The Supply Chain Matters blog provides an editorial update regarding our ongoing coverage of commercial aerospace customer demand and supply networks, and specifically the impact of the COVID-19 coronavirus on this industry’s supply chains.
As noted in prior updates, the industry implications of COVID-19 could be just or more significant overall, depending upon the industry’s new aircraft demand disruption, individual manufacturer, and respective supplier impacts. An industry, long the envy of many with upwards of ten year’s of airline and lessor demand for new aircraft has likely the most at-stake in the post COVID-19 scenario, and right now, the picture is not at all pretty.
U.S. based manufacturing Boeing continues to be the most impacted from a number of dimensions, given the ongoing challenges of the one year plus 737 MAX global grounding of the aircraft, before the onslaught of COVID-19.
On April 6, a decision was communicated to suspend all commercial aircraft manufacturing operations because of growing concerns for virus outbreak within these facilities. Boeing indicated that its decision was based on an ongoing assessment of the health and safety of employees, an ongoing assessment of the spread of the virus with the state of Washington, and additional recommendations from respective health authorities. Tragically, there is a report of the death of one factory worker succumbing to the virus, that likely prompted the decision.
After an initial two-week operations suspension, thirty thousand employees have now been notified to either initiate vacation or sick time or apply for unemployment insurance while production operations remain suspended. Salaried employees who can work from home, reportedly were not included in the extended suspension order. The company is further asking for voluntary layoffs for those nearing retirement.
Boeing has additionally been working on a revised plan to identify essential production workers, those that can remain working because their work is associated with either government or military aircraft production, or in maintaining critical plant facilities. Reportedly, employee medical coverage benefits will be maintained during the work stoppage.
Concerns centering on the continued cash burn and financial state of Boeing continue to escalate, especially with this suspension of production. The company had lobbied to include upwards of $60 billion in the $2 trillion stimulus package passed by the U.S. Congress, to be earmarked to Boeing and its broad supplier network to blunt the blow of the pandemic on employment.
The passed legislation had stipulations that any financial stimulus provided to businesses, and to U.S. based air carriers, would include provisions for efforts to maintain employment during business operational suspensions. Reportedly, the legislation indicates that loan recipients must maintain al least 90 percent of the existing workforce through September 30 to secure the loan. Similar to what occurred during the 2008-2009 severe global wide recession, the legislation called for the U.S. government to take an equity or warrants stake in companies granted such funds.
Boeing CEO Dan Calhoun has thus far, rejected the stimulus based on the equity provisions, and is instead seeking a means to tap financial markets for additional capital. According to a published report by The Wall Street Journal, analyst estimate that the aircraft manufacturer must raise an additional $20 billion this year to cover debt service, customer and supplier support needs as well as to complete a previously announced joint aircraft development and sale venture with Embraer.
Additional industry reports indicate that Boeing is expected to soon announce far lower production rates for 2020 and subsequent years.
While all of this is occurring, major suppliers are also responding with their own financial measures.
Last week, the Wichita Eagle reported that thousands of Spirit AeroSystems employees in Wichita are being furloughed without pay for three weeks, according to a company email obtained by the publication. Reportedly, the bulk of the company’s operations directly supporting Boeing’s airframe component needs will be placed on 21-day suspension starting this week. Beyond temporary layoffs, some salaried workers will have work weeks and paychecks cut to four days a week indefinitely, while Spirit’s U.S.-based executives and board of directors will take a 20 percent pay cut until further notice.
Aircraft engine manufacturer General Electric earlier announced that the company is furloughing upwards of half of its U.S. manufacturing workforce for four weeks, citing industry impacts caused by the coronavirus pandemic. The move came shortly after the company furloughed up to half of its maintenance and repair employees for a period of three months.
More than likely, other such announcements will follow from other Boeing suppliers.
Europe based Airbus is further challenged by production workforce and supply network shortages that continue to cascade across Europe and other global locations.
The aerospace manufacturer announced last week additional production suspensions in Germany and in the United States, in addition to prior announcements of production pauses in France, Spain and in the United Kingdom, in response to an industry-wide slowdown triggered by the coronavirus crisis. The U.S. suspension includes the plane maker’s A220/A320 manufacturing facility in Mobile, Alabama.
According to the plane maker, these actions were taken in response to several factors related to the ongoing COVID-19 pandemic including high inventory levels in the sites and the various government recommendations and requirements which impact at different stages of the overall industrial production flow.
The Toulouse-based aircraft builder further received approval from the Board of Directors to secure a new credit facility, amounting to $16 billion (€15 billion) with another $3.2 billion (€3 billion) of revolving credit facility. With the decision to convert the unused credit facilities, the company is estimated to have $32 billion (€30 billion) of liquidity from the previous sum of $21 billion (€20 billion).
Furthermore, the company has suspended its 2019 dividend payout of $1.93 (€1.80), which amounts to approximately $1.5 billion (€1.4 billion), and its voluntary top-up in pension funding. Additional cost-cutting measures have been identified and would be activated if the situation of the outbreak of the virus deems necessary to do so.
Last month the company suspended its near-term 2020 delivery guidance due to the coronavirus crisis.
Aircraft Demand Picture Moving Forward
With many international and domestic airlines now experiencing drastic reductions in air travel, the implications for ongoing demand for delivery of previously ordered new aircraft is very uncertain, and likely drastic. In addition to upwards of 400 grounded 737 MAX aircraft, there are now literally thousands of operational aircraft now parked on storage runways due to the drastic decline in airline business and leisure vacation travel. The only aircraft that are still flying are those required to maintain critical service, and those dedicated to ferrying critical medical and other high priority supplies.
Industry publication Aviation Week has cited a Jeffries forecast published at the end of March indicating that aircraft deliveries could fall upwards of 70 percent year-over-year in 2020, with 2020-2023 cumulative aircraft deliveries estimated to decline 60 percent, depending upon airline industry demand and financial health. Analysts at Vertical Research Partners are cited as forecasting market demand as 6300 new aircraft over the next five years as compared to a previous forecast of 8300 aircraft, a 25 percent decline. Surely, industry forecasts will remain in flux for some time as the overall commercial aviation industry attempts to adjust to some form of a new normal in airline travel.
Thus, with one Black Swan event, an entire industry’s product demand and supply networks have been disrupted and the implications are looking to be far reaching, extending to month in the future.
The two dominant manufacturers are both impacted, one that entered the disruption with a previous disruption with sever financial impact, the other on a literal production ramp trajectory to meet multi-year order backlog.
With one event, all has changed, and an industry that plans on 5,10- and 20-year product demand, development, manufacturing, and fleet maintenance planning is thrust into much uncertainty as to the end state of demand, supply, and of industry players.
The implications for global economies and global supply chains are significant.
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