At the end of March, just days before Boeing was set to hand over a new 787 Dreamliner to one of its most valued customers in the Middle East, the airline's head of procurement picked up the phone to the US aircraft maker. The deal was off, unless Boeing was willing to increase the 55 per cent discount it had already agreed on the US$338 million ($559.4m) list price.
In normal times, an airline would hesitate before threatening to cancel an order at such a late stage. Cancellation would normally mean heavy penalties and forfeiting the downpayments, which for Boeing's state of the art twin-aisle model amounted to close to US$100m of the agreed US$150m price tag.
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But these are not normal times. Boeing caved in and cut the price by a further 15 per cent, according to people involved in the deal. The US aircraft maker — which declined to comment on the contract details — saw more value in getting the jet out of the hangar than haggling for a few million dollars more.
Despite supplying more than 90 per cent of the world's commercial aircraft, Boeing and its European rival Airbus do not have much leverage when nearly all their airline customers are fighting for survival.
As international air travel grinds to a halt in the face of the coronavirus pandemic, the global aerospace industry is being forced to confront some hard truths about a future it once believed was secure for at least the next decade. Record order books, built on a decade of booming demand and worth more than US$1 trillion at list prices, are looking less certain by the day as airlines push back deliveries and even cancel orders to survive the worst crisis in aviation history.
More than 60 per cent of the world's commercial aircraft have been grounded as governments quarantine their populations and close borders. And with little or no revenue coming in, airlines are cutting costs, drawing down huge credit lines to bolster liquidity, and calling for billions in state aid.
Ed Bastian, chief executive of the world's biggest carrier, Delta Air Lines, says his company is burning through US$60m a day while 600 aircraft are parked on the tarmac and 80 per cent of April's scheduled flights are cancelled.
Iata, the aviation industry's trade body, has warned that some 25m jobs in both the aerospace and aviation sectors are at risk if governments do not step in with lifelines.
"I wish I could predict this would end soon," Bastian told employees in April. "But the reality is we simply don't know how long it will take before the virus is contained and customers are ready to fly again."
For Boeing, already struggling to overcome the grounding of its 737 Max single-aisle fleet after two fatal crashes, and for Airbus, which earlier this month slashed aircraft production by a third, the world has changed enormously. It is a sharp U-turn for companies which in recent years had so relentlessly increased production that they sometimes struggled to sustain it.
Only in February Boeing and Airbus were confidently predicting demand for more than 40,000 aircraft worth roughly US$7t over the next 20 years. In March, even after Italy went into lockdown, Airbus was pushing European suppliers to invest in accelerating production of the single aisle A320 — the company's runaway success — says one of its key programme partners, who asked to remain anonymous.
Now airlines are preparing for a long period of depressed demand and, having taken on substantial debt to survive the crisis, will not be fighting for aircraft delivery slots as they were just a few months ago.
"More order cancellations and deferrals are coming," predicted Cai von Rumohr, aerospace analyst at Cowen investment bank, in a note to clients last week. "We are in uncharted waters."
The impact of the aviation shutdown on the aerospace industry is beginning to raise concern at government level.
Aerospace companies are not only lifelines for tens of thousands of high-tech suppliers, ranging from big international companies such as Rolls-Royce and General Electric to small family-run businesses providing low volumes of critical components.
They are also strategic enterprises for their governments. They pay higher than average wages, drive innovation and generate healthy trade surpluses. In 2018, the sector was responsible for the largest share of the EU's high-tech exports at €94 billion ($169b), while US civil aerospace exports were worth US$122b.
When Boeing had to suspend deliveries of the 737 Max single aisle after it was grounded last year, US economic growth slowed. President Donald Trump said in April he would do "whatever is necessary" to help Boeing, which has called for US$60b in state aid to help the industry and its supply chain through the crisis.
Teal Group, the aerospace consultancy, estimates the total value of the global industry is close to US$1t. More than half that value lies in the supply chain behind the big aircraft and engine manufacturers, according to Aerodynamic Advisory, another consultancy.
Many of those suppliers have invested heavily in recent years to meet the demands of aircraft makers, anxious to capture the more than 6 per cent average annual growth in passenger traffic the industry has experienced over the past five years.
While passenger traffic growth had begun to slow before the crisis, in particular for widebody aircraft, the market was still growing on the back of demand in countries such as China and India.
In 2018, Boeing increased the number of employees in its passenger jet division for the first time in six years — hiring 9,000 new workers to raise its total to more than 64,000.
Since 2016 Airbus has increased employees in its commercial aircraft business by 7,000 to nearly 81,000 to help deliver on its record order book.
But some in the sector believe the shape of the aviation industry will be vastly different when the crisis ends, with consequences for aircraft demand and the number of jobs in the industry. Much will depend on how and when governments decide to lift travel restrictions and what passengers will expect when they finally decide to travel again.
"Do we really want to be flying within a few centimetres of someone? Will we be expecting more space on aircraft in the future?" asks Phil Seymour, president of the International Bureau of Aviation, which advises airlines and leasing companies on fleet management.
"All of this is potentially game changing for what airlines can offer as a product and what it will mean for manufacturers."
Rob Morris of Ascend by Cirium, an aviation data consultancy, estimates that seven years of passenger traffic growth could be wiped out if Iata's prediction for a 48 per cent fall in traffic this year proves true.
"To return to the level of traffic we enjoyed in 2019 would require nearly 100 per cent of compound growth on the demand forecast for 2020," he says. "Achieving that growth even over the next two years seems extremely optimistic."
Under the Iata scenario, between 12 and 35 per cent of the 20,150 commercial passenger jets in service at the beginning of 2020 would be surplus to requirements by the end of the year, he adds. That is up to 7,000 aeroplanes.
Fewer aircraft in operation will also mean lower income from aftersales services, an important profit stream for the aircraft makers and engine manufacturers such as Rolls-Royce and GE.
Brian Burridge, chief executive of the Royal Aeronautical Society, believes there will be no going back to the good times for several years at least. "We believe the airline ecosystem will be 50 per cent smaller," he says. Many airlines will shrink and others collapse. "Out of the world's nearly 1,000 airlines a lot are just bubbles of debt with wings."
Boeing halted all commercial aircraft production at its facilities for nearly three weeks to introduce safety measures such as new shift patterns and social distancing to protect workers, several of whom have fallen victim to the virus.
But no one expects the US aerospace giant — which faces a US$19b bill for the 737 Max crashes — to return to previous production levels when it restarts this week. The company has reportedly looked at job cuts of up to 10 per cent of the workforce. And it may be forced to delay the launch of its newest wide-body jet the 777X.
The squeeze on Boeing is particularly severe as customers are now cancelling orders for the Max — which had been expected to be the company's best selling model — and there are doubts over how many of the 400 jets the company has already assembled can be handed to airlines that no longer need the capacity. Production of the Max, when it gets a safety all-clear from authorities, will also be far lower than initially expected.
"The last thing any airline wants right now is for the Max to be recertified," says one consultant to several major carriers. "The industry does not need new aircraft."
Bernard Delvaux, chief executive of Belgian aerostructures group Sonaca which supplies both Boeing and Airbus, says any hopes he had of a quick recovery have evaporated and job losses are inevitable.
"It is becoming more and more clear that there will be a very significant impact not just on 2020, but on 2021 and 2022 for the whole industry," he says. "We will have to reduce the size of our operations and do it quickly."
Big aerospace suppliers such as GE Aviation, Spirit and others have already announced sizeable job cuts. More will follow once the emergency payroll support offered by many governments during the crisis ends, say several aerospace executives.
Manufacturers such as Boeing and Airbus, as well as engine makers General Electric, Rolls-Royce and Safran, are keenly aware of the risks of supplier disruption. Unlike the car industry the aerospace supply chain is highly regulated, with each supplier certified to provide parts or systems.
Yet many are small businesses, sometimes with only a few dozen employees, and many are struggling to deal with both the impact on workers' health of the virus and the changed outlook for demand which is draining already scarce cash.
"Many of our suppliers will not survive," says a senior executive from a major engine maker. "They have invested a lot and their sales will not now support those fixed costs."
Some manufacturers could be forced to bail out critical suppliers, he says. "We are thinking of getting new suppliers certified, [to safeguard supply] but that takes time. So we may be forced to buy some of them."
Other senior executives fear the crisis could accelerate competition from new entrants to the commercial aerospace industry, such as China's Comac, which is building the narrow-body C919. Chinese companies, with strong backing from the state, have already acquired a number of small to medium sized aerospace suppliers in Europe and the US.
"I am worried that the Chinese may buy, at very low prices . . . a lot of expertise and knowhow," says one executive.
Richard Aboulafia, vice-president at Teal Group, says there is an even bigger risk if the current crisis leads to heightened tensions between west and east. As the fastest-growing market for aviation, Chinese demand is vital to the success of the existing global aerospace industry.
"Do Chinese aircraft stand a chance in the global market? No, not for some time," he says.
"But is there a chance China becomes its own market? Yes. You could satisfy an enormous amount of Chinese demand from about 2030 with the C919 and then you have removed [between] 25 and 30 per cent of [global] narrow-body demand. Foreign policy is one of the biggest risks."
The key for western companies, say executives, is to maintain a technological lead. But that becomes more difficult when cash is scarce, customers are in no position to buy and banks are more reluctant to lend.
Both Boeing and Airbus have shelved non-essential investment for the time being, and that appears to include any plan for a new midsized aircraft as was mooted by the US aerospace company before the Max crisis. That has now been delayed by several years, say suppliers to both companies.
"A new aircraft? For what market?" asks Charles Champion, former head of engineering at Airbus and now a director at Akka Technologies, the technology consultant. "We don't know what that market will be like in the short term and who will be in a position to commit to a new programme."
In the meantime, many in the industry are fighting for their very survival. "Travel will take a big hit and the backlog [of orders] could shrink very quickly," says one senior banker to the aerospace industry. In that context, Boeing's decision to take the hit of more than US$20m on the sale of a single 787 Dreamliner seems less extraordinary.
Written by: Peggy Hollinger
© Financial Times