- Covid-19 causes collapse of travel demand, hitting airlines & aircraft manufacturers
- Measures undertaken by Airbus to battle the situation
The Coronavirus pandemic has affected almost all industries across the globe, while there are a few which have been weighed down severely. Unfortunately, the Airlines industry falls into the second category. The pandemic has plunged the industry into an unprecedented crisis amidst restrictions on travel led by government regulations related to lockdown worldwide. In our previous blog, we discussed how Boeing received a fresh blow from the Covid-19 crisis, over and above its undergoing trouble due to the global grounding of its 737 MAX planes since March 2019, after the said model was involved in two consequent crashes. Though, Boeing already had a lot on its plate to handle prior to the Covid-19, however, other aircraft manufacturers such as its rival Airbus are no less immune to the pressures of the now widespread pandemic. Airbus and Boeing, who have enjoyed a duopoly for several years now, are suddenly seeing demand evaporate overnight, both due to grounding of fleet, as well as deferring and/or cancelling new orders from the Airline operators. Airbus has so far registered order cancelations for 29, A320/A321 alongside 17, A350 in 2020. In addition, in early April, budget-carrier Easyjet said it would defer the delivery of at least 24 Airbus aircrafts. While these figures are so far lower than the order cancellations faced by Boeing, future cancellations of orders seem inevitable indicating a rather grim picture for Airbus for whom defence and space account for less than 20% of revenue. In March 2020, the Company announced a slew of measures that it was undertaking to boost its liquidity and balance sheet:
- Secured new € 15 bn credit facility
- Withdrawal of the 2019 dividend proposal of € 1.80/share, with cash value of approx. € 1.4 bn
- Suspension of voluntary top up in pension funding
- Withdrawal of 2020 guidance (target of deliveries of c. 880 commercial aircrafts in 2020)
In conjunction with the above, Airbus says it has identified operational scenarios, including measures to effectively minimize cash requirements and will be activated based on further developments of the Covid-19 pandemic.
Furthermore, in order to grapple with the crisis situation, the European giant declared earlier this month that it is initiating a cut on the production of its commercial aircrafts owing to the falling demand due to Covid-19 apart from shortages on spare parts and health concerns. Airbus has cut production on its narrow-body A320s by a third equating to 40 frames per month, whilst production of its larger jets would be cut down by 42% to 6 A350s per month and 2 A330s. While Airbus had gone into the year with a goal of handing around 880 planes in 2020 (2020 guidance) or an average of 73 planes /month, it will now be looking at manufacturing around 48 planes across the 3 programs: A320, A350 and A330. Guillaume Faury, Airbus’ CEO says the company is gearing up to deal both with supply chain issues as well as deferral requests from customers. The production cut is said to allow Airbus a critical balancing act between considering flexibility needs of its customers whilst not cutting off vital income to its subcontractors. While the Company is looking at deferring capital expenditures and reducing its cost structure, Faury clarified that Airbus was not looking at closing factories, at least in the short-term.
In a statement released to its employees on 27th April, the Company warned its 135,000 strong workforce of potentially deep job cuts, with its sustainability at stake in the absence of immediate action. Airbus has begun the implementation of government-assisted furlough scheme, starting with 3,000 workers in France. Industry analysts warn, a similar restructuring plan as the Company’s 2007 Power8 that saw a job cut of 10,000 employees; could come into play this summer. In addition, Airbus is also said to be in talks with the various European governments which have come up with different schemes in order to assist struggling industries. Airbus is said to be “bleeding cash at an unprecedented level” (a record US$ 7.04 bn in Q1 2020 alone), Company Chief Faury warns of the need to undertake drastic measures with the future of Airbus in jeopardy. In line with the negative sentiment that has gripped the world, Moody’s revised its outlook to negative from stable for Airbus amidst the steep decline in travel demand and uncertainty regarding recovery of aviation industry as the pandemic drags on. The rating agency expects full-year deliveries in 2020 to be 40% below 2019 levels, based on the slump in demand for air travel and delivery delays, and returning to 2019 levels by 2022 end, thereby resulting in "sizable" negative free cash flow in the year 2020.
As per estimates from Roland Berger, one of the leading consulting firms globally, in a worst case scenario, if global travel restrictions continue for another six months, aircraft demand is set to decline by almost a half through 2030 (or c. 10,460 jets). IATA estimates that the airline industry would likely burn through close to US$ 61 bn in Q2 2020 globally, with some carriers possibly running out of cash. With new plane orders set to take a significant amount of time to recover, Airbus is going to grapple to sustain its business by employing several measures. Needless to say, it is going to be an uphill climb for the Company to merely survive, if not thrive for the next couple of years. Faury warns, “Unfortunately, the aviation industry will emerge into this new world very much weaker and more vulnerable than we went into it”.