A renewal of the aviation industry? (episode 4/4)

This article proposes a non-exhaustive overview of the air transport actors’ situation (limited to commercial aircraft > 100 seats), before, during Covid-19 pandemic, and then starts to identify how the sector could recover.

To ease reading, we propose a series of 4 episodes. Here is episode 4, the last one: how the sector can recover. If you missed the previous episodes, here are the links to episode1, episode2 and episode 3.

As the situation is quickly evolving, the figures reported in the article may change after its publication.

In the previous episodes, we have seen that the whole civil aviation sector (airlines, lessors, airports, MROs, aircraft manufacturers and their suppliers) will suffer very strong aftermaths from the Covid-19 pandemic with a major worldwide economic crisis. For aviation, it means market fall, limited airplanes capacity usage, potential bankruptcy of the weakest or smallest actors, stronger competition, jobs disappearance… 

After containment, what’s next?

The lockdown removal is being organized, if not yet effective, by governments in several countries following the local control of the covid-19 pandemic. As soon as the restrictions will be removed, the global economy will restart strongly to recover the gap. Airlines will especially try to relaunch as much as possible flight routes following the lockdown removal pace, with a reopening probably occurring first at regional level, then at national level, then between countries at continent level (like within European Union) and finally between continents.

Clearly, the recovery pace will certainly not bring us back quickly on the trajectory we had before the pandemic:

• First, even if airports and airlines are setting and tuning very smart sanitary measures, it will take a while before passengers feel psychologically at ease to embark on a plane. One can imagine that this fear may last until a remedy or a vaccine is available
• In addition, business trips, representing 25 to 30 % of passengers and more than 50% of airlines revenues, will certainly be reduced, both for costs reduction and because containment period showed that homework is finally quite efficient
• On top of that, people might start to change their tourism habits and might not consume aircraft travel as much as before for distant trips for economic reasons.
• This decrease of tourism aircraft travel would stack with the environment protection movement within societies like in Scandinavia. Consequently, the intercontinental flight lines relying on bigger aircraft will take more time to restart than continental trips, which will benefit first from the post lockdown “spring”
• Then, the globalization could certainly slow down as countries set-up protectionism regulations in a direct sequel of recent economic warfare between USA, China, Europe… Relocating primary critical industries will certainly be a visible consequence of the globalization slowdown. These new trends might have impact on air traffic level related to freight
• Governments aids will also mean counterparts that might reduce the freedom and slow down decisions to relaunch aviation as it was before. We can see that for Air France-KLM financial support by France and Netherlands governments is conditioned to the company to be one of the cleanest airlines in the world in the coming years. For example, French government already asked Air France to reduce their domestic flights when a 2,5 hours train line exists as an alternative, at the exception of transfer flights through Paris Orly and Roissy for longer trips.
• Finally, pessimistic projections estimate that up to 25 Million on 65 Millions jobs in the aviation sector (from manufacturers up to tourism agencies) are threatened all around the world, which is quite a radical view.

How to be prepared?

All the civil aviation actors need to prepare different scenarios addressing: 

• Sales & Operations (S&OP) planning: ability to assess the demand and to ensure the right balance between workload & workforce and more globally between revenues and costs (both recurring and non-recurring)
• Supply chain securing and redesign if needed, taking into account dependency level from foreign countries that might lead to re-localization
• Review the Make or Buy strategy
• For pure players, envisage or accelerate diversification to other sectors and/or to other stages of the value chain 
• Identify and retain key/core knowledge and skills, both internally and externally 
• Keep some investments to have the ability to prepare the future of aviation sector, and not miss the train (or the plane...) when this will come. This means smart Value to Cost approach so as to keep some innovations at mastered costs
• Not forget continuous improvement on all the company processes
• And more transversally, take advantage of this situation to review management practices, work organization, remote Agile working mode, digital transformation...

[Short aside] Here is a good occasion for us... ?? to remind that Mews Partners offers tackle the above topics. If you need further information, you can consult Mews Partners’ expertise: https://www.mews-partners.com/expertises/ 

Global conclusion: A new hope 

Realistic projections estimate to 3 years the time to recover 2019 traffic level and 10 years the same yearly increase rate. 

During this period, many things will change.

A first big change of Covid-19 may be the way to travel. We might see the emergence of smart airports with improved boarding process (e.g. able to detect fever on travelers before embarking or at arrival, to control people pre-flight good health certificate, to check up-to-date vaccines…). Also, inside plane, passengers may also act differently like with a limitation of contact with cabin crew, and for next months the obligation to hold a mask.

At company level, the aviation market equilibrium will extremely evolve. The aviation “winter” just started by covid-19 will come with massive job loss, financial difficulties, stronger competition for the actors, even bankruptcy for the weakest and most certainly merge & acquisition. The airlines are likely to be the most visible companies to disappear or to be merged. National champion companies will need to be financially sustained. This is already happening for Airlines or manufacturers that the countries cannot allow to let die. The governments have started to inject massive cash thanks to loans, investments, or even maybe partial nationalization of these champions.

As Societies willingness to address pollution and to fight global warming is increasing, the government helps to airlines or manufacturers may be the right justification to engage companies to a greener philosophy. Though this environmental trade might not be activated everywhere, like in the US for example… So, the ecological trend shall be accelerated following the Covid-19 crisis. At short term, the aircraft manufacturers will probably continue to work on kerosene consumption reduction. But, at mid-term, the current oil prices shall rise again, knowing that the oil reserve are not infinite, and that the cheapest extractible reserve will not allow to sustain demand in a longer time horizon. Thus, the need to find an oil free / carbon neutral alternative Aircraft will also be pushed, on top of social pressure. As announced by Airbus mid of 2019, the next revolution in the aircraft industry will be the emergence of Green Aircraft for mid of 2030. Big investments are necessary to mature the technologies like electrical engines or energy storage within the aircraft with more efficient power/weight ratio battery… The current situation is clearly the right time to bring a boost on such investments and to get rid of the fossil energy foundation of the sector and thus act against global warming. And why not even imagine developing new airships, fitting perfectly with the willingness of people to use less carbon-based aircraft product, and to slow down the travelling pace, enjoying landscape like in train or in boat cruise?

It is time to conclude our series of 4 articles. As every crisis in the history, the economy will rise again. There will be sweat, tears and blood, but from all of this can emerge a new direction. This direction should be the GREEN one! Its rising is a matter of political and society decisions that will prepare the sector to be more resilient to potential future events. Politicians, CEOs, consumers, it’s up to you to bring this future alive!

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 This episode is the last of the series of articles that were all written by Jean-Baptiste Didiot (Associate Partner at Mews Partners), Nicolas Lambert (Senior Manager at Mews Partners) and Fran?ois Vergnet (Manager at Mews Partners).  

We hope you liked them, contact us if you want to exchange more on the topic. https://www.mews-partners.com/en/secteurs/aerospace-defense/