A&D, Aviation: Crisis Management During the COVID-19 Crisis - Overall industry impact assessment
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A&D, Aviation: Crisis Management During the COVID-19 Crisis Overall industry impact assessment April 3rd, 2020
IMPACT OF COVID-19
COVID-19 is first and foremost a humanitarian crisis. Once you
are able to turn your thoughts from safeguarding your family and
your people, you must turn to the health and safety of your
business.
The COVID-19 virus is dominating the news cycle, and it must also be
dominating your personal and professional conversations.
AlixPartners is no different; we are actively In a crisis, the foremost concerns must be personal
implementing our response to this situation while health and safety—of our families, our employees,
operating in an environment of considerable and ourselves. Taking care of those who contract the
uncertainty. We are all in this together. virus and joining the global community in taking
sensible steps to slow its spread is of the utmost
At AlixPartners, we are leaning on our core values: importance. Once you have addressed the critical
Commitment, Professionalism, Teamwork, Common efforts to safeguard your family and your people, you
Sense, Personal Respect, and Communication. must turn to the health and safety of your business.
These values have guided us since our founding in Our firm exists to protect our clients’ businesses and
1981, and we test all our actions against them, help them manage through the most complex of
because they will continue to be our core values for challenges. There is no single formula for doing this,
many generations to come. and the COVID-19 threat is unprecedented.
We draw on almost forty years of experience in Still, there are a few responses that can be applied
helping our clients navigate through their most here which we have developed through decades of
urgent and challenging situations. helping clients with their greatest challenges and this
document will detail those out for you.
2IMPACT OF COVID-19
COVID-19 impact on commercial aviation: a “perfect” storm which
requires immediate action by the supply chain
Commercial aviation is undergoing a crisis never encountered before – with a triple hit
• First hit – since March 2019, the B737MAX grounding has mostly impacted Boeing and
its supply chain with reduced production rates. This has strongly accelerated and degraded
1. B737MAX since beginning of the year with the MAX production stoppage in January 2020 – with many
grounding suppliers losing already 20+% of their revenues.
• Most impacted: Boeing (and its supply chain) – ripple effects on other OEMs supply chain
• Second hit - much stronger than the first one: the COVID pandemy - a huge blow to
air traffic globally. All airlines globally are suffering from 50-90% traffic drops, adjusting
2. COVID capacity and fighting for their survival. Some will fail. None will need additional capacity in the
pandemic – short-term. Most will not take any aircraft delivery in the short/medium term.
Traffic
• Most impacted: airlines, OEMs, Tier1 and their supply chain, MRO and aviation
collapse
services, suppliers with significant spares, repair & services content (engine, system,
avionics, cabin OEMs) –
• The third hit comes from significant reduction of OEM production rates for both
narrowbody and widebody segments due to inability of airlines to take deliveries as
their fleet are grounded. Following travel restrictions, high uncertainties will remain on
3. Production order backlogs and speed of recovery
rates cuts • OEMs lack of decisiveness and communication on rate reduction and communication with
supply base may represent a significant risk for their supply chain
• Most impacted: OEMs and all their suppliers, aerostructure highly. Widebody likely to
be hit harder than narrow body.
Source: AlixPartners analysis
3IMPACT OF COVID-19
Although strategic topics need to be tackled, focus on cash
containment measures and resizing business
Levers to Maximize Cash Flow
• Model OEM production: 3 scenarios of 2020-2021 volumes
Business Focus COVID-19 Top • Model Services impact: Up to -50% average fleet activity
Line impact through 2020; peak at 80-90% parked depending on region
• Assess business
• Build scenarios at 3/6/9/12/15 months
scenarios and
impact on top line • Focus on cash as key scarce resource
• Forecast, manage • Develop / refine cash forecasting (e.g., 13 week cycle) based
Cash Management
and preserve on new top line assumptions
liquidity • “Cash is King” culture / centralize key cash decisions
• Conserve cash • Streamline SG&A costs
during this period • Reduce fixed overhead costs to align with reduced activity
of uncertainty Operating Costs
levels (e.g., Logistics, Production, Engineering)
• Drive better • Rationalize indirect labor costs
working capital
• Pull in customer receivables and reduce DSO’s
management to
unlock cash • Push out material deliveries to conserve cash
Working Capital
• Optimize reorder points, lead times and safety stocks to reduce
• Pro-actively inventory levels and extract more cash
manage and
support supply • Assess weak suppliers and their need for cash
chain Supply Chain
• Dual source wherever possible
Monitoring
• Leverage crisis to • Consolidate supply base – Drop underperformers
re-define portfolio
• Defer Capital Expenditures
• Consolidate / Be
Assets • Dispose of non-core assets, if any
consolidated
• Delay acquisitions or Buy on the cheap
4AIRLINES
The COVID-19 crisis will have a far greater impact on air travel
demand and industry compared to past crises
Impact of crisis on RPKs and demand
9/11 SARS Global Fin. MERS COVID-19 • All recent air travel crisis
(2001) (2003) Crisis (2008) (2015) (2020) in the last 20 years have
resulted in
Max
regional -10% − significant regional
-12%
monthly RPK decreases
RPK
-35% − prolonged recovery of
reduction demand
-45%
− but limited global
Impact at Impact at
regional level global level impact
-75/85%
• Due to global travel
restrictions, the COVID-
Months for 19 crisis is much more
demand ~12 Months ~7 Months ~20 Months ~7 Months - severe in terms of both
recovery geographic reach and
regional / global demand
7% fall
2% 1%
Global • There is a real risk that
annual COVID-19 precipitates a
-3%
RPK global recession as
growth unemployment rises
Based on IATA globally
estimates (24 March
2020)
-38%
Source: IATA, ICAO, Boeing; AlixPartners analysis 5Scenarios as of April 3rd AIRLINES
We consider two potential scenarios for COVID-19 impact on
airlines capacity and demand in 2020-2021
Capacity Scenarios: % vs. 2019 baseline: Global A. ‘Stable’ Recovery Scenario
• Effective COVID containment measures and recovery from
2021 pre-Outbreak forecast 110% peaks – no 2nd wave in Q3/Q4
2020 pre-Outbreak forecast 105%
2019:100% • Coordinated relaxation of flight restrictions
• Temporary shock to global economy; return to growth in
95%
IATA key regions by Q3-Q4 2020
86% 90% • “Snap-back” of corporate travel demand
• Pick-up on leisure demand through Q3 (Summer season)
80%
• Rapid and extensive support from governments
2020 capacity: ~ -40% / RPKs: ~ -45%
A. ‘Stable’
Recovery Airlines recover 70-80% of 2019 capacity by end 2020, Asia 90%
60% Scenario
B. Sustained Downside Scenario
• Recurrent regional outbreaks through Q2-3, sustained
B. Sustained containment measures following initial peaks
30%
Downside • Inconsistent government lifting of travel restrictions
25% Scenario • Start of global economic recession going into 2021
• Corporate travel depressed with pressure on businesses
• Leisure travel sustained low with lack of confidence
• Extensive Airline structural changes to recover
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Potential for further downside if above measures deteriorate
2020 capacity: ~ -50% / RPKs: ~ -55%
Airlines recover 40-60% of 2019 capacity by end 2020, Asia 80%
Source: AlixPartners analysis; IATA. RPKs = Revenue Passenger Kilometers 6Scenarios as of April 3rd AIRCRAFT OEMS
We consider two potential scenarios for 2020-2021 deliveries of
Boeing and Airbus, consistent with airlines capacity drop
Deliveries scenarios for Covid-19 impact in 2020–2021 – Boeing and Airbus
A. ‘Stable’ Recovery B. Sustained Downside
1,606 Scenario Scenario
Short U-shape Long U-shape
Boeing WB 226
1,243 1,270
-55-60% -70-75% -25-30%
Boeing NB(1) 580 253
910
127
173
Airbus WB 154
520
350
Airbus NB 646 690
2018 2019 2020 2021 2020 2021
Scenario A Scenario A Scenario B Scenario B
• Context: effective COVID containment • Context: recurring regional air travel
with no 2nd wave in Q3/Q4 - Gradual outbreaks through Q2-Q3 - Limited lifting
relaxation in flight restrictions – Gradual of travel restrictions - Slow restart of
