In today's Finshots, we talk about the global aircraft manufacturing industry.
The Story
The data is clear. There are 91% fewer airline passengers this time around when compared to the same time last year. Globally, airlines are burning hundreds of millions of dollars daily, and experts have predicted that it’ll take the industry roughly 2–5 years to recover completely. And as airlines clamp down on their expansion plans, it’s bad news for aircraft suppliers as well.
As late as February this year, Boeing and Airbus were convinced they would be supplying 40,000+ aircraft worth roughly $7 trillion over the next 20 years. But if recent events are anything to go by, that outlook isn’t tenable anymore. Boeing received order for just one new aircraft in June. Airbus got none. And the single order Boeing received wasn’t even for a passenger plane. It was a cargo aircraft.
This sad figure highlights a harsh reality — there’s not much that aircraft makers can do when their customers are struggling for survival. Except, cut costs, of course.
Together, Boeing and Airbus are planning to cull some 35,000 jobs in the coming months. They are also cutting investments in research. And although they are ramping down production by more than a third, they can’t exactly stop manufacturing airplanes completely.
The problem can be attributed to the complex supply chain supporting the industry. Some of these suppliers are large conglomerates that include the likes of Rolls-Royce and General electric. They’ll tide over the crisis one way or another. However, you also have small firms that supply critical components in modest volumes. These companies usually work with a few dozen employees and very limited resources. And when Boeing and Airbus trim their order book, these manufacturers will also have to bear the burden. And if some of these suppliers do in fact shut shop, finding alternatives can be extremely challenging.
Also, this isn’t just limited to some obscure manufacturer halfway across the world. Indian companies including the likes of Hindustan Aeronautics Limited (HAL), Aequs and Dynamatic have also been impacted. HAL produces doors for Airbus’ A320 aircraft and flaperons for the Boeing 777 aircraft. Aequs delivers titanium machined parts to some of these players and Dynamatic supplies airframe structures and aerospace components.
It’s pretty bad.
But that’s not all. Airbus and Boeing also have to deal with another problem. Oftentimes, new airplanes are ordered years ahead of delivery. This makes the whole purchase journey rather unpredictable since an airline carrier could be committing to a large order during a travel boom and receiving delivery whilst battling a crisis As Bloomberg puts it.
This risks creating a dynamic that pits the plane makers against ailing carriers, as they try to get them to honor contracts and accept jets they can’t afford and don’t need. If they don’t press carriers to pay for at least some of the planes ordered during flush times, then the airframe manufacturers will have to burn more cash to keep their operations humming. But if they push too hard, they could further hobble some customers financially — endangering future sales or even driving them toward bankruptcy, jeopardizing existing contracts.
And as you can imagine, things don’t always go according to plan. Consider what happened to Boeing at the end of March. According to FT, the manufacturer was ready to hand over a brand new 787 Dreamliner to an important customer in the Middle East, when the customer threatened to call the deal off — unless Boeing offered another discount on top of the 55% discount that it had already offered on the $338 million aircraft.
Now, normally, this kind of behaviour would be unacceptable. Failing to honour the contract would have cost the customer a cool $100 million. But accepting the delivery at the quoted price would have probably cost more. Finally, however, Boeing ended up slashing the price by another 15% and they somehow managed to get the aircraft off their books even if it meant losing good money.
In fact, between April and June this year, Boeing burned through $5.6 billion in cash, while Airbus lost $5.2 billion. And unless air travel comes back with a vengeance, things aren’t going to look much better anytime soon.
Until then…
