Assessing the Situation in the Aviation and Supply Industries
Collapsed demand for operators, production shutdowns, and associated supply chain instability
The aviation sector was already under pressure before the advent of Covid-19. Now it is suffering immensely from the pandemic’s consequences. Almost every country is affected. The passenger numbers are sinking rapidly at all airlines and the coronavirus crisis is leaving its mark on airplane manufacturers too.
It is estimated that the industry will lose up to US$314 billion (55 percent) in passenger revenues in 2020 (compared to 2019).
The estimated liquidity losses and impacts on available cash flow mean that existing supply chains must be rearranged, which will in turn affect the overall global economy. According to a BDLI study dated April 24, 2020, the high level of uncertainty has led to a forecast liquidity shortfall totaling €2.84 billion among the aviation companies studied (compared to total industry revenue of €6.2 billion).
Even the maintenance, repair, and operations (MRO) sector, which was previously performing strongly, is heavily affected by the global restrictions. Despite many airplanes currently being grounded, many airlines lack the capital required to perform necessary maintenance and repairs. Similarly, companies with new business models, for example, ones based on the provision of services (such as engine availability), are disproportionately affected by the crisis. (“Aviation Industry Facing Belt Tightening and Consolidation”, analysis article in German)
It is all the more important right now to reposition and bank on new strategies. Whether as an aviation supplier in order to react flexibly to new requirements in the supply chain and stay future-proof and competitive with a consistent, sustainable cost-reduction program. Or be it as an OEM profiting from value-chain synergies and efficiencies through merger-and-acquisition (M&A) activities, for the purpose of reducing costs and workforce size and ensuring the establishment and restructuring of resilience against future challenges.
It is unclear how long the coronavirus crisis is going to last. Some economic statements and forecasts say that it may take years until 2019 levels can be reached again, if at all. However, what is certain is that professional change management and the use of a well-stocked, tried-and-tested method toolbox can help contribute to the fast implementation of strategies and long-term company success.
That is why the focus is currently on three specific fields of action for the aviation and supply industries:
We believe there are three concrete areas of action for the aviation-supply industry:
- adaptive production system for changing circumstances
- alternative business models and industries
- cost-reduction program with simultaneous boost for the technologies of the future (e.g., AI, robotics, etc.)
1. Adaptive Production System
We believe that the adaptive production system should take into account the supply chain as an integral factor since it is clearly critical for the survival of an organization. The need for transparency is growing significantly because of the circumstances that will be (constantly) changing over the next few years (potentially two to three years). It will be compounded by the existing overcapacity and potential changes from consolidation and shifts to second sources. Efficient management and the potential adaptation of an individual production system are difficult to accomplish without transparency in the supply chain.
With looming consolidation and the associated organizational restructuring, the issue of establishing and restructuring resilience against future challenges must be considered in organizational strategies.
The post shutdown ramping up of plant production that has taken place since May 2020 is not a routine affair. In addition, the overall circumstances are completely new and unprecedented compared to previous crises (e.g., 9/11 or the financial crisis). Demand has dropped considerably, international travel has come to a virtual standstill and, on top of that, there is the public-health factor (COVID-19) that can affect anyone and already influences everyone today. This is a massive burden for the supply industry, including with the new legal hygiene regulations that are absolutely mandatory. The provision of appropriate face coverings, disinfectants, and so on must also be assessed critically during the present period, with it influencing production systems as well.
Rostering models and line balancing must be adjusted and adapted to the new coronavirus-pandemic conditions in a short space of time and discussed with works councils. In departments with a high concentration of workers, additional worker-protection measures must be implemented. Task forces are given high priority to work on obtaining complete supply chain transparency, identifying problem suppliers, and realizing short-term solutions.
2. Alternative Business Models
Actively designed stakeholder management between governments, customers, and suppliers is demanded by company leadership teams for strategy adjustment; adjustments to business models must be evaluated and implemented. This can also mean digital transformation and therefore an expansion of business models into other areas of business. It can also entail activities that require a market entry and also taking on the conditions required for approval.
Assumption: focus on stable business models first
The industry was quite indulged by the market over the last 10+ years through the continuous increase in rates and capacity. This growth climate will not continue comparably over the coming years and will instead be strongly marked by the stabilization and alignment of business models and by preparation for coming challenges and the afterpains of the coronavirus pandemic, particularly in the next year.
