NAVEO Consultancy managing director Richard Brown reflects on a turbulent year, but offers hope for a much brighter 2021.
Aviation leaders tend to be optimists. Each dawn, they believe, promises a new start. The storm clouds will pass, they confidently say.
We are lucky that our industry is full of engineers, strategists and planners who are specifically trained to forecast and prepare for disruption and unscheduled events every day. Covid-19 though has tested the skills, patience and will of every positive thinker our industry has and made so very many of their best-laid plans obsolete.
During the global lockdowns in spring, we hoped air travel’s recovery would be well underway by the end of 2020. Back then, forecasts were confidently expecting December’s traffic to be down just 20 per cent on 2019’s levels. As the year progressed, it became clear Covid-19’s impact on air travel, production and the MRO market would be far more profound and prolonged than we had feared. The International Monetary Fund (IMF) has projected a 4.4 per cent global economic decline for 2020 – the worst since the Great Depression.
Air transport has cruelly reminded us all that it is a cyclical industry. (Those who can’t remember back to 2008 or 2001 will be forgiven for thinking the aerospace supercycle was never-ending). However, this is the first global pandemic that many of us have had to deal with, so how the MRO industry would be impacted was always going to be challenging to forecast.
Airlines, lessors, financiers, OEMs, MROs and parts suppliers continue to face unprecedented challenges, the greatest of which is the high degree of uncertainty over recovery speed. After the 2008 financial crisis, it took six to seven quarters before aftermarket growth returned, but the impact was less severe than from Covid-19.
Back then, negative quarterly results in the range of -10 to -17 per cent were reported. Compared to the -50 per cent seen in the second quarter of 2020, those seem tame. The aviation industry has had to continually adapt to changing travel restrictions, lockdowns and resurgent virus outbreaks. Planning has been challenging, with the ability to respond quickly to fleet flex and changes to travel schedules being the name of the game.
In 2019, air transport MRO spend was US$87 billion and was expected to be US$91 billion in 2020. Now though, 2020 MRO is likely to be down 50 per cent overall, with the different types of MRO activity varying between -40 to -60 per cent depending on the levers that airlines can pull to reduce expenses. Discretionary items and high-spend items, such as modifications and engine shop visits, will be deferred if possible. The MRO market is unlikely to recover to 2019 levels until 2022 or even 2023 – meaning three to four years of lost MRO revenue.
The increased retirements of aging, maintenance-intensive aircraft that would have required heavy airframe checks and third or fourth engine shop visits also reduce the material and labour hours required going forward – thereby reducing MRO expenditure for operators, but slashing revenue for OEMs and MROs.
One of the last decade’s key aftermarket trends has been the availability and increasing acceptance of used serviceable material and green-time engine management. Where possible, operators will consider using green-time engines in-lieu of an engine shop visit, surplus parts, part repair and, particularly in the cabin, PMA parts – all designed to reduce maintenance expenses.
You’d be forgiven for thinking it’s all doom and gloom. Look a bit closer, and several bright spots pave the way for 2021 seeing an MRO recovery.
Firstly, the regional situation continues to diverge. Covid fatigue in the US has helped domestic travel recover, with 65 per cent of the fleet now active. The bright light continues to be China, where domestic travel has staged a remarkable recovery – resulting in 85 per cent of the fleet being in service.
Many European countries are in a renewed lockdown, so the fleet there is the worst active one of any region (only 50 per cent active in November). Remember, even if the aircraft are active, they are often flying reduced hours/cycles, and load factors are still lower.
Secondly, the key to unsticking the pandemic is the availability and rollout of a vaccine. Suppose governments can be assured that their ICU beds won’t be overwhelmed with Covid-19 patients and that the virus is under control. In that case, they will relax restrictions that have grounded travel – particularly non-domestic and long-haul travel. Pfizer, Moderna and Oxford’s exciting news that their vaccines were found to be more than 90 per cent effective in preventing Covid-19 has caused airline and aerospace stocks to rally.
The vaccine now looks likely to be more effective and rolled-out faster than many had predicted just a few months ago. Consequently, there’s talk of a more ‘normal’ life returning after April. Enhanced passenger-testing regimes to reduce quarantine requirements will also help unstick business travel – a key source of airline profits. This provides leadership with much-needed visibility on the likely direction of travel so they can plan.
With the vaccine rollout set to begin, air travel barriers can begin to be dismantled, and the industry can finally rebuild itself. There’s now a more exact path for recovery. We need to get through the winter period, but the green shoots of recovery are there – spring and summer 2021 look to be much healthier.
We have to continue to leverage expertise, best practices and lessons learned. It’s vital your company takes advantage of the opportunities that can’t come soon enough.
*This feature is taken from the December 2020 issue of MRO Management, which you can read here.