Story ID: 023b
Aerospace Suppliers in for Uneven Recovery
By: Gregory Polek
Caption: While most Tier 1 OEMs carry the financial muscle to rebound quickly from the Covid pandemic, diversification proves key to long-term prospects. 
Word Count: 1270
One would be hard-pressed to overstate the effects of the Covid pandemic on the aerospace industry, but the level of impact has varied considerably between sectors and among individual suppliers. For example, as a general rule, larger companies fared better than smaller ones. Those that controlled enough resources to absorb 30 percent declines in revenues through spending cuts likely can look forward to a fairly strong recovery. For others—mainly the so-called Tier 2 and Tier 3 suppliers—the future might look less encouraging, particularly for those that depended on government support to stay afloat.

Another divide resides between companies involved heavily in military activity and those whose business depends more on civil programs. Throughout the pandemic, governments generally did not reduce defense spending, meaning suppliers whose product portfolios tilted toward military equipment fared comparatively well. A few even saw single-digit revenue growth last year, while the pandemic decimated the finances of those more dependent on airliner sales and support.

Among the major Tier 1 suppliers, Raytheon subsidiary Collins Aerospace falls into the category of those whose business volumes lean more toward the commercial side, which accounts for some 64 percent of its sales. The U.S.-based aircraft systems supplier maintains a particularly strong position in the Boeing Max airliner, for example, and enjoys a presence on virtually all the Boeing and Airbus commercial programs. Its comparative lack of exposure to defense, however, hurt its financial performance last year, when it saw a 26 percent decline in revenues compared with 2019.

But just as companies with a heavy presence on the military side have enjoyed something of a hedge from the ravages of Covid, future prospects within commercial aviation might vary with their exposure to different categories of that sector. As the airline industry begins to emerge from the pandemic, most analysts agree that domestic and regional flying will return faster and see a stronger recovery than international flying. That will translate into a stronger market for narrowbodies than widebodies, thereby favoring companies with positions more heavily weighted toward programs such as the 737 Max and Airbus A320neo.

Speaking with AIN from his offices in Washington, D.C., Jay Carmel, head of the aviation practice at global consulting firm Avascent, noted that no company escaped Covid without experiencing financial pain. But, similar to the divide that has developed between the narrowbody versus widebody segments, companies that depend heavily on airline maintenance and aftermarket parts supply suffered from the severe decline in the need for those services during the pandemic.

Nonetheless, as traffic continues to build from the Covid recovery, those companies should see a corresponding increase in the need for maintenance services and parts. “Maintenance suppliers, especially those providing a lot of spare parts and repair services for things like APUs or other sorts of mechanical systems that have a little bit higher tendency to break…will have a shot of kind of clawing back that type of business sooner,” explained Carmel. “When you look at the flip side…anything that’s widebody-related is in for a tough haul ahead just because we don’t expect international travel to get back anytime soon. And, therefore, if you look at how much production of widebodies was going on before Covid, it was already starting to overheat.”

In fact, Avascent doesn’t expect widebody production to return to 2019 levels until after 2030. “So that can really make or break a lot of these suppliers,” said Carmel, who works closely with the Aerospace Industries Association on trend analysis. “Some of them have major exposure on those big programs and will be in for, potentially, a tougher haul. So you can make some of these general statements about who's looking better or worse, but it really does boil down to who ended up with the right types of positions with the right types of systems.”

Among all the main widebody types, Carmel expressed particular concern for suppliers with major positions on the Boeing 777X. Now not expected to reach the market until at least late 2023, three years behind its original schedule, the 777X since the pandemic lost about a third of its backlog due to accounting adjustments Boeing needed to make to reflect uncertainty over whether some of its marquee customers will take all their airplanes on order, according to a February 2021 filing by Boeing with the U.S. Securities and Exchange Commission. 

“[The 777X] is a big, big concern for the supply chain,” said Carmel. “I think it already was starting pre-Covid; it already was looking a little suspect because a big, big chunk of the order book was concentrated in some very shaky Middle East airline customers.”

Emirates Airline, Etihad Airways, and Qatar Airways accounted for two-thirds of the gross orders listed on Boeing’s orders and deliveries website through April. “Those airlines aren't going to disappear, but they were certainly facing some serious financial challenges pre-Covid and, now especially, post-Covid, as a lot of other airlines are starting to compete more effectively against them,” added Carmel.

Among specific categories of suppliers, further pessimism about widebodies has dampened the outlook, particularly for composite aerostructures makers, notwithstanding carbon fiber’s growing prominence in the design of new and future airplanes. Because they require little or no MRO services, aerostructures generate little aftermarket revenue. Meanwhile, as production rates for airplanes such as the Boeing 787 and Airbus A350 remain depressed into the foreseeable future, composites suppliers will see similarly dampened demand for their materials.

Carmel noted that although major composites maker Hexcel’s effort to merge with Woodward failed due to Covid-related considerations, the attempt illustrated the difficulties standalone aerostructures makers face. “Composites are going to be very essential moving forward for the industry, but it's a tricky business to be in,” he said. “That merger was going to be interesting in that it tried to combine more of a mechanical systems company with a structures company and to see if you could find some vertical integration opportunities for next-generation aircraft. I think the logic made sense but it was also a bit of a play to offset some of those standalone risks you have as a composites player.”

From the standpoint of the wider aerospace industry, offsetting the risk of bankruptcy by drastically cutting employee roles and research and development spending carries a risk of its own, namely the ability to quickly and effectively restore technology maturity efforts put on hold due to the pandemic.

“If you’re shedding all this talent and you’re shedding a lot of R&D investment, which a lot of these companies did…it’s coming at no worse time because we’re just looking at all these exciting new developments related to electric aircraft and hydrogen aircraft,” explained Carmel, who further noted that European manufacturers, especially in France, enjoy far more direct government research and development support than do U.S. companies.

“The French government dedicated hundreds of millions of dollars to keeping their industry afloat by investing in R&D for next-generation aircraft,” Carmel concluded. “And that wasn't really nearly to the same extent here in the U.S. And so that's going to be the big question. I think in the long run [the question] is how much will this Covid downturn and the negative impacts not only hurt the industry and the workforce today but also potentially hurt the [U.S.] industry’s competitiveness 10 years from now when we start seeing these new types of aircraft technologies coming in.”