Jerome Bouchard
Our aerospace industry is strong, is resilient.
Narrator
The Velocity Podcast is brought to you by management consulting firm, Oliver Wyman. This episode features Jerome Bouchard and Ken Aso as they return for the third edition of Aerospace Recovery Post COVID-19. If you haven’t already, have a listen to part 1 and 2. Thank you and we hope you enjoy the show.
Ken Aso
Welcome to the Oliver Wyman’s Velocity podcast. I'm Ken Aso, a partner at Oliver Wyman, and I'm also joined by Jerome Bouchard, delighted to be continuing the conversation around the aerospace recovery following COVID-19, with my good friend, Jerome. Jerome, you are also a partner at Oliver Wyman and based in Toulouse, France. How are things going?
Jerome
Well, thank you Ken and first of all, that's great to hear you on this podcast. Indeed, I am in Toulouse as you know and well, I’m not sure the morale is as high as I would expect but things are going relatively well, and how about you Ken, you are in Seattle?
Ken
Yeah, it's fun that you live in Toulouse, and I live in Seattle, two great aerospace cities. In Seattle, obviously, it's just been an unprecedented year like every other city around the world, particularly during the spring and summer months. And of course, within aerospace, it was just hit tremendously. I'm reminded that Seattle is a different city than it was in prior decades because the tech industry now is such a force in Seattle the Puget sound area, Microsoft, Amazon, and other businesses headquartered here and insurance, retail and services. It has been lights out for many of these industries that has really helped to buttress the economy and insulate things here in the region. How about yourself? What has life like in Toulouse over the Spring, Summer and Fall?
Jerome
Yes, I wish I could tell the same about the diversification of Seattle. Here in Toulouse, the truth is that city is heavily depending on aerospace, of course it’s not only the commercial aerospace, here in Toulouse we have a lot of satellite industry. We have different industry as well as although aerospace is really the heart of the economy, we have not been that badly hit and since Airbus is a large company and that the French state has been quite lenient with subsidies. Overall, the economic situation is okay. The question that we will touch base on the podcast is when and how fast and which altitude we will recover but certainly we have a high confidence in the aerospace industry capability to regain altitude and to come back to a certain cruise maybe not the one it had just before the crisis. Definitely, to move out of this turbulent area that we are in at the moment. The previous podcast that Ken and I hosted was recorded in July 2020 so I am happy we are able to connect again and take a look at the issues the aerospace industry faces today and how our interpretation of the pandemic crisis have evolved since then.
Ken
I couldn’t agree more with Jerome. And I'm looking forward to an interesting discussion as well. Following a recent Oliver Wyman survey, we're also going to be covering the changing attitudes for travelers and just how confident and comfortable they feel, getting back into the skies. I'm excited to talk about this because this is the second in a series of traveler sentiment surveys we have conducted. And this one being 4 or 5 months, following the first one that we did in around May, with very interesting evolving results.
Jerome
Then we will discuss the short and long time airline traffic recovery scenarios and compare the implication and contrast between an accelerated or prolonged recovery.
Ken
We will also touch upon our in-service fleet forecasts and retirements and the challenges for the aerospace supply chain dealing with profound mismatches between its production schedule, and customer demand.
Jerome
Then we will discuss the MRO aftermarket. Well Ken, it seems like we have a very robust discussion ahead. It’s certainly remarkable to see how the aerospace marketplace has reacted to the crisis. Let’s start discussing the overall airline situation, Ken. As you know, we are tracking very closely the traffic figures and forecasts with our IATA partnerships, and the figures we are seeing are, of course, better than in April where we were at something like minus 76% off ISM overall. But still, there are not great, still down by 58% from 2019 year to year figures that’s in October. But, there is a lot of geographical disparity in the global average. Would you like to comment that for us Ken.
