How Will Aviation Giants Emerge From the Pandemic?

“Do not travel.” That’s the no-nonsense advice from the U.S. State Department in case some restless Americans are thinking of taking to the skies amid the spread of the new coronavirus disease, COVID-19. The reality is that the pandemic has decimated demand for international air travel, as most would-be flyers are sheltering at home and working remotely as best they can. The global collapse in travel is battering Western aviation and aerospace companies, potentially inflicting lasting harm on a strategically and economically vital industry.

A 9/11 Moment

Mostly empty planes are a haunting sight for the global aviation industry, which was heading into 2020 coming off of an impressive money-making streak. “Certainly, no matter how you measure it, it’s been the most profitable five-year period in eighty years of industry history,” said Alex Dichter, a pilot turned McKinsey & Company partner, in a February podcast. Now, operating at a tiny fraction of their capacity, U.S. airlines are receiving billions of dollars in federal bailouts in the hope that they can ride out the storm in the months ahead.

Still, there’s little question that the industry will be forever changed, much like it was after the 9/11 terrorist attacks. While security became the top priority for airports and air carriers after 2001, health and hygiene is expected to become the industry’s focus now. Airlines will look to improve aircraft sterilization and air