The Aerospace Industry is used to deal with crises. However this crisis caused by a virus is different especially regarding its world-wide dimension.
What are the key characteristics of this crisis? Health systems at their limits, too many people dying, lock-down of non-essential businesses, hardly any travelling national and international, closed borders, home office, home schooling, disruptions of world-wide supply chains and so on.
However, like all other crises, this crisis is going to have an end as well. And we are convinced that affected processes, companies, people etc. come out more robust, more trained and better prepared for the future than they have been before the crisis. From our own experience, like a natural law, as long as you survive the crisis, you are going to be stronger than before.
Why are we so optimistic that this crisis is going to end as well and when is it going to happen?
Today we know much more about this dangerous virus than a year ago. And with an incredible effort, there are already a number of promising vaccines world-wide available and there are more in the pipeline to come. Testing has improved as well significantly in terms of accuracy and in terms of speed. More and more we have instruments in our hands to manage this virus and its impact on our daily life. However, it looks like that the virus is getting endemic. In other words, vaccinations against Covid19 and maintaining some of our protection measures could become a permanent element of our future life.
In our blog, we try to explain the rationales behind this thinking and we recommend what key players in this industry needs to do now to be prepared for the future.
Development of air traffic in the next years
There is no crystal ball which allows us to forecast a clear timeline for the end of the crisis. So we have to look back at past crises. What happened there and how long did they last?
In the chart below, you can see the air traffic development since 1950. As most of us know, the underlying growth rate is very strong for decades:
What you can see as well, that the Aerospace Industry has suffered a number of severe crises in that timeframe. The impact of the COVID19 virus is just another crisis. If we count correctly, it is number eight.
Since 1991 we are an active part of the Aerospace community and went through the crises three to seven ourselves. At crisis number 3 in the early 90ies we were working at Airbus in Germany. As a consequence of the Gulf crisis, aircraft production rate was cut by approx. 30% and resulted in an painful adaptation of Airbus’ plant structure and workforce. However, due to the still intact underlying growth, only two years later the aircraft demand has recovered the pre-crisis level and the production rate was back on an increasing slope.
As a result of this crisis experience, Airbus made some substantial changes to processes and organisation. Measures were implemented to increase flexibility in the blue and white collar workforce, the infrastructure and the entire supply chain.
Looking at the air traffic development in Picture 1 again, the curve shows in the 90ies only a little deviation from the overall intact strong growth. When we go along the curve and look at the other crises, the pattern is quite similar. The aftermath of the 9/11, which has been superimposed by the SARS Pandemic, caused a bigger bend, however the original curve was recovered only three years later. And again in 2009, crisis number seven, was recovered in two years followed by a very steep increase in air traffic.
Is the COVID19 crisis comparable with the seven crises mentioned above? On a first glance the answer is rather a no. The production rate cut at Airbus was a bit higher than the “usually” 30%. And the duration of the crisis is very long. After eight months in pandemic mode, the Frankfurt Airport is still suffering a 82% passenger reduction in December 2020 compared to the year before. One of many headlines which shows how heavily most of the transport related businesses world-wide is still struggling. Really world-wide?
When we have a look at China, the picture we see is different:
After a sharp decline with the start of the pandemic, the number of flights in China recovered within six months nearly back to pre-pandemic levels. This is a result of a focussed Chinese pandemic crisis management. Very strong and fast lock downs, even for big cities & regions, even at a comparable small number of infections. Applying the same radical measures in decentralised structures, like the European Union, seems to be much more difficult.
Therefore the rest of the world has to manage the pandemic with discipline (wearing masks, keeping distance, washing hands), vaccinations and frequent testing. And that takes obviously a bit longer. The key question is, how long is it going to take to get back our “normal” live with “normal” travelling possibilities? The current development of mutations of the virus still makes a judgement difficult. But we think that with all the current measures in place, air traffic will resume to old levels starting in 2021 and be back on the pre-pandemic levels, latest in 2022.
Therefore the air traffic should soon get back to its long term trend. There are a number of supporting arguments:
- After a one year lasting “lock down”, people are keen to travel again.
- Virtual meetings cannot replace all types of personal meetings
- The underlying economic growth is already recovering in countries like China
Actually, Airbus announced in January 2021 on its webpage, to increase the production rate in 2021 in the Single Aisle Programme from actually 40 to 45 in the last Quarter. We should keep in mind that there is still a pretty full orderbook. As soon as the perspectives are getting better, further rate increases are very likely. And the key question is then, is the Supply Chain ready to deliver?
Restructuring needs in the Supply Chain
According to the Airbus annual Report 2018 (Non-financial information) the supply chain consists of about 24000 suppliers in 100 countries. For years, Airbus is trying hard to reduce the number of first tier suppliers and pushes the smaller ones to merge with the bigger first tier players. The key question is, how flexible is this world-wide complex supply chain in such a crisis?
We can imagine that the mastering of the crisis in 2020 was very hard work for everybody. It is not about the cutting of production rates only. We assume that a number of aircraft had to be swapped in the production sequence, some of the orders were eventually even transferred to another customer. This requires not only a very flexible workforce at the OEM in Customisation, Engineering and Production, it requires a very flexible and agile supply chain as well.
We know from our foliofive work in the operative supply chain field, that the high cost pressure and offset obligations asks first tier suppliers to establish a global low cost supply chain. This puts often an additional complexity and risk to the delivery of components and parts to the OEM. We were surprised to see in some case that even customised parts have been selected to be produced in countries far away from the suppliers home base.
As a consequence – even in non-crisis situations – changes in aircraft configurations needed to be pushed through this complex delivery chain causing delays or quality or issues or quite often both. We strongly recommend to subcontract only standard parts far away in remote low cost countries and maintain configuration management and customisation in the own hands (and close to the OEM) as much as possible.
Prepare for the next ramp up
In our view, the increase of production rates in 2021 might be still moderate. And everybody possibly believes “ the current rate is no problem for us, we did it already before”. We think that exactly this kind of thinking might become the problem. 2021 must be used to challenge and improve all processes along the value chain and to prepare now for the steep ramp-up to be expected in 2022. And we recommend to start the preparation already today. You never know if the recovery may occur faster than we currently all imagine.
What should we do now? We recommend to check the readiness of the entire process starting in Engineering with focus on Customisation, Procurement, SupplyChain, Operations and Logistics. If you can, try to do some “stress tests”. At foliofive, we have developed a check list with key questions accordingly. Ask us, if you want to know more.
Take care as well of your installed infrastructure. Take the downtime now for maintenance and replacement of critical machinery. Think about implementing NOW long planned restructuring on the shop floor. Usually that is easier to achieve at a lower production volume and with less risk and not when your factory is running in full steam.
The Supply Chain might require some attention as well. We recommend to have a look at the issues of the last month and to consider new approaches. As already stressed at the beginning of this blog, consider having the customisation close to your home base or even close to the OEM.