FIFTEEN years to the day since the A380 ‘Superjumbo’ made its very first flight on the 27th April 2005 how tragic it is that in the wake of COVID-19 impact on airline customers, one that has seen aircraft order cancellations and realisation of there being little prospect of large scale order recovery any time soon, Airbus CEO, Guillaume Faury announced in a letter to employees that narrow body aircraft production would now be reduced by a third to 40 jets per month and also warning all 135,000 Airbus employees “to brace themselves for potentially deeper job cuts”.
Airbus is haemorrhaging cash and Faury says that the company’s “very survival is at stake without immediate action” being taken. If Airbus is suffering then so too are all those in its supply chain.
In the letter to staff, Guillaume Faury said that Airbus was “bleeding cash at an unprecedented speed” and that a recent drop of a third or more in production rates did not reflect the worst-case scenario. Production rates, he said, would be “kept under review” and while the company had already begun implementing government-assisted furlough schemes with some 3,000 employees in France, he said that “we may now need to plan for more far-reaching measures” adding that “the survival of Airbus is in question if we don’t act now” and he confirmed that the company was already exploring “all options” whilst awaiting more clarity on demand.
While Airbus has already expanded commercial credit lines with banks, in order to stem the outflow of cash the company had already announced its intention to slash benchmark narrow-body jet production by a third to 40 jets a month, Faury is reported to have also said that “in other words, in just a couple of weeks we have lost roughly one-third of our business and frankly, that’s not even the worst-case scenario we could face”.
Airbus CEO suggested that the new production plan would remain for as long as it took to make a more thorough assessment of demand – adding this would probably be between two and three months and that it was too early to judge the shape and pace of a recovery. He talked of there being several possible future scenarios emerging out of the COVID-19 crisis including a short and deep crisis with a fast rebound or that of a longer and more painful downturn with previous demand levels only returning after 5 or 10 years adding that “Unfortunately, the aviation industry will emerge into this new world very much weaker and more vulnerable state than we went into it”.
Of course, Airbus is far from being alone facing up to the same problem. Boeing which over the weekend has sensibly chosen to abandon its proposed $4.2 billion purchase of an 80% stake in Embraer’s commercial jet operation said in a letter written by CEO David Calhoun to employees last week that “it’s important we start adjusting to our new reality now” is also facing up to the need to further cut commercial aircraft production and potentially reduce the workforce.
With, according to analytics company Cirium, roughly 64% of the global airline fleet now parked up and the number of daily commercial aircraft flights globally down to just under 19,000 some commentators believe it may take ten years for aircraft manufacturers and airline to recover. Be in no doubt that even when some social distancing COVID-19 restrictions are possibly relaxed my own view is that airline travel restrictions are almost certainly likely to remain in place for at least the rest of 2020. Would-be airline passengers are also likely to think long and hard as to whether they really do wish to travel through airports that are hardly designed for social distancing let alone to board aircraft where one may be crammed up against the neighbouring passenger. And then there is the issue of security – just imagine the very thought of entering passport control queues at airports such as Heathrow!
My own view is that from an airline perspective the COVID-19 crisis is not only ground-breaking for all but for some, terminal. Airlines have been quick to cancel orders for new planes and they know well that there is no possibility of a quick recovery in this industry. Ryanair was reported as having said last week that it would not fly if the middle seat of three is forced to be removed. EasyJet and Virgin Atlantic are two of several UK based airlines requesting government financial assistance.
While European and Asian governments will undoubtedly provide immediate financial support to the troubled airline industry through 2020 the bigger question is what do they do after that? Lufthansa which has grounded the majority of its aircraft, announced a Q1 loss of EUR1.3 billion just last week and says that it is burning cash at a rate of $1 million per hour is an interesting case in point as it attempts this week to finalise a state aided rescue package combined with worth equity injection reportedly worth $10.8 billion in total is being watched by observers very closely.
The perception that a prerequisite of a strong national economy requires a strong and vibrant airline sector came into its own in the US after nine-eleven when for a time in the immediate aftermath, all commercial aircraft flights into and out of and domestically were grounded for a time. The result was that the US economy was very badly hit although that said, recovery was also quite fast. And remember this too – it has taken many large airlines between five and seven years to recover from the 2008 financial crisis and not all made it.
Bad enough for the commercial airline sector but the same arguments apply for airports, travel and holiday companies, hotels and the whole of the leisure industry. True, history tells us that we always recover and that will eventually be the case. Subject to the current COVID-19 crisis not being repeated next year or the year after, a degree of seeming normality will resume but as I have already suggested, the normality that aircraft manufacturers and airlines wish to see may be anything from five to ten years away.
Airlines may not even be the worst affected sector – for that I would look at the cruise industry as being potentially the one that may take in excess of at least ten years to recover if at all.
CHW (London – 27th April 2020)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785