Commercial aerospace could remain challenged, while the defense sector is expected to be stable, according to an analysis by Deloitte.
The commercial aerospace industry could remain challenged, while the defense sector is expected to be stable
The commercial aerospace industry has been significantly affected by the COVID-19 pandemic, which has led to a dramatic reduction in passenger traffic and, in turn, affected aircraft demand. As a result, the commercial aerospace sector is expected to recover slowly, as travel demand is not expected to return to pre–COVID-19 levels before 2024. The defense sector, on the other hand, is expected to remain stable in 2021, as most countries have not significantly reduced defense budgets and remain committed to sustaining their military capabilities. However, given the disruption in the complex global supply chain, some defense programs could face minor cost increases and schedule delays in 2021.
A slow recovery in passenger travel may affect aircraft deliveries and industry revenues
Commercial air travel is gradually recovering, albeit at a slow pace, with global passenger traffic substantially lower (-70%) in November 2020 compared with a year ago. Capacity levels also declined year over year in November 2020 (-59%), while load factors decreased to 58%. The continued impact on passenger demand is expected to result in a 61% decline in passenger numbers in 2020, with an expected rebound in 2021 (+56% year over year). Despite the rebound, passenger traffic will likely remain about 38% below prepandemic levels. An effective vaccine against COVID-19 could result in short-term growth in passenger traffic, driven by pent-up demand. However, this is unlikely to offset the ongoing damage to lucrative business travel, which may take two to three years to recover, as virtual meetings are expected to continue to substitute in-person meetings for a prolonged period.
Passenger traffic may not return to prepandemic levels before 2024. This would negatively affect order books and deliveries for original equipment manufacturers (OEMs). In 2021, global commercial aircraft deliveries are estimated at 950 aircraft, a decline of 41% from 2018, the peak year for deliveries. Though the commercial aircraft order backlog stood firm at about 13,421 at the end of December 2020, it was down 8.7% from the peak backlogs of about 14,700 at the end of 2018. Apart from commercial aircraft, deliveries for rotorcraft are also expected to remain nearly 15% below prepandemic levels in 2021, at 750 units. As new orders are likely to remain subdued in 2021 and airlines continue with order cancellations, aircraft backlog could decline further. Moreover, OEM rate reductions would continue to adversely affect the extended commercial aerospace manufacturing supply chain, especially the mid-to-lower-tier suppliers which may struggle due to lower earnings and cash flows.
The pandemic has resulted in certain behavioral changes among passengers, with an increased focus on short-haul and domestic travel. In 2020, average air travel trip length was expected to drop by about 8.5% globally—the International Air Transport Association (IATA) does not expect a return to prepandemic trip length levels before 2025. According to Deloitte research conducted in January 2021, 81% of consumers surveyed said they are unlikely to take a domestic flight for leisure in the next three months, and 89% responded they are unlikely to fly internationally in that period. These changes in consumer behavior could result in higher demand for narrow-body aircraft, which is likely to lead the path to recovery over the medium term.
Due to expected lower aircraft utilization rates, the sale of aftermarket parts and services could also remain weak, especially as airlines delay discretionary maintenance or upgrades to conserve cash. This is likely to have a disproportionate impact on profitability, as aftermarket parts often have higher margins. However, the overall impact on aftermarket services is likely to be lower, since the actual number of flights was down only 42% year over year in 2020, compared with an estimated 61% decrease in the number of passengers.
Read the full report at https://www2.deloitte.com/us/en/pages/manufacturing/articles/global-aerospace-and-defense-industry-outlook.html
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