Global outlook: Navigating turbulence to find blue skies
Commercial aerospace has faced a challenging 2019, with a combination of trade wars, deteriorating economic conditions, and the 737 MAX grounding contributing to a global slowdown in the industry.
Accenture’s latest Commercial Aerospace Insight Report reveals that year-on-year growth for the whole commercial aerospace market is expected to fall to 2.5 percent this year, a notable drop on 2018’s figure.
The global 737 MAX grounding has been a key factor. With the 737 MAX still awaiting regulatory reapproval to fly, Boeing delivered only 239 jets in the first half of 2019, a 37 percent decline on the previous year. As a result, the company posted its largest ever loss of $3.4 billion in the second quarter of 2019.
However, there are positive signs for the industry. The aftermarket continues to be healthy, driven mainly by air traffic growth and airlines keeping older aircraft in the skies. What’s more, extra demand in Europe, supported by strong growth rates in the Middle East and Latin America, is taking up some of the slack created by weaker growth elsewhere.
Furthermore, both Boeing and Airbus have commercial aircraft backlogs of more than five years, which should allow these companies to navigate any short-term order volatility, while increasing production rates should continue to drive up manufacturing efficiency and supply chain innovation.
What’s happening in commercial aerospace?
This Commercial Aerospace Insight Report also highlights some of the other important trends affecting the industry today:
- Downturn expected
As industry EBIT margins continue to decline (projected at 5 percent in 2019 down from 8.6 percent in 2015), and airline capacity growth appears to be outstripping demand, executives are bracing for an eventual market downturn. Manufacturers should not expect a dramatic increase in new aircraft orders over the next 18 months.
- Political instability risks driving up costs
Global trade disputes and retaliatory tariffs mean the cost of raw materials, sub-systems and parts could rise, while the ongoing trade war between the US and China risks derailing Boeing’s prospective 100 twin-aisle jet mega deal with Chinese airlines.
- Short-term relief in the supply chain
Boeing’s recently announced production cut should provide temporary relief for suppliers of fuselages, engines and wing parts for the 737 MAX. But elsewhere production increases (fueled in particular by US tax reforms) are putting pressure on costs and driving additional investments in efficiency.
- Boost for the aftermarket
Fewer aircraft retirements and additional shop visits for older aircraft, alongside expected overall growth in air traffic, are continuing to fuel strong performance from MRO providers. Aircraft over ten years old make up more than half of current fleets, increasing the need for maintenance and contributing to an estimated $76 billion global commercial MRO market in 2019.
What’s keeping commercial aerospace executives awake at night?
The report shows how macroeconomic risks—interest rates and general economic conditions in particular—are set to dominate industry executives’ risk planning over the next 12 months. Looking further ahead to the next two years, the risks from global political instability and terrorism are once again looming large for aerospace companies. Notably, every risk factor surveyed is considered at least a medium risk by executives across all timescales.
Sustainability top of the agenda
Environmental sustainability is now a priority for commercial aerospace. The Air Transport Action Group has set a target to reduce CO2 emissions to 50 percent of 2005 levels by 2050. And the IATA is working towards full implementation of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
Meanwhile, new capabilities like smart flight planning and electric taxi are starting to have an impact. Airlines are also showing a growing interest in hybrid and electric aircraft concepts. Startups are competing with industry giants to develop electrically propelled aircraft which are expected to disrupt urban and short-haul air transport within the next decade.
Reasons for optimism in 2020
Commercial aerospace manufacturers enjoyed a very healthy 2018, with record numbers of aircraft delivered (including over 1,600 by Boeing and Airbus combined).
As Accenture’s Commercial Aerospace Insight Report shows, however, 2019 has been a tougher year. While Airbus delivered 389 jets in the first half of 2019 (a 28 percent increase year on year), the grounding of the 737 MAX means Boeing has a significant underdelivered inventory—and has severely impacted the company’s bottom line. Weakening demand and growing political instability are also contributing to a gloomier outlook than in previous years.
However, there are reasons for optimism. Once the software issues with the 737 MAX are resolved, Boeing should be able to take its production rate back up to 52 jets per month. Production ramp ups from both Boeing and Airbus, combined with significant aircraft backlogs for these companies, should allow the industry to ride out the near-term turbulence and chart a path to brighter times ahead.
Accenture’s Commercial Aerospace Insight Report combines sophisticated econometric modeling with insights from leading industry executives worldwide. Covering a wide range of industry perspectives, from the supply chain to the aftermarket, the report provides detailed quarterly forecasts on the health of the commercial aviation market and offers a unique perspective on short- and medium-term trends and drivers for the industry.
Podcast: Commercial aerospace business forecast: Down but not out
The Boeing 737 MAX fiasco has become a punch to the gut for the commercial aerospace market this year, and when combined with China and European trade wars and tariffs, the sector will emerge bruised and scratched. But longer term, advisers still see growth and exciting changes as new technologies alter everything from how aircraft fly to how companies make money. Aviation Week Senior Business Editor Michael Bruno talks with Accenture Global Aerospace and Defense Lead, John Schmidt, and North America Aerospace and Defense Lead, Brian Legan.
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