When Will the Aerospace Industry Rebound from the Covid-19 Global Pandemic? (Part 3)

By Tom Captain, managing director of Captain Global Advisory, LLC

In the middle of the Covid-19 pandemic in 2020, we offered in TITANIUM TODAY a sobering forecast for a difficult recovery in the aerospace industry, and similar prospects for titanium and other raw materials suppliers. As of this writing, the Economist magazine estimates there have been 14 million pandemic fatalities worldwide, and only 5 percent of those aged over 12 are fully vaccinated. Many parts of the world are still in the grips of rising infections and additional deaths.

On the positive side, key economic drivers of the global economy, particularly in the United States, China, and European Union countries, have succeeded in vaccinating over half of its citizens, and reopened their economies. However, with every hopeful advance, there are unfortunate negative trends such as with the rise of the Delta variant, people not willing to get vaccinated, mask mandates being re-instated, and borders being closed again.

Existential Impact

As previously mentioned, this pandemic, now going on 18 months in duration, has had an existential impact, never experienced before in the commercial aerospace industry and its broader ecosystem. From airline passengers, to the airports, airlines, aircraft producers, aircraft suppliers, the hotels, restaurants, catering companies, and aircraft repair, maintenance and spare parts companies, the pandemic has created economic and employment hardship.

Global airlines have lost almost $100 billion, and still counting, and wiped out all their cumulative profits made since WWII, a statement worth repeating to fully grasp the impact. Passenger travel went from over 8.5 trillion RPKs (revenue passenger kilometers) to less than 10 percent of that level within a span of 30 days. It’s as if the world stood still.

Aircraft sales orders plummeted from a high of 2,900 in the recent past to 330 orders in 2020. Airline production went from a high of 1,600 aircraft recently to 440 aircraft produced in 2020.

Assessing Aerospace’s Rebound

However, passenger travel is recovering, especially in the domestic markets. As of this writing, domestic airline passenger enplanements have almost returned to their pre-pandemic levels, about 75 percent globally, and even better in the United States and China domestic markets. In those markets, airports have become congested again and aircraft capacity has reached pre-pandemic load factor rates. Domestic airlines and the airports that serve them are having difficulty in staffing up fast enough to serve this incredibly resurgent demand.

The picture is much different on the international front, with cross border and trans-oceanic flights still only 15 percent of its pre-pandemic levels. This is due to onerous government cross border restrictions still in place, such as 14day quarantines, pre-travel Covid-19 testing requirements or outright bans on travel between certain countries.

The following chart from the Montreal-based International Air Transport Association (IATA) illustrates the uneven recovery we are experiencing in air travel:

The rebound in major domestic markets, driven by increased vaccination rates, reduced infections and fatalities, success of Covid-19 safety protocols and loosening or elimination of government restrictions has clearly had a positive impact on the aerospace eco-system. As mentioned earlier, from airport and airline personnel to aircraft producers and their suppliers, activity is ramping back up. For titanium and other raw material suppliers to the aerospace business, this is good news. Aircraft production rates are starting to ramp back up, meaning that suppliers are starting to receive orders for parts again.

Pratt & Whitney, as well as GE and Safran—producers of the CFM engines—are seeing a dramatic uptick in jet engine maintenance activity. “Airlines are spending money ahead of the recovery,” Greg Hayes, the CEO for Raytheon Technologies, said. Raytheon said that commercial MRO (maintenance, repair and overhaul) sales increased 41 percent by June 30, 2021. GE Aviation’s maintenance and spare parts revenues increased 50 percent. Many of those spare parts are made from titanium. That’s good news for that supplier base.

Demand for Travel, Increased Vaccinations

There continues to be an almost insatiable appetite for air travel, and the recovery from the pandemic is dependent on this demand. We observe there is an instinctual desire of mankind to meet face to face, for domestic, business and leisure reasons. Mankind is wanderlust, having the desire to experience the world and to connect face to face with business associates, friends and family domestically and internationally. This has been the trend since the advent of commercial airline operations.

We are reminded that passenger travel volume has risen from about 1 trillion to 8.5 trillion RPK’s in the period from 1980 to early 2020, despite shocks to the system such as the SARS epidemic, Middle East wars, H1N1 virus and the Ebola epidemic during that time period. The demand for travel is quite resilient and despite economic, conflict and health reasons, the long-term demand for air travel continues to grow. However as previously mentioned, government allowance and passenger trust in safe travel will depend on vaccination rates increasing.

Consider for a moment that it is estimated that only 6 to 20 percent of the global population has ever traveled by air. Consider also that millions, if not billions of people will enter the middle class, as global economies advance and wealth is created for its citizenry. Due to these two factors, we expect demand for travel will continue unabated for decades if not centuries to come; another cause for optimism for this industry and its supply base.

Reviewing Forecasts

As described in Parts 1 and 2 of this author’s forward look, published in TITANIUM TODAY, the recovery of the airline and aerospace ecosystem is reliant on passenger’s trust that they will not contract Covid-19 while traveling. This, in turn, was dependent on vaccination rates and expectations of travel requirements, including safety protocols such as mask wearing, negative tests, and government travel restrictions. Progress is being made on each of these fronts.

However, there is a significant portion of the 7.5 billion people on earth who have not been fully vaccinated, some by choice and some due to vaccine availability. Significant efforts to cajole or require where necessary, the remaining population to obtain the vaccine are underway. Humanitarian efforts to provide vaccinations to underserved populations such as in Africa are underway. Thus we expect vaccination rates will significantly increase, maybe to the often cited 70-percent level required for herd immunity.

While vaccination efforts continue, the unexpected return of domestic travel so soon is certainly a cause for optimism for aerospace suppliers. Both the increase in aircraft production rates as well as increased aircraft MRO activity, bodes well for the aerospace manufacturing industry and the parts and the raw materials supplier base.

In Part 2, we forecasted that by late 2021, airline passenger traffic would experience a significant increase and stated that vaccines were the key for passengers to feel safe to enable increased passenger traffic. We are still on track with that forecast. We also forecasted that the global airline industry would experience a 50-percent return to RPK levels by late 2021. We forecasted a near recovery of previous RPK volume in the late 2022 timeframe and we forecasted aerospace OEM and aerospace supplier network production volume to pick up mid to late 2023 for the suppliers.

Upon reflection, we are probably ahead of that forecast due to the success of vaccination rates, the quick rebound of domestic air travel in important global regions, the resulting uptick in both new aircraft production rates as well as increased levels of maintenance of older aircraft.

Thus, here in Part 3, we now forecast aircraft sales and production to return to its pre-pandemic levels by early 2023, about 16 months from this writing (in August 2021). On the other hand, we are concerned about the long-lasting damage that the pandemic has had on the industry, with layoffs, bankruptcies, inability to afford innovation, loss of key skilled personnel and financial stress. It remains to be seen if there will be unrecoverable damage and negative consequences. Time will tell.

We remain optimistic with the long-term forecast of 40,000 new aircraft to be produced over the next 20 years. As we return to growth, the aerospace supply chain should become healthy again. It is already happening.

(Tom Captain is the managing director of Captain Global Advisory, LLC, headquartered in Mercer Island, WA, and is a 40year industry veteran and expert in the aerospace, defense and space sector. He is the retired vice chairman of a Big Four consultancy where he led their global industry practice. Captain currently serves on the boards of several industry-related organizations.)