As roughly half of the global airline fleets (approx. 26,000 units) remain grounded due to the infamous COVID-19 crisis, the two largest aircraft producers, Airbus and Boeing, find themselves in an extremely vulnerable position.
Airbus has therefore decided to reconsider its strategic plan, and significantly reduce its production of its A320 and A350 variants by up to 40% for at least 6 months, sources close to the matter said.
The decision is followed by the unprecedented downturn that the aviation industry is suffering, which may not see a return to levels prior to the crisis at least until next year. Similarly, an announcement made by their American counterpart, Boeing, regarding numerous job cuts evidenced that the European conglomerate would follow a similar path.
This will of course result in a catastrophic reaction in terms of job losses throughout the aviation spectrum.
The two most affected types of these measures would be the A320 (compressing the entire family variants) which would be face a reduction from 60 units per month to 35 (40% reduction), and the A350, that would go from 10 to 5 units per month. The A330 family, on the contrary, will only see its production line reduce the number of units delivered by month from 3 to 2.
To this effect, Airbus had to ask the corresponding suppliers to slow down their production in order to meet its own. Rate cuts that were described by many as “inevitable” as both airlines and leasing companies may as well either cancel or defer aircraft deliveries.
This move by Airbus is intended to preserve its future by not producing excessive stock that may as well not be absorbed after the spread of the virus is contained, as it is clear that not all the airlines that we now know will make it through.
According to industry analysts, production rates are not easily established and will not be maintained if the manufacturers do not foresee market viability to keep up with it. Moreover, it is a major indicator for investors regarding future financial stability, meaning this decision has been rightly deliberated as it implies great risks for the company.
Airbus also suspended its dividend a week ago and has not released further comments after its stocks plummeted by 29% in one week, going to a low of €51,00 on April 3. However, the company is expected to update the market on April 16.
In the meantime, Airbus states that it is continuously monitoring the situation in order to mitigate the effects of the virus in their future operationality, as well as maintaining constant communication with its suppliers so that they all can run their production in lower levels until the market stabilizes.
In this regard, Rolls-Royce has expressed its vulnerability as its revenues depend on a system called “power by the hour”, thanks to which it receives marginal revenues only if the engines are getting airborne. Each engine is, according to this system, sold on an estimated 1.4€ loss. In an statement, the company said that “Airbus needs to retain its ability to support the global crisis efforts, support customers, suppliers and continue to bring its essential contribution to society... as it tries to avoid massive layoffs along with local government help”.
However, new restrictions are being imposed by Spain, which renders the whole production line in jeopardy after being already reduced in other countries to adapt to these governmental requirements. This affects plants in Bremen (Germany), Broughton (U.K.) and Toulouse (France).
Nonetheless, it is Spain that is suffering the most among the participant countries as previous lay-offs and relocations (630) were occasioned by the lack of A400M and C295 orders, and after 138 out of its 12,650 employees tested positive for COVID-19, abruptly paralyzing the industry.
The company is already in talks to get extra liquidity in the market, while there are rumors that it is negotiating public funding from French President Macron’s administration.