London, 1 May 2020
As we are writing this viewpoint, the world is coming to term with the COVID-19 pandemic. Air travel is at a standstill, many airlines are on the brink of bankruptcy and Boeing, the largest aerospace company in the world, is in talks with the U.S. federal government for a bail-out.
Nobody knows yet how all this will play out over the next months and years. Of course, many of us in the aerospace community are trying to estimate how big the overall damage will be and how long it will take for the industry to get back to some level of normalcy. But this exercise is somewhat futile because in extreme, “out-of-boundary” situations like the one we are living through, standard forecasting models and usual economic models do not work anymore. It is like doing division to derive a ratio. When the denominator gets (close) to zero, the result (infinity) becomes meaningless.
And so we are left with two yardsticks: our own gut feeling and our ability to take some altitude and look at the situation from a distance to be able to see some underlying patterns or long-term trends that may emerge from the apparent chaos.
Looking at commercial aerospace this way, several things become clearer. First, one must recognize that its growth trajectory before the crisis was unsustainable, with a lot of self-deception and structural weaknesses embedded in the system. When the industry starts moving from survival to recovery mode, it will need to address those weaknesses and “reset” expectations about the future. That could be the “great corrector” effect, applied to aerospace.
A big correction could happen on the demand side. While most analyses point to a recovery timeframe from 18 months to three years (back to 2019 levels and then back to the historical growth rate), several variables could further dramatically impact the future air traffic growth trajectory. Those variables include:
Increased environmental pressure, e.g. will governments impose sustainability covenants to airlines as a condition for their aid?
Consumer behavior, e.g. will consumers travel as much and with the same level of tolerance for “poor” service as before?
Airline business models, e.g. will low-cost airlines continue to push the sector towards commoditization, or will there be a revival of a highly differentiated and segmented market?
Such variables could collectively reverse the shape of the air traffic growth curve from its historical convex shape to a concave one, as the long-term growth rate slows down significantly. In one such scenario, by 2035, Revenue Passenger – Kilometers (RPK) could be one third lower than the 15 trillion expected before the crisis. This would imply a long-term annual growth rate between 1995 and 2035 of around 3.8%, which, all things considered, would not be that bad (and would improve the odds of the industry achieving its sustainability targets), but still much lower than the pre-COVID 4.9% forecast (see chart below).
Another correction could and should happen on the supply side. The aerospace supply chain is incredibly complex and inefficient, with parts and sub-assemblies going back and forth between thousands of players scattered all over the world, partly because of history (in Europe, Airbus was first a political construction, and then became an industrial puzzle) and partly because of the bad habit of tying up airplane sales with industrial offsets. With a market growth possibly slowing down by as much as 50% in the medium-term, the time has come for all large OEMs to reset their supply chain strategy and footprint.
What is needed is simpler, more compact, and more modular supply chains with a much deeper level of cooperation between customers and suppliers. In that context, governments, which are back in the driver’s seat as they deploy their stimulus toolkit, will play a key role in setting the rules of the game, hopefully with a proper industrial strategy in mind. In fact, the way each government will intervene could well be the main driver of competitive advantage or disadvantage for their country’s industry going forward.
Apart from being a “great corrector”, this crisis is likely be a “great accelerator” as well, as it crystallizes forces that were already at play before it started. The marginalization of traditional (predominantly hardware) aerospace products in the digital economy is one of those forces. Value will migrate at an even faster pace towards software and service industries, and digital communications and AI-driven computing will replace transportation as the key enablers of tomorrow’s economic activity. This may seem far-fetched, but when people and companies will be able to do 90% of their job remotely and digitally, from controlling 4.0 factory floors to managing a fleet of mining robots, transportation systems such as large commercial airplanes will become a footnote in their ecosystem.
Above all, the crisis will likely accelerate the rise of Asia and of China in particular, with its corollary: the decline of the West, where 90% of the aircraft manufacturing industry is still located. From a competitive dynamics standpoint, it probably means difficult times ahead for the Airbus-Boeing duopoly, which shortcomings are laid bare today: In spite of their decades-old arch-dominance, blinded by their head-to-head rivalry, they just took too many long-term risks for short-term wins. The recent Boeing’s 737MAX $5 billion fiasco and Airbus’ $4 billion corruption inquiry settlement illustrate their reckless behavior.
Meanwhile in Asia, after playing Airbus and Boeing against each other and benefiting from the “laissez-faire” of Western nations, their Chinese competitor finds itself in the strongest position ever. It now has all the liquidity, the domestic market scale, the political efficiency, and the industrial capacity necessary to accelerate its quest to become an aerospace powerhouse. The West on the other hand, will likely come out of the crisis financially bled dry, industrially bruised, and politically in shambles.
In the space and defense sectors, the dynamics should be somewhat different as institutional customers are expected to play a stabilizing role, thus mitigating the impact of the crisis. However, one should expect both some corrections (e.g. few of the many planned satellite constellations should materialize – OneWeb has already thrown the towel) and some acceleration of pre-existing trends as well (e.g. “New Space” players displacing “Old Space” ones).
A looming question also overclouds the defense and space sectors: Will institutional customers (defense ministries, space agencies…) have the financial means and political leeway to keep funding their defense procurement and space programs at pre-crisis levels? This may prove difficult when so much public money and effort will be needed to rescue other economic sectors that may be given higher priorities in the wake of the COVID-19 pandemic, such as healthcare, consumer finance and education.
In any case, one can safely predict that the business of aerospace will become more challenging over the next ten years than it has been in the last ten. The aerospace industry is entering a new age, the age of resilience. It was foreseeable before the COVID-19 crisis and it is now a certainty.