Why would you want to be in the commercial aviation game? There is no business at the moment. And, when it does return, no one knows what it is going to look like.
Those were the thoughts of one aviation executive this week and a pretty good summary of the coronavirus-infected civil aerospace investment case.
The global market for commercial jetliners is dominated by two players: Boeing of the United States, whose main final assembly lines are in Seattle on the west coast, and Airbus in Europe, which fits together most of its planes in Toulouse in southern France. In a typical year — and we haven’t had one of those for a while — they would be nip and tuck to see who delivers the most aircraft, a total well in excess of 1,000 a year.
Boeing’s biggest seller is the single-aisle short-haul aircraft, the 737 Max, a plane that hasn’t flown or been in production for 12 months after the second of two crashes that killed 346 people in total. When the Max does go back into production, the decline in demand from its customers — and Ryanair for instance is one of the largest — means Boeing has already cut planned production by 37 per cent from 51 planes a month to 32. Production for its bestselling wide-body plane, the 787 Dreamliner, has been halved to seven a month.
At Airbus, production of its short-haul plane, the A320 has been cut by a third from 60 to 40 a month as airlines, such as its biggest customer Easyjet, cancel or defer orders. Its equivalent of the Dreamliner, the A350, has had its production rate cut 40 per cent from ten to six.
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The read-through for the parts suppliers to Boeing and Airbus is plain to see. But it is in fact worse than that. Many suppliers are as dependent on the aerospace aftermarket, supplying parts and maintenance services, as they are on producing the components in the first instance. If your business is dependent on existing in-service jetliners then the travel restrictions that have grounded the global fleet mean you are doubly hurting especially as the official (conservative) industry forecasts are for passenger traffic to halve in 2020 overall.
And if, as Guillaume Faury, the chief executive of Airbus, indicated this week it could take five years to get the flying public up in the air as much as they were in 2019, then that is another fundamental pillar of the non-investment case for civil aerospace.
The FTSE 100 has three companies plumbed into this sector. Rolls-Royce is Britain’s champion engineering company, the exclusive supplier of engines to Airbus’s widebody fleet from its Derby plant and a manufacturer of engines in Singapore for the Dreamliner.
Melrose is GKN by any other name, the engineer it acquired in an abrasive takeover two years ago. It helps build the wing structures and fuselages of aircraft, most famously from its plant at Filton near Bristol where it is a near neighbour of and main supplier to Airbus. It also gets paid £4 million for every ten Boeing 737 Max jets that go off the assembly line.
Meggitt is on the 737 Max programme as well, supplying seals and high-performance composite components, as well as being an expert in engine cooling systems and landing gear braking systems.
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Meggitt is hurting enough to have been among the first in the sector to order job cuts — 1,800 out of a total of 12,000 around the world. Hundreds of them are in Britain where it is in the process of consolidating to one superplant at Ansty, north of Coventry.
As if GKN Aerospace’s problems are not bad enough it is but half of the old GKN. The other larger half is in the automotive industry where the virus crisis is even worse: few if any cars are being manufactured. GKN accounts for 84 per cent of Melrose, an industrial conglomerate whose raison d’être is to buy underperforming engineering companies, improve them and sell them on.
With none of these things possible in the current climate, one analyst commented after cutting his forecasts for the group for the third time in a month, that it is difficult to find where the bottom for Melrose might be.
Making engines for passenger planes is an £8 billion-a-year business for Rolls-Royce. But the big numbers that are supposed to come in from the single most valuable bit of kit on a plane can quickly go the other way. The fiasco of the Trent 1000 for the Dreamliner has weighed heavily on the reputation of the company as it has been forced to ask airlines — including those now in danger of going bust like Virgin Atlantic and Norwegian — to ground dozens of planes at a time because of faulty parts. It is costing Rolls £2.4 billion.
What little good news there is for these companies is that while the civil market is disappearing, in defence, governments have not turned the taps off and encouraged manufacturing to continue where protocols allow. For a company like Rolls this is important: building engines and propulsion systems for warships, submarines and fighter jets is a multibillion-pound business.
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A little further down Britain’s aerospace food chain is Senior, a company that has been disproportionately hit by Boeing’s woes with the 737 Max from which it derives 10 per cent of its income making the wing ribs as well as a host of ducts, valves and components, including for engines.
Of the aerospace companies it has been worst hit in the stock market selloffs, suffering from being a business which like Melrose/GKN is also plugged into the automotive industry. It has had the added infelicity of not being able to make its mind up on whether it wants to sell its aerostructures business.
In the flotsam and jetsam of the stock market crashes of recent weeks those companies exposed to the civil aerospace market have not been able to catch the tide of the bouts of optimism among investors.
At times of great stress — the impact of the 9/11 terrorist attacks in 2001, the post-2008 economic pain of the global financial crisis — it is easy to believe that things have changed for ever.
Civil aerospace will return to some form of normality after Covid-19 just as the rest of the world economy will. But if that normality is businesses worried about health litigation if they send staff on planes, and the leisure consumer afraid of air travel, then that recovery could be a long time coming.
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WHY If the industry has no idea where it will end up, how can investors?