restart in flights in Q3/Q4 – Effective commercial flights, mainly in Q4 - Global
government support to limit the recession economic recession going into 2021
• Deliveries: strong reduction in deliveries • Deliveries: massive reduction in
Notes: in Q2 (unless for military versions), with deliveries in Q2-Q3 (unless for military
1) 737 MAX deliveries for 2020-2021 do not restart in August - Airlines / lessors to versions), with restart in Sept.-Oct. -
include the 400+ aircraft already delivered defer deliveries and cancel orders, but Airlines / lessors to defer deliveries and
NB: Narrowbody - WB: Widebody accepting some cancel orders, accepting very few
7Scenarios as of April 3rd AIRCRAFT OEMS
Aircraft deliveries are expected to decrease significantly in Q2-Q3,
with different recovery pattern for each of the two scenarios
Deliveries scenarios for Covid-19 impact – Monthly progression - Boeing and Airbus
A. ‘Stable’ Recovery Scenario B. Sustained Downside Scenario
Short U-shape Long U-shape
110 110
Forecast Forecast
100 100
• Effective COVID • Recurring regional air travel
90 containment with no 2nd 90 outbreaks through Q2-Q3
wave in Q3/Q4 • Limited lifting of travel
80 80
• Gradual relaxation in flight restrictions
70 restrictions 70 • Slow restart of commercial
• Gradual restart in flights, mainly in Q4
60 commercial flights in 60 • Global economic recession
50 Q3/Q4 50 going into 2021
• Effective government
40 support to limit the 40
recession
30 30
20 20
10 10
0 0
Apr-20
Jun-20
Jul-20
Apr-20
Jun-20
Jul-20
Feb-20
Aug-20
Nov-20
Feb-21
Feb-20
Aug-20
Nov-20
Feb-21
Jan-20
Mar-20
May-20
Oct-20
Dec-20
Jan-21
Mar-21
Jan-20
Mar-20
May-20
Oct-20
Dec-20
Jan-21
Mar-21
Sep-20
Sep-20
Boeing WB Boeing NB Airbus WB Airbus NB
Aircraft production rates along the supply chain will have to be restated according to deliveries
expectations – The A&D industry will need to adapt its cost structure to the “New Normal”
NB: Narrowbody - WB: Widebody
8Scenarios as of April 3rd AIRCRAFT ENGINES
Engines - We consider two potential scenarios, in line with Airbus
and Boeing expected deliveries and airlines capacity drop
Engine deliveries scenarios for Covid-19 impact in 2020–2021 – Boeing and Airbus commercial Aircraft
Not including spare engines A. ‘Stable’ Recovery B. Sustained Downside
Scenario Scenario
3,040
Short U-shape Long U-shape
Pratt & Whitney 438
2,540
2,374 -55% to -70% to -20% to
Rolls-Royce 416
-60% -75% -25%
626
1,820
434
CFM International 1,852
1,041
932 701
General Electric 334 382
2018 2019 2020 2021 2020 2021
Scenario A Scenario A Scenario B Scenario B
• Context: effective COVID containment • Context: recurring regional air travel
with no 2nd wave in Q3/Q4 - Gradual outbreaks through Q2-Q3 - Limited lifting
relaxation in flight restrictions – Gradual of travel restrictions - Slow restart of
restart in flights in Q3/Q4 – Effective commercial flights, mainly in Q4 - Global
government support to limit the recession economic recession going into 2021
• Deliveries: strong reduction in deliveries • Deliveries: massive reduction in
in Q2 (unless for military versions), with deliveries in Q2-Q3 (unless for military
restart in August - Airlines / lessors to versions), with restart in Sept.-Oct. -
defer deliveries and cancel orders, but Airlines / lessors to defer deliveries and
accepting some cancel orders, accepting very few
Notes: Airbus and Boeing commercial aircrafts (A320, A220, A350, A330, A380, 737Max, 737NG, 767, 777, 787, 747) and
corresponding engines (Genx, CF6 Family, GE90, GE9X, Trent, LEAP, CFM56, PW1000G) are considered for this analysis 9
excluding spare engines. 2018 data does not include engines delivered by Engine Alliance for A380Scenarios as of April 3rd AIRCRAFT ENGINES
Engines - Deliveries are expected to decrease significantly in Q2-
Q3 2020, with different recovery pattern for the two scenarios
Engine deliveries scenarios for Covid-19 – Monthly progression - Boeing and Airbus – Not including spare engines
A. ‘Stable’ Recovery Scenario B. Sustained Downside Scenario
Short U-shape Long U-shape
220 220
Forecast Forecast
200 200
• Effective COVID • Recurring regional air travel
180 containment with no 2nd 180 outbreaks through Q2-Q3
wave in Q3/Q4 • Limited lifting of travel
160 160
• Gradual relaxation in flight restrictions
140 restrictions 140 • Slow restart of commercial
• Gradual restart in flights, mainly in Q4
120 120
commercial flights in • Global economic recession
100 Q3/Q4 100 going into 2021
• Effective government
80 support to limit the 80
recession
60 60
40 40
20 20
0 0
Apr-20
Jun-20
Jul-20
Apr-20
Jun-20
Jul-20
Feb-20
Aug-20
Nov-20
Feb-21
Feb-20
Aug-20
Nov-20
Feb-21
Jan-20
Mar-20
May-20
Oct-20
Dec-20
Jan-21
Mar-21
Jan-20
Mar-20
May-20
Oct-20
Dec-20
Jan-21
Mar-21
Sep-20
Sep-20
Pratt & Whitney Rolls-Royce CFM International General Electric
Engine OEMs have to adjust their supply chain according to the aircraft deliveries expectations –
The industry will need to adapt its cost structure to the “New Normal”
Notes: Airbus and Boeing commercial aircraft (A320, A220, A350, A330, A380, 737Max, 737NG, 767, 777, 787, 747) and
corresponding engines (Genx, CF6 Family, GE90, GE9X, Trent, LEAP, CFM56, PW1000G) are considered for this analysis 10
excluding spare engines. 2018 data does not include engines delivered by Engine Alliance for A380AIRCRAFT OEMS & ENGINES
The commercial aerospace industry needs to re-size itself for a
lower-volume future, as the automotive industry did in 2009
Historical automotive sales in the United States (millions)
-35%
16.1 16.5
15.5
14.4
13.2 12.7
11.6
10.4
2007 2008 2009 2010 2011 2012 2013 2014
• From 2007 to 2009, automotive industry hit hard as US sales decreased from 16 to 10 millions of vehicles
• OEMs and Tier 1 suppliers forced to reshape their industry to lower volume
− Reduce fixed costs by consolidating brands
− Rationalize manufacturing capacity
− Increase operations flexibility
− Reduce break-even costs
− Re-sizing personnel costs
− Shedding pension liabilities and simplifying labor union constraints
• Painful medicine, but worked
− Annual sales at peak levels again during 2015-2018
− GM, Ford and Chrysler had their most profitable years ever during the same period
Source: Bureau of Economic Analysis 11SUPPLY CHAIN
Commercial aerospace supply chain will be heavily impacted by
the reduced activity
• Each supplier translating information from OEMs/market into 2 to 3 potential
top line decrease scenario – in some cases, take pre-emptive measures to
protect own cash and supply chain despite too optimistic scenario from OEMs
Fighting for cash
and liquidity • Asses impact of top line reduction on cash – new liquidity needed
• Launch initiatives quickly to create on its own more liquidity and also access
aid programs, presenting a viable plan
• Assess and monitor supply chain through a crisis management watch tower
• Identify distressed situation – get financial data – operational performance
history
Protecting own • Decide to support or not depending on alternative source
supply chain • Implement support or alternative solution: re-insourcing, re-sourcing, work-
package transfer, consolidation
• Implement process to ensure selected suppliers get access to liquidity quickly
• Build a re-start / ramp up plan
• Review supply chain strategy and its risks
Leveraging crisis
and building a • Assess where and how a more robust and resilient supply chain is needed
more resilient • Design plan to re-balance and de-risk future supply chain
supply chain
• Implement
12Scenarios as of April 3rd COMMERCIAL MRO
Recovery scenarios for MRO market is likely to follow similar
patterns to Airlines capacity curves, with an offset of few months
Impact of COVID-19: % vs. 2019 global baseline
Slower ramp-down resulting from time to
cycle through Aircraft / Engine being inducted A. ‘Stable’ Recovery Scenario
in Q1 2020 – Peak crisis expected in Q3 2020
• Effective COVID containment measures and
recovery from peaks – no 2nd wave in Q3/Q4
• Coordinated relaxation of flight restrictions
89% • Temporary shock to global economy; return to
74% growth in key regions by Q3-Q4 2020
48%
• “Snap-back” of corporate travel demand
29% 48% • Pick-up on leisure demand through Q3
(Summer season)
Airlines recovery
• Rapid and extensive support from governments
MRO recovery
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021
B. Sustained Downside Scenario
• Recurrent regional outbreaks through Q2-3,
sustained containment measures following initial
peaks
74%
• Inconsistent government lifting of travel
restrictions
54%
• Start of global economic recession going into 2021
43%
32% • Corporate travel depressed with pressure on
Airlines recovery businesses
21%
MRO recovery
• Leisure travel sustained low with lack of confidence
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021
• Extensive Airline structural changes to recover
Source: AlixPartners analysis; IATA. RPKs = Revenue Passenger Kilometers 13Scenarios as of April 3rd COMMERCIAL MRO
Commercial MRO business down 40% to 60% in next 12 months,
all the segments heavily impacted
COVID-19 impact on the demand (peak) by MRO segment
A. ‘Stable’ B. Sustained
Recovery Downside
Scenario Scenario Impact on Demand Impact on Supply1
A. Cabin MODs are discretionary so likely to be cut
MOD Very high Very high in a context of cost reduction, while Cargo MODs Short term:
($6bn) -60% -80% may benefit from the global supply chain disruption Although the impact
B. Almost all MODs to be cancelled to save cash seems under
control based on
Likely to be deferred while surplus aircraft available the recent MRO's
Heavy
High Very high in favor of newer fleet (less heavy maintenance). press releases (e.g.
Maintenance Lufthansa Technik,
-40% -75% A. Rescheduled quickly if the crisis remains short
($8bn) B. Not re-scheduled quickly to preserve cash AFI KLM..), the
implementation of
stringent health and
Line A. & B. Performed while the aircraft is its operating
Very high Very high safety measures
Maintenance environment, during turnarounds. Expected to drop
-70% -80% will adversely affect
($13bn) in line with the reduction of number of flights
productivity
Component
Directly linked to volume of line / heavy
Maintenance Very high Very high Medium term: As
maintenance. Parts of grounded aircraft may
($19bn) -60% -80% the demand
become an alternative to component maintenance
shrinks, the market
may switch from
Correlated to number of take off and flight hours. massive oversupply
Engine High Very high A. Periodic maintenance may remain on schedule to scarcity of
($31bn) -50% -70% B. periodic maintenance could be deferred as long resources.
as the large surplus aircraft remains
MRO Spend Next 12 months Next 12 months
20192 -40% -60%
$77bn -$30bn -$45bn
(1) Source: www.lufthansa-technik.com, www.afiklmem.com, www.aviationbsuinessnews.com, www.aviationweek.com
14
(2) Source: AlixPartners analysis, IATABUSINESS CONTINUITY
Heatmap crisis management prioritises 10 business continuity
elements to be addressed over next 5 to 10 working days
15BUSINESS CONTINUITY
Risk signals across multiple dimensions need to be monitored
1 Supply chain 5 Logistics
• Raw material and • Transit/shipping delays
component delivery • Cancelled orders
Supply slow-down • Customer complaints
chain • Supplier default risk • Lower personnel/inability
• Depleting inventory, growing to fulfil demand
Customers 1 Regulatory semi-finished and WIP
• Out-of-stock, cancelled People/offices
orders 6 • Local case of infection
7 2
or exposure
2 Regulatory • Red-zone/quarantined office
• Events and meeting
locations
cancellations
People/ Support • ‘Red zone’/no-travel policies • Factory and plant closures
6 3
offices services • Quarantined/locked • Employee attrition and
down areas absence levels
5 4 • Travel ban/black-list
locations Customers
7 • Delayed payments,
Logistics Sales force 3 Support services increasing days sales
• Lower operational outstanding
performance • Cancelled orders and
• Inability to fulfill agreed renewals
SLAs
• Difficult to reach
• Customer complaints
• Security breaches customers to close new
deals and/or extensions
4 Sales force
• Disruption to sales-
related travel
• Abandoned leads/inability
to close deals
• Client meeting cancellations
• Lower lead velocity and
conversion rate
16BUSINESS CONTINUITY
The Business Continuity Workstream links into the Decision Board
• The Decision Board is focused on driving critical
Decision Board decisions that have cross-functional impact and/or fall
(typically CEO, CFO, COO) outside of business-as-usual: disruption, strategic
implication, significant product and customer impact
Business Continuity Workstream
• The Business Continuity War Room meets
Tracking
Decision virtually on a daily basis, to review and interpret
platform
Daily to and Informed signals from different parts of the business, re-assess
Virtual
weekly action- by data and the forward-looking options, prepare actions to
setting
cadence oriented signal models address short-term and medium-term headwinds
agenda
• Each function captures and pre-processes signals
coming from internal sources (e.g. supply chain,
Customer Success
Communication
Manufacturing
mfg, product, HR) or from external sources
management
Supply chain
and treasury
Sales and
(vendors, competitors, customers, lenders/banks)
Product
Finance
and HR
Legal • Verticals and functions participate in the Business
Continuity War Room to raise options, capture
interdependencies and cross-functional impact
of decisions
Business (internal) and market (external) signals
17©2020 AlixPartners, LLP.
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