The COVID-19 pandemic has led to a significant reduction in passenger traffic, negatively impacting demand for new aircraft and utilization rates of the existing fleet. These trends have significantly affected aircraft orders and deliveries, which directly impact commercial aerospace original equipment manufacturers’ (OEMs’) topline and the extended supply chain. Also, lower utilization rates resulted in a weak demand for aftermarket and maintenance services as airlines delay discretionary maintenance and upgrades. Overall, the pandemic has impacted the complete commercial aerospace value chain — from OEMs and their suppliers to aftermarket providers.
Commercial to Recoup Slowly
In November 2020, passenger traffic was down 70%[i] compared to a year ago as the industry trails far behind recovery, given the resurgence of the virus and continued restrictions on travel. Capacity levels also remained significantly low compared to a year ago (-59%), while load factors were at a record low for November, at 58%.[ii] The continued impact on passenger demand is likely to result in a 66% decline in passenger traffic in 2020, with an expected rebound in 2021 (+50% year-over-year).[iii] Despite the rebound, passenger traffic is expected to remain about 50% below pre-pandemic levels and may not return to 2019 levels at least before 2024.[iv] This is especially true when considering the increasing international travel restrictions due to the emergence of new variants of the coronavirus. Moreover, even as leisure travel may recover in the long-term, it is unlikely that business travel will return to pre-pandemic levels even by 2024 as virtual meetings are expected to continue to substitute in-person meetings for a prolonged period. Travel demand reduction is impacting order books and deliveries for OEMs, a trend likely to continue in 2021. This will have a larger impact on long-haul aircraft as domestic travel is expected to recover sooner than international.
In 2021, global commercial aircraft deliveries are expected to decline by 44% from 2018, the peak year for deliveries, to about 900 aircraft.[v] Due to lower deliveries in 2020 and airlines continuing to cancel orders, the commercial aircraft order backlog is down more than 9% from the peak backlogs of about 14,700 at the end of 2018 to 13,350 as of December 2020.[vi] Apart from commercial aircraft, deliveries for rotorcraft are also expected to remain nearly 15% below pre-pandemic levels in 2021, at 750 units.[vii] Commercial aircraft backlog could further decline as new orders are likely to remain subdued in the short-to-medium term. Production rate reductions by OEMs will also adversely impact the extended commercial aerospace manufacturing supply chain, especially the mid-to-lower-tier suppliers and service providers, some of which may struggle to survive due to lower earnings and cash flows.
Narrow-Body Leads Recovery in the Short-to-Medium-Term
As a result of the pandemic, there have been certain behavioral changes among passengers, with an increased focus on short-haul and domestic travel. In 2020, average air travel trip length was expected to drop by about 8.5% globally — International Air Transport Association (IATA) does not expect a return to pre-pandemic trip length levels before 2025.[viii] Hence, the focus on domestic and short-distance travel is expected to continue in 2021, as well. According to our research conducted in January 2021, 81% of consumers said they are unlikely to take a domestic flight for leisure in the next three months, and 85% responded they are unlikely to fly internationally in that period.[ix] With domestic travel gradually opening up — and restrictions on international travel continuing — aircraft deliveries are expected to be skewed toward more narrow-body aircraft in the short-to-medium-term. This could also result in higher demand for narrow-body aircraft, which is likely to lead to recovery over the medium-term.
Demand for Aftermarket Parts & Services to Remain Weak
Due to lower aircraft utilization rates, the sale of aftermarket parts and services will also remain weak, especially as airlines delay discretionary maintenance or upgrades to conserve cash. The impact on the sale of aftermarket parts and maintenance services is likely to have a larger impact on sector profitability as this is typically a high-margin business. One of the critical challenges impacting the aftermarket business is airlines taking advantage of excess aircraft to swap out parts that need repairs. Some parked planes have high running hours remaining on an engine or other high-value part before needing an overhaul. Airlines are swapping those onto aircraft currently in use, thereby deferring the maintenance. This demand erosion could lead to larger threats to the operations of smaller aftermarket providers.
However, the overall impact on aftermarket services could be lower since the number of flights may not mirror the decrease in passenger traffic. For instance, in 2020, the number of flights was down 58% year-over-year, compared to a 66% decrease in passenger traffic during the same period.[x] While passenger traffic is expected to increase by 50% in 2021[xi], the number of operating flights may experience a steeper increase. Most airlines may see reduced spending on fleet maintenance due to smaller operating fleets. However, they may also experience incremental maintenance expenses as they delay new aircraft deliveries and retain older aircraft. Moreover, for aftermarket services providers, the conversion of passenger jets into freighters could further extenuate their business impact. In 2021, the boom in e-commerce could increase the demand for such conversions, helping aftermarket providers offset losses from reduced passenger flights.
Aftermarket service providers should capitalize on this lower demand period to improve operations and prepare for the next growth phase. By investing in and deploying digital initiatives, companies in the aftermarket space could realize benefits across inventory management, product quality and operations.
Industry to Focus on Supply Chain Transformation and Building Digital Capabilities in 2021
Since the aerospace and defense (A&D) supply base is not homogeneous, the crisis will continue to affect suppliers differently, depending on whether they focus on commercial aerospace manufacturing or the aftermarket. Suppliers that rely primarily on the commercial aftermarket are expected to experience lower volume for the next couple of years due to reduced flying hours, a glut of used serviceable material and inventory destocking.
However, the industry should likely take advantage of the pandemic and drop in demand to transform their supply chains to make them more resilient and build digital capabilities. Transforming aftermarket services by leveraging advanced technologies will be the key for aftermarket providers. For instance, using advanced analytics, predictive applications, and digital platforms to proactively monitor customers’ maintenance needs and drive customer engagement; leveraging augmented reality/virtual reality (AR/VR) to reduce the need for on-site technicians as trivial maintenance, repair and overhaul tasks are likely to be managed virtually or with minimal on-site staff, further improving field service efficiency.
[i] International Air Transport Association (IATA), “Air travel recovery delayed by the resurgence of the virus”, January 7, 2021.
[iii] International Air Transport Association (IATA), “Industry Statistics,” November 24, 2020; International Air Transport Association (IATA), “June data and revised air travel outlook,” July 28, 2020
[v] Deloitte analysis based on The Boeing Company, “Order and deliveries“; Airbus Group, “Orders and deliveries”; Barclays, “US Aerospace & Defense – The Weekly Scope.”
[vi] Deloitte analysis based on The Boeing Company, “Order and deliveries,” Airbus Group, “Orders and deliveries,” Russian Aviation Insider, “MC-21: Newest Russian narrow-body aircraft,” Ari Magnusson, “COMAC Rising: China’s state-owned aerospace manufacturer aims high,” Airline Passenger Experience Association (APEX), January 23, 2019.
[vii] Deloitte estimates and Deloitte analysis based on General Aviation Manufacturers Association, General Aviation Aircraft Shipment Report: Q2 2020, September 14, 2020.
[viii] International Air Transport Association (IATA), “COVID-19: Outlook for air travel in the next 5 years,” May 13, 2020.
[ix] Deloitte Insights, Deloitte State of the Consumer Tracker, accessed January 12, 2021.
[x] International Air Transport Association (IATA), “Industry Statistics,” November 24, 2020.
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