk of increased ‘white-tail’ productions due to potential deferrals or increased numbers of cancellations.

Therefore, all market players require a holistic and strategic reassessment of their current operating model, as well as an immediate and adequate response to overcome the current global crisis.

Facing the challenges of COVID-19 – with the expertise of Deloitte

All  'external implications’ together cause the necessity for short-term and even radical adaptations of operating models. Yet, a holistic view is key - along the entire COVID-19 recovery cycle. Companies will have to undergo three fundamental transformation phases:

1. Respond (Save-to-turnaround)
   
2. Recover (Save-to-fund)
3. Thrive (Save-to-grow and Save-to-transform)

Many companies are currently still in the ‘early Respond-stage’ with core priority areas to be considered in the short-term including (A) market intelligence, (B) liquidity, (C) operating model adaptation, (D) cost structure, and (E) workforce adaptation. Both market intelligence and liquidity must be considered as the top priorities for the current business scenario adjustments, risk assessments, and early development of mitigation plans (Save-to-turnaround).

In the ‘Recover’ phase companies will have to increase their focus on cost measures, while keeping liquidity as a priority. Hence, the focus will be centered around decisions on the right (strategic) investments, enabling companies to achieve both, short- to mid-term cost advantages as well as sustainable and long-lasting market positions (Save-to-fund).

Subsequently, the ‘Thrive’ phase will emphasize on core value adding activities to enhance top-line growth and operating model transformations by unlocking the potential for superior cost structures and digitally enhanced processes (Save-to-grow and Save-to-transform).