Another question is the instruments that can be used to protect the value chain. An aviation bond could be a potential solution here. Likewise, a further solution could be a sustainable construct consisting of a rescue company for the entire aviation industry with the objective of reintegrating later on. In this respect, it is a matter of developing a suitable, individual strategy.
Businesses that possess sufficient liquidity should evaluate potential acquisitions in order to exit the crisis strongly, however this scenario may well apply only to a few major market players. Professional change management and the use of a well-stocked, tried-and-tested toolbox of methods are essential preconditions for returning a company to success and helping implement a strategy for the medium to long term.
Operational measures overseen by the task forces safeguard the supply chains during the restart. A realignment and revision of risk management will be necessary so that supply chains have a more stable structure for similar crisis situations in the future (other types of crises and their consequences will have to be evaluated here too by “looking outside the box”). The basis should be formed by having the organization hold lessons-learned sessions and ask, “How much are crisis-defense measures allowed to cost?” Risk management considerations such as these gain fully new dimensions in light of the current financial losses. Accordingly, existing structures must be reviewed and also relentlessly stress-tested to identify any weak points and develop suites of measures based on them. There should be a clear, convincing conclusion: “Risk management after the crisis must never fade into the background again!” That is because the current entrepreneurial, financial, and geopolitical damage is simply incomprehensibly great and will burden businesses and economies for many years to come.
3. Cost-Reduction Program with Simultaneous Boost for Future Technologies
For the aviation industry, improving supply chain efficiency is now unavoidable. It can be achieved by concentrating on the relevant aspects of company transformation and end customer value. The industry-performance benchmark plays a key role in this, since this very benchmark should, as expected, (hopefully) keep optimizing itself quite quickly when faced with the above demand. It can be assumed that the performance benchmark will improve if organizations really do structure themselves to optimize costs and thus push up their cost of work and working efficiency while developing the product quality of purchased parts in partnership with suppliers.
The airlines’ cash situation must be supported by the entire value chain. The airlines’ partners, that is, the supply chain, are able to influence the focus on fleet reliability and reduction of throughput times. There does indeed exist the typical competition in this supplier domain and that is undisputed. However, social, economic, and not least also ethical considerations must be made as to whether there exists a higher goal of overall prosperity. Such a goal serves to support the entire European and also global aviation industry, by truly working together in partnership, and to “sort things out” together. The goal should be that the aviation industry develops and returns to a sustainable, globally leading position, offering outstanding transport to all sectors (industry, automotive, tourism, science, business, and many more) and people. This also requires revisiting the mindset and leadership within the sector, which can be met with a holistic approach of company development.
What is important is that future technologies are desired, sought after, and supported. It is not sufficient to rely on third parties or politicians in order to develop modern, environmentally friendly technologies. Rather, if relevant, new partnerships and forms of cooperation may also be needed and could arise as part of the looming consolidation. This aspect intersects with the subject of “Alternative Business Models”.
Now is the time for action. Now is the time to implement large-scale, lasting efficiency programs. Firstly, to produce and supply premium products and quality, and, secondly, to generate cost structures that are relatively economical, just like “budget airlines”. The next few months will show who has introduced the right measures and can profit from the restarting economy. Reducing working hours is a “quick fix” that many businesses are happy to use, though it is not at all sustainable. It is not personnel that generates costs, but rather the activities carried out by the personnel, especially when non-value-adding activities are being performed. Based on our experience realizing many projects, efficiency-improvement measures offer significant, lasting improvement and savings very quickly despite the initial costs for appropriate, value-adding advice.
Technologies of the Future
Strategic projects, including for environmental protection and ecological sustainability, must proceed at full force even with all the savings initiatives. Based on our assessment, these projects must be organized independent of business operations so that the speed of projects is not hampered by cost-reduction initiatives. Slowing down the speed can have severe, negative influences on long-term competitiveness and on higher and greater, global goals. Saving rigorously on one hand while making corresponding investments for the future on the other is a tightrope. Walking it will be a key success factor, in keeping with the motto that intelligent investing is made possible through efficient economies and the right strategy. Ingenics can be your partner to give you the appropriate help with this.