Strategy consultants EY are predicting a three to five year bounce back for aviation, with greater consolidation and smaller production lines in the short term.
Matt Ward, EY’s UK & I Aerospace and Defence Leader, said the industry was already facing economic complexities and challenges before the massive drop off in demand caused by COVID-19. “Even before the pandemic, we were seeing the sorts of challenges: geopolitical turmoil, trade wars, other trade issues with Brexit and safety issues that were particularly impacting the commercial side of the market.”
He said the pandemic had also highlighted the adaptability and agility of the industry. “I think this is demonstrated some things that are great about the industry,” he said. “It’s been able to rapidly bring innovative medical technologies and products to market, PPE, ventilators, evidencing its innovation and creativity.”
“Recovery exacerbated by need to burn off inventory”
He said recovery could take five years, with the single aisle market recovering more rapidly than widebodies. “If you look forward, we’ve seen a huge drop off in demand for new commercial aircraft, depending on the segment, of between 30 and 50 per cent and it’s going to take three to five years for those markets to recover.”
He said that although production had restarted, there were a number of factors that needed to be balanced. “That recovery has been exacerbated by the need to burn off inventory that businesses have accumulated to support higher rate production and to mitigate disruption for Brexit, those factors have to be balanced with the need to retain skills and capability.”
Supply chains disrupted
Ward said demand within the defence sector was likely to remain steady but supply chains had been disrupted by the pandemic related shutdowns. He added that productivity had also dropped with production lines reconfigured to comply with social distancing and workplace safety guidelines.
“I think if we look at things in the context of now, next and beyond, in the near term, we’re looking at a shift in supply chains, constraints on rapid ramp up in production. Order books are going to take time to recover and I think you’re going to see issues such as discussions about changing contract terms within the supply chain. As we move forward, we’ll see a reassessment of production location, production footprint and that’s likely to lead to some consolidation.”
Consolidation is the route to recovery
He said order cancellations and horizontal and vertical consolidations would be felt across the supply chain and would occur would be out of necessity. But he added the industry had successfully recovered from previous crises. Ward explained: “If you look back at past crises, the industry’s had a very good track record of recovering from past crises but one of the consequences has been a consolidation of the supply chain. If you look back at 2009 and you look back post 9/11. The reasons why are that we’ve now got a smaller market size given the lower production rates.”
He said there would be more of a focus on more cost competitive products and OEMs would be looking for new sources of funding and support. He added: “They all have a vested interest in maintaining the viability and the resilience of our supply chains to meet future demand.”
He added another dynamic that EY had identified was the role of the state in actively supporting industries which had been particularly impacted by the pandemic, with many countries having already rolled out specific packages to help aviation.
“It’s likely that this government intervention will come with stipulations, which may be to do with job preservation, it may be still with reshoring production into that country and or to drive towards new technologies, whether that’s net, net zero or something else.”
COVID-19: A “Black Swan” event to redefine the industry
At the time of filming, EY was noticing a stabilization with a focus on recovery and resurgence. Ward described the pandemic as a “Black Swan” event which would have the impact of altering the course of the market, redefining the industry and its strategic priorities. He said it was difficult to make predictions of outcomes and scenarios for the crisis as the “driver for the destruction” was out of control until COVID-19 vaccine could be produced. He said cash preservation was still king but had to be balanced towards recovery.
“You must be really rigorous in understanding how you how you achieve cost savings, but also, whether that has to be balanced by the risk of disrupting trade flows, and the ability to keep flexibility. We can we can make predictions about possible outcomes and scenarios for the crisis. But the core driver for the destruction – COVID – is beyond our control. It’s hard to predict while we wait for a vaccine to be discovered. It’s going to take time.”
