Deloitte Sees Headwinds for Commercial Aviation

Commercial aviation is “facing an uphill battle” as it attempts to adjust to new worldwide situations wrought by the Covid-19 pandemic, according to global financial audit and consulting firm Deloitte. In its recently issued 2020 Aerospace and Defense Outlook midyear update, the firm noted that it sees a prolonged recovery for the sector, which has seen a significant reduction in both international and domestic passenger traffic, particularly on the heels of a production decline in 2019.

The International Air Transport Association expects this year’s passenger traffic to decline by as much as 55 percent from the previous year, and Deloitte stated that levels could possibly take as long as three years to recover to the pre-Covid state. In a recent survey conducted by the company, 73 percent of respondents indicated they did not feel safe flying right now. Among U.S. respondents, 77 percent said they would likely not take a domestic flight for leisure purposes in the next three months, and 86 percent stated they were unlikely to fly internationally during that same span.

Against that backdrop, with several air carriers already announcing order cancellations and deferrals, the company suggests global commercial aircraft deliveries this year could range from 650 to 690 aircraft, a slip of as much as 50 percent compared with 2018’s peak and a drastic downgrade from the company’s initial 2020 production estimate of 1,900. That number also takes into account the ongoing delays in the return to service and resumption of deliveries for Boeing’s troubled 737 Max.

Deloitte suggests that airlines will initially see heightened demand for short-haul and domestic travel as the effects of the pandemic ease. Estimates call for the shortening of the average trip length by approximately 8.5 percent globally, which could eventually lead to higher demand for narrow-body aircraft, but Deloitte expects a bleak outlook for new orders in the second half of the year.

The global commercial aircraft backlog as of the end of May totaled some 14,100 aircraft, only slightly below the previous year’s level of 14,300. In the long term, the company sees a rebound in demand with a production of nearly 40,000 units anticipated over the next two decades.

The military sector has seen sustained growth as security threats have increased, requiring governments to continue boosting their defense budgets, which Deloitte expects to reach an estimated $1.9 trillion worldwide in 2020. According to Deloitte, most of that growth will come from increased spending in the U.S. and other areas such as China, Japan, and India, as well as by members of NATO, which continue to feel pressure to reach a defense spending target of 2 percent GDP.

The U.S. defense industry will likely not feel significant effects from the pandemic due to the increased spending by the current administration. “Though the rate of growth may decrease or flatten in 2020, the United States’ emphasis on firming up its military capabilities is expected to result in relative stability in the defense sector,” the report noted. It said that despite efforts by the U.S. Department of Defense to ensure that the defense industrial base remains strong during the Covid crisis, supply chains could see temporary disruptions due to their complexity and geographic exposure.

Deloitte stated that the result of the upcoming U.S. presidential election in November will likely not affect defense budgets before 2022.

U.S. foreign military sales will also remain steady in the face of global threats and will likely add to the performance of the defense sector, reckons Deloitte. While such opportunities could spur an increase for U.S. contractors, Deloitte cautioned, a strengthening U.S. dollar could have a dampening effect, as it could allow European defense exporters to become more price-competitive.

Overall, Deloitte’s analysts said, the aerospace and defense industry “needs to prepare for a hard landing,” in the wake of the pandemic. It believes those companies that embraced digital transformation in terms of the adoption of robotics and automation in their manufacturing processes will more effectively weather the crisis, along with those that have followed “a more focused capital discipline strategy” in the past. Companies could also leverage digital technologies to manage a remote workforce, as well as ensure health and safety on the factory floor. Some will no doubt view the crisis as an opportunity to accelerate their adoption and integration of digital technologies to help them not just better survive business disruptions but to recover and thrive.

Regarding merger and acquisition activity, the company expects a sluggish second half of the year as the pandemic continues to affect demand, particularly in the commercial aerospace sector. Liquidity could also become a consideration as the year progresses. Such concerns have even led to the dissolution of deals announced pre-Covid, such as Boeing’s agreement to acquire a controlling stake in Embraer’s commercial aircraft division. Deloitte noted that the U.S. has recently taken measures aimed at restricting opportunistic purchases by foreign entities during the pandemic, especially those from China.