The last 21 months have been the most volatile period in the history of commercial aviation. The industry experienced peak aircraft deliveries in 2018, with Boeing and Airbus hitting 1,860 combined aircraft and the supply chain continuing efforts to ramp up production from there. Then came the one-two punch of the Boeing 737 Max grounding, followed quickly by the onset of the Covid-19 global pandemic.
The entire industry has been thrust into a period of turmoil due to the evaporation of global passenger demand, which is the engine that powers the entire commercial aviation ecosystem. According to IATA, global passenger demand dropped in 2020 by nearly 70% compared to the prior year, marking the largest year-over-year decline. A bifurcated recovery of sorts occurred in 2021 with passenger demand surging in large domestic markets such as China, Russia, the United States and Brazil. The uptick was fueled by pent-up demand for leisure travel and some workers' sanity threatened by the tedium of virtual conferencing. Meanwhile, long-haul international travel (flights greater than 3,000 miles) remains in doldrums with passenger demand still down 68% in late December 2021 compared to two years ago.
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, indicating 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, while maintaining supply chain cohesion and positioning themselves to recover as soon as the world returned to normal. But every approach has its limits. With a resurgence of Covid in the form of the Omicron variant, the industry again had to navigate imposition of travel restrictions, lockdowns, and flight cancellations.
So, what happens now? As 2022 kicks off, my Magic 8 Ball toy tells me to “ask again later,” rather than make predictions for the aviation market, but the year ahead will likely present following themes:
Liquidity in the supply chain will inhibit production rate increases
From the perspective of 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. Although a large share of press coverage centers on big companies—such as the aircraft OEMs and large Tier 1 suppliers—a high proportion of the industry’s annual component and assembly requirements rely heavily on a foundation of lower middle-market, privately owned or private equity-backed, component manufacturers. These companies have made it through the pandemic thanks to continued procurement by the OEMs and Tier 1s, government liquidity infusions and lenders’ unwillingness to move on non-performing loans. Those sources of liquidity have now largely run dry, leaving many companies with high leverage ratios and little access to working capital to fund production rate increases, and these factors will cause industry-wide recovery to drag.
Airbus narrow-body aircraft supplier demand will closely mimic aircraft production rates
Airbus has endured the pandemic with its inventory position in good condition. 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, France, toward a stated goal of producing A320-family aircraft at 64 per month by the second quarter of 2023, suppliers will likely see demand increase in a relatively linear fashion, when 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 most or all of 2022.
Boeing has announced its intention to increase production rates of the B737MAX to 31 per month by early 2022 from its current upper-teen production levels. But Boeing, as well as some of its key suppliers like Spirit AeroSystems, saw its balance sheet expand to unsustainable levels through 2020 and 2021 in a bid 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 increases from both OEMs in 2022.
While commercial passenger demand slimmed down markedly through 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, South Carolina. With Boeing aiming to increase production from one to two aircraft per month, modest improvements are likely to occur, but with so much underutilized capacity in the market, B787 and A350 production rates are unlikely to start making material progress towards pre-Covid 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, I am encouraging business leaders and investors to be judicious with investments, recognizing that the freighter conversion trend is likely short term and might end when long-haul travel recovers. From a longer-term economic perspective, main deck freighters simply cannot compete with freight carried in a passenger aircraft. Passenger ticket sales, checked bag fees and $18 sandwiches generate enough revenue to operate the flight profitably, while the freight is just incremental revenue that drives profitability on a typical flight full of paying passengers.
These five themes will be important for the state of commercial aviation in 2022. The good news: the industry can expect lift and increasing demand for most aircraft in the coming quarters. The bad news: financing that growth could be very challenging, and the timing and trajectory of the recovery is still unknown. As we used to say in the Army, “the best-laid plans never survive the first shot in combat, so be flexible and adapt accordingly.” That same advice holds true for the current business climate as professionals strive to bring clarity to each market and respond appropriately to the year as it unfolds.
David Nolletti is a managing director at Riveron, a national business advisory firm, where he partners with clients in healthy and distressed business environments across several verticals including aerospace, defense, distribution, consumer products, aerospace maintenance repair and overhaul (MRO), and more.