- Covid-19 crushes demand for air travel & planes
- Impact on Boeing
As the world battles the spread of the global pandemic, it is virtually impossible to look anywhere and not see how it has impacted our lives, homes, communities or workplaces. The impact of the Covid-19 pandemic is evolving by the very minute. With social distancing being advised by governments globally and travel bans imposed by several countries, commercial aviation has taken a hit like no other. ICAO’s (International Civil Aviation Organization) air travel forecast projects a drop of 1.2 bn travellers and US$ 160-253 bn in revenue losses in 2020 for the global air travel industry.
The worst-hit regions in terms of air travel are set to be Asia-Pacific, North America and Europe, also considered to be the dominant engines of air travel growth. Airlines around the world have parked hundreds of their planes and are deferring orders for new jets, in effect exacerbating a more difficult time for aircraft manufacturers such as Boeing and Airbus. The situation is further worsened for Boeing, which had already been struggling with the global grounding of its 737 MAXs from March 2019 and since then been grappling for certification from the FAA (Federal Aviation Administration). As is common knowledge, a design flaw in the flight’s antistall system in Boeing’s now infamous 737 MAX compromised the safety of travellers while resulting into two crashes spread across 5 months (October 2018- Indonesia and March 2019- Ethiopia) and taking lives of 346 people. Further, Boeing has so far been unable to get its much sought-after certification from FAA allowing the 737 MAX to hit the skies again. It is estimated that the global grounding would likely cost Boeing approx. US$ 20 bn in penalties to customers, added expenses and advanced payments to keep its expansive supply chain running.
In a recent blow to Boeing, China Development Bank Financial Leasing Co., a Chinese leasing firm, cancelled an order for 29 737 MAXs worth close to US$ 2.9 bn (based on list prices). This comes after another firm Avolon Holdings Ltd., cancelled an order for 75 jets, a deal worth US$ 8 bn and General Electric’s leasing division cancelled an order for 69 jets worth US$ 6.9 bn. While Boeing desperately needs cash, airlines and leasing companies are instead holding onto theirs with virtually no revenue coming in for them. In another development, Boeing recently terminated a deal worth US$ 4.2 bn that would’ve given it control (80% stake) over Embraer’s commercial aerospace operations.
In an attempt to save cash, the Company is now offering its employees a voluntary separation program. The company has also suspended share buyback program as well as dividends. In addition, President & CEO, David Calhoun along with board Chairman Larry Kellner, are said to forego pay for the rest of the year 2020. Boeing announced recently that it planned to lay-off about 10% of its workforce in its civil aviation unit that could result in a job loss of approx. 7,000 jobs. Boeing, in fact is set to cut the production of its 787 model by almost 50%, thereby bringing down its target of 14/month down to single digits and is even lower than its earlier estimation of 10/month. This comes after the manufacturer was forced to temporarily halt production at many of its facilities over the coronavirus concern. On April 10th, Moody’s (a debt ratings agency) downgraded Boeing’s rating to Baa2 from Baa1, based on its expectation of the aerospace giant facing “additional strain” on its balance sheet over the next couple of years owing to the “harsh impact” the Covid-19 pandemic will have on demand for new aircrafts coupled with the likely potential for order cancellations or deferrals. Johnathon Root, a Moody’s analyst, said in a statement “The coronavirus is likely to become a significantly greater pressure point on Boeing than the long-running 737 Max crisis. We now estimate external funding needs in 2020 to at least double to $30 billion compared to our pre-coronavirus expectations”. Boeing has in fact asked for US$ 60 bn in government aid for itself and its supply chain, however it is yet to see how much of the Congress approved US$ 2 tn. coronavirus relief package the industry is set to receive. Reeling with issues at multiple fronts, Boeing’s stock movement also spiralled downwards with the stock falling by over 50% in the Jan-March quarter alone.
While prior to 2020, air traffic had been growing on an average of about 5% each year, an estimate now by Rob Stallard (analyst at Vertical Research Partners) suggests it could take up to 7 years for commercial air traffic levels to match up to 2019 levels. With more than half of the global fleet parked, the impact of Covid-19 has far exceeded that of any other event in history including the 2002 SARS outbreak or even the 9/11 attack. With the situation ever evolving due to the presence of plenty of unknown elements, the future of the aviation industry will depend on what sort of recovery leisure-travel will witness and how would business travel be impacted with an uptick in video conferencing? With air travel expected to almost entirely disappear for the rest of 2020, this situation seems deeply problematic for aircraft manufacturers in the commercial aviation industry, especially for Boeing, who in addition to woes from the MAX grounding, could likely be looking at successive order cancellation from clients wary of the long-term impact on travel due to Covid-19