Crisis management in the aerospace industry: COVID19 - crisis number eight in our industry
The aerospace industry is used to dealing with crises. But this crisis, triggered by a virus, is different, especially in terms of its global dimension.
What are the main features of this crisis? Health systems at the limit, too many people dying, closure of non-essential businesses, hardly any travel nationally and internationally, closed borders, home offices, home schooling, disruption of global supply chains and so on.
But like all other crises, this one will come to an end. And we are convinced that affected processes, companies, people etc. will emerge more robust, more trained and better prepared for the future than they were before the crisis. From our own experience, it is like a law of nature: as long as you survive the crisis, you will be stronger than before.
Why are we so optimistic that this crisis will also end and when will that happen?
We know much more about this dangerous virus today than we did a year ago. And with an incredible effort, there are already a number of promising vaccines around the world, and more in the pipeline. Testing has also improved significantly, both in terms of accuracy and speed. More and more, we have tools in our hands to get a grip on this virus and its impact on our daily lives. However, it looks like the virus is becoming endemic. In other words: Vaccination against Covid19 and maintaining some of our protective measures could become a permanent part of our lives in the future.
In our blog, we try to explain the reasons behind these considerations and make recommendations on what players in this industry need to do now to be prepared for the future.
Development of air traffic in the coming years
There is no crystal ball that 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 development of air traffic since 1950. As most of us know, the underlying growth rate has been very strong for decades:
What you can also see is that the aerospace industry has gone through a series of severe crises over this period. The impact of the COVID19 virus is just another crisis. If we count correctly, it is the eighth.
We have been an active part of the aerospace community since 1991 and have lived through crises three to seven ourselves. At crisis number three in the early 1990s, we were involved with Airbus in Germany. As a result of the Gulf crisis, aircraft production was cut by about 30% and led to a painful adjustment of Airbus' plant structure and workforce. However, with underlying growth still intact, aircraft demand returned to pre-crisis levels only two years later and the production rate increased again.
As a result of this crisis experience, Airbus made some significant changes to processes and organisation. Measures were implemented to increase the flexibility of workers and employees, the infrastructure and the entire supply chain.
Looking again at the development of air traffic in Figure 1, the curve in the 1990s shows only a slight deviation from the overall intact strong growth. If we go along the curve and look at the other crises, the pattern is quite similar. The aftermath of 9/11, eclipsed by the SARS pandemic, caused a major bend, but the original curve was regained only three years later. And 2009, crisis number seven, was also recovered within two years, followed by a very steep increase in air traffic.
Is the COVID19 crisis comparable to the seven crises mentioned above? At first glance, the answer is rather a No. The production cut at Airbus was slightly higher than the "usual" 30%. And the duration of the crisis is very long. After eight months in pandemic mode, Frankfurt Airport still has a passenger decline of 82% in December 2020 compared to the previous year. One of many headlines that shows how much the majority of transport-related businesses around the world are still struggling. Really worldwide?
If we take a look at China, a different picture emerges:
After a sharp decline with the onset of the pandemic, the number of flights in China recovered almost to pre-pandemic levels within six months. This is a result of China's focused pandemic crisis management. Very strong and rapid lockdowns, including for large cities and regions, even with comparably low numbers of infections. Applying the same radical measures in decentralised structures, like the European Union, seems much more difficult.
That's why the rest of the world has to manage the pandemic with discipline (wearing masks, keeping your distance, washing your hands), vaccinations and frequent testing. And that, of course, takes a little longer. The crucial question is how long it will take before we have a "normal" life again with "normal" travel options. The current development of mutations of the virus still makes it difficult to assess. However, we assume that with the current measures, air traffic will return to the old level from 2021 and will be back to pre-pandemic levels by 2022 at the latest.
Therefore, air traffic should soon return to its long-term trend. There are a number of arguments for this:
- After a one-year "lockdown", people are eager to travel again.
- Virtual meetings cannot replace all types of face-to-face meetings
- Underlying economic growth is already recovering in countries like China
In fact, in January 2021, Airbus announced on its website that it would increase the production rate in the single-aisle programme from the current 40 to 45 in the last quarter. We should not forget that the order book is still quite full. As soon as the outlook improves, further rate increases are very likely. The crucial question then is whether the supply chain is ready to deliver.
Need for restructuring in the supply chain
According to the Airbus Annual Report 2018 (non-financial information), the supply chain consists of around 24000 suppliers in 100 countries. For years, Airbus has been trying to reduce the number of first-tier suppliers, pushing the smaller ones to merge with the larger first-tier players. The crucial question is how flexible is this globally complex supply chain in such a crisis?
We can imagine that dealing with the crisis in 2020 has been very hard work for everyone. It is not just about cutting production rates. We assume that a number of aircraft had to be replaced in the production sequence, some of the orders were even transferred to another customer in the end. This requires not only a very flexible workforce at the OEM in customisation, engineering and production, but also a very flexible and agile supply chain.
From our foliofive work in operational supply chain, we know that the high cost pressure and offset obligations force first-tier suppliers to build a global low-cost supply chain. This often adds complexity and risk to the delivery of components and parts to the OEM. We were surprised to see that in some cases even customised parts were selected to be produced in countries far away from the supplier's home base.
The result was that - even in non-crisis situations - changes to aircraft configurations had to be channeled through this complex supply chain, leading to delays or quality problems, or quite often both. We strongly recommend subcontracting only standard parts far away in remote low-cost countries and keeping configuration management and customisation in your own hands (and close to the OEM) as much as possible.
Prepare for the next ramp up
In our view, the increase in production rates in 2021 could still be moderate. And everyone may think "the current rate is not a problem for us, we have done it before". We think that this very mindset could become a problem. The year 2021 must be used to question and improve all processes along the value chain and to prepare already now for the steep increase to be expected in 2022. And we recommend starting to prepare today. You never know if the upswing won't come faster than we all currently imagine.
What should we do now? We recommend reviewing the readiness of the entire process, starting in Engineering with a focus on Customisation, Procurement, SupplyChain, Operations and Logistics. If you can, try to do some "stress testing". At foliofive we have developed a corresponding checklist of key questions. Ask us if you want to know more.
Take care of your installed infrastructure too. Use the downtime now to maintain and replace critical machinery. Think about implementing a long-planned restructuring in manufacturing NOW. Usually this is easier to achieve at lower production volumes and with less risk, not when your factory is running at full speed.
The supply chain might also need some attention. We recommend looking at the issues of the last few months and considering new approaches. For example, as we pointed out at the beginning of this blog, you should consider doing the cutsomisation n close to your home base or even close to the OEM. This can significantly reduce the complexity of what is already a very involved process.