Ken
Yeah, it is interesting and also somewhat painful to see that the recovery is going a lot slower than our optimistic model that we shared in the spring. It's now an accepted fact that we're not going to be seeing a V-shaped recovery more like a U-shaped or an elongated U-shaped recovery, that's much more realistic now. And that’s of course, unfortunate for both the aviation market and for aerospace manufacturers and suppliers as well. What's interesting to me is that as of today North America and Western Europe are in similar places. They're both down dramatically in terms of traffic. But in China, it’s interesting to see how they are progressing. And I guess using the metric of flight hours globally, we’ve seen about 6 million flight hours per month over the last one and a half years. And since the April bottom where it was about 75% down, flight hours have increased and specifically in China, we've already seen 99% of the fleet recovery and 93% of the utilization recovery in terms of hours, as measured in flight hours against the regions 2019 average. So, we are seeing some signs of recovery in accelerated recovery around the world despite the fact that in North America and Western Europe, it is and will continue to be slow. Moving on to our traveler sentiment survey, Jerome any initial insights and observations around the second survey.
Jerome
Well, I think the main insight is very positive for our industry Ken, that more and more passenger are comfortable traveling. So, that's good. And across all regions, we are seeing some increase by 7 to 10 points on being comfortable traveling. And along that taking a flight provides lets say the most comfort to people who are traveling and that’s a very good news for our industry and for the airlines. The other point was about special air filtration, do you want to tell us a couple words about that Ken.
Ken
Yeah, Jerome. It was interesting that 91% of our survey respondents selected cleaning related safety measures in the top three. Surface cleaning, special air filtration that comes on board the aircraft as well as policies including mandatory mask wearing onboard. These are really important safety measures for the airline ridership. Producing proof of negative was actually far lower, only 23% said it was among the most important safety measures, is very interesting to see that.
Jerome
Well, Ken, it's time that we touch a very important element of airline recovery. Could you tell us Ken which are our main scenarios most likely to be happening.
Ken
We have an amazing market intelligence and forecasting team led by Ian Reagan and it's something that we do as a firm a couple of times a year. But in a case like this given COVID, the team actually revised and revisited the underlying assumptions of the forecast many many times in 2020. I think we're still in the middle of it, frankly. But our best guess, even at this point, is really a full-fledged recovery will be sometime in the middle, to the end of 2022. We've also developed recovery scenarios around the 75% level, and the 90% level as well, which we believe will materialize sometime around late next year, with some variation from region to region. But in terms of returning to pre-COVID levels, it’s going to be several years. There is going to be some regions that lag back and of course, some regions like we mentioned before like China that are going to be reaching those levels ahead of time. And it will be later from the standpoint of aircraft production versus airline traffic that I just mentioned. But I think the baseline for what we believe as a firm it's going to be another couple of years before we reach the recovery. What are your thoughts on that Jerome?
Jerome
I agree with you Ken. I think, unfortunately, our perspective on the airline traffic recovery have shifted a bit since the last time we talked. I do agree that unfortunately, we will not come back to 80% of the 2019 airline traffic before 2022, that’s for sure. And that above this 80%, the road to come back to 100% of what was 2019 traffic would be long and relatively flat. So, of course, region by region, as you were mentioning Ken, we will have some diversity. Asia and China have already picked up a lot of growth and are back on track but the rest of the world, is a sort of lagging behind. But still, I think there are a few certainties on that, its domestic flights and shot haul flights will be the first one to recover and long-range will take definitely longer.
Ken
Yeah Jerome. I think that's spot on. And I think that from a wide body traffic standpoint, it is just been a lot worse. Of course, international travel is very difficult to do these days without a passport of a native country to your traveling to. Borders are just simply closed right now by enlarge. And so that is an unfortunate consequence for wide body traffic because that’s of course, the most lucrative segment for air travel for operators. But we are on a of swing, particularly a narrow body, and we’re seeing a lot more domestic travel picking up across all regions of the world. I guess that leads me to a question Jerome, what is your opinion, have we reached the bottom of the cycle? And are we on the upswing, or do you feel like there is more fall out to come?
Jerome
I think we have reached the bottom at the very beginning of the summer, and I hope from what I see this is already confirmed, we will never come back to levels like - 75% of traffic. I was hoping that after the summer break, we were on a slight increase of traffic still maybe like a plateau due to winter IATA season, unfortunately, at least from a Europe perspective that is not happening. And we are seeing a very small and light W-shape to take place but that’s only in Europe and largely compensated on a global basis by China and Asia. But, definitely we have a stable airline traffic expected until the next IATA season, which is March April 2021. Do you have a different perspective, Ken?
Ken
I do feel like we've hit the bottom, particularly from the standpoint of global aviation traffic and in the in-service fleet. Beginning of 2020, we had almost twenty-eight thousand aircraft in the in-service fleet and at the worst of it, which was April 2020, the in-service fleet with only twelve thousand, five hundred aircraft. The vast majority of the airplanes were parked in that month. And since that time, we’ve seen the bulk of those aircraft return to service. In the springtime, we were projecting, that there would be well over two thousand, four hundred aircraft that would be retired early over the course of 2021. What are the implications of early retirement this year as a result of COVID?
Jerome
I believe that this aircraft are flying less than what they used to be flying before the COVID, the number of cycles per aircraft is more limited than what it used to be. My overall take is yes, the in-service fleet is growing and recovering, still if we take a 10-year perspective and look at what would be the forecast for 2030, we’re still saying that five thousand aircrafts more or less will not be produced over the decade. And that’s a direct effect of the COVID situation. So, our industry will still be growing but it will grow slower-than-expected and it will not be recovering as the volume that we had originally expected in 2019. If we take a look at the mix of aircraft retired, we clearly see that the prediction of retirement of long-range aircraft, especially four engine aircraft, has been confirmed. Do you want to tell us a bit more about the mix of retirement, Ken?
Ken
Yeah. The retirements are less than what we originally estimated. It's clear that it's going to be huge year for retirements with implications, for part outs for these services or material, which also had implications on how airline's and MRO’s look at material consumption in their preferences across material types. There is also a lot of downstream implications particularly in the aftermarket around distribution MRO and then material choices. We look at it in terms of wide body versus narrow body split. And it’s clear that from a wide body standpoint, they’re being hit much worse just because the percentage of wide body aircraft that are retired is much more significant relative to the base. There is one bright spot there in the cargo market, cargo traffic of course, is growing and sustaining the industry quite well. And so, for 767, 830, 777 and other freighter aircrafts seen that is a bright spot. You also see there is a significant hit for the A320 and the 737. We’ve seen significant early retirements in 2020. And as a result of that, we're seeing a lot of challenges, in terms of pricing for new services or material availability or resourcing material. There also certain classes of material where the demand has always been pretty significant. And so there are some small segments of the market that are sustaining their traditional pricing levels. But in general, we are seeing lower USM prices and there’s frankly, a lot of compounding issues across the aftermarket, unfortunately.
Jerome
Let's stay on the using serviceable materials Ken, because I know that's a topic of choice for you. We had a publication that expected a tsunami of using serviceable material parts. Do you see that wave coming in?
Ken
It has become clear that a lot of airlines are delaying decisions to officially retire the aircraft from the fleet permanently and are choosing instead to have their aircraft parked on a long-term basis, preserving the optionality while they wait for a potential market recovery. PPE and other government forms of support help to create that optionality. But eventually, those aircraft will be retired. It will have an impact over the next two or three years. And many of the USM Specialists are preparing to aggressively require engines and hold aircraft over the next months to years, when they expect a lot of material to come onto the market. We also have assessed the potential mismatch in airplane productions and airplane deliveries to challenge aerospace supply chains. I'm wondering Jermone, what you're seeing on that.
Jerome
Well, there is definitely a mismatch Ken and there are a lot of whitetails that are both by Airbus and Boeing of course. We estimate the number of those whitetails at about two hundred and fifty aircraft. That’s what we can see on the market and across the two main manufacturers. This gap between production and delivery will of course, be compensated in the years to come. So those whitetails will be progressively introduced into the delivery system. And that will take up until 2024 to actually clean the backlog of these whitetails. But, more interestingly, we are seeing that the delivery situation of Airbus and of Boeing is quite different at the moment. Airbus is now for the month of October, seventy-two deliveries which was quite unexpected back in spring when we were talking together and that you're very good performance of course. The Boeing side is a little bit more challenged at the moment and that may start to give some early signs of exiting the crisis in better condition for the European player rather than the US player. Very early to claim who's going to be, you know, leading the recovery at that stage. But, those early signs are here.
Ken
Let's talk a little bit about the long-term consequences, Jerome. Airbus has forecasted to maintain its status as the market leader for aircraft deliveries throughout the decade. What do you think are going to be the implications for the Airbus versus Boeing as well as for their broader supply chains?
Jerome
The first one I could mention is there could be much fewer programs that actually produce and deliver so, the main deliveries will be the 320 family for Airbus with the 321XLR that will over the decade will become one of the bestseller of their commercial aviation world wide. I see also a lot of consolidation for Airbus wide body around the A350 900 most probably and of course, there is the A220 largely produced as well in North America, for this market that will become a strong seller in the Airbus portfolio. I think that the rate of production for Airbus will be quite re-ramping up soon. Because if we take the official figures that were claimed, we would be over 500 single aisle expected to be delivered in 2021. So we’ll see if that prediction materializes but that will be already a game changer for the supply chain because obviously, ramping down as they ramp down in 2020 and re-ramping up to rate 47 for the second half of 2021, on the Airbus V20 will be a huge challenge and that will question the sustainability and resilience of this actors because as, you know very well Ken, in our industry the stop and go is very bad and very difficult to manage from an industrial and a financial standpoint. And what are the US and North American perspectives on the same question regarding the supply chain and its sustainability over the next years?
Ken
Yeah. Particularly for the North American supply chain that is very Boeing centric, there is a lot of concerns because of course, the Boeing supply chain was much more heavily exposed given the situation associated with a 737 Max in 2019. And so, one analysis was a chart on global deliveries of aircraft over the next decade and in the past decade and the industry has in the past has been a duopoly where Boeing and Airbus have each enjoyed around 40% share each with the remaining fifteen or twenty percent shared among all the other OEMs. But, its clear that Airbus is forecasted to maintain its status as the market leader for new aircraft for the next decade. And what striking to me is that Boeing will have less than 20% of the total deliveries for the first time ever, ever in 2020. And over the next 10 years, Boeing will maintain probably around a third of the market share with 50% of market share for Airbus, and the remaining 15, or so percent shared by all of the others, over the course of the 2020’s. Well, Jerome, it looks as though this may be all the time that we have for today. It's been wonderful speaking with you. And I personally hope that when we record the next Velocity podcast, we will be pointing out green shoots and new areas of growth for the industry.
Jerome
Absolutely Ken. We want to conclude on a very positive note because I am conscious that we have not always brought some good news to our listeners today. But our aerospace industry is strong, is resilient, it’s a global industry, people will need and like to travel. I am sure that traffic figures will go up again and consequently, the industrial side, the aircraft manufacturing and the positive impact on the supply chain. So, I’m very optimistic in the need into long-term. Thank you, Ken, for this discussion. It’s always a pleasure to exchange, compare our Toulouse and Seattle perspectives.
Ken
Thank you so much. And if any of our listeners would like to cover any specific topic, please do get in touch. We were delighted to hear from our listeners following our previous episodes. Thank you for writing into the show and in the future, you can contact us at Oliver Wyman on Twitter and LinkedIn. Thanks. Speak soon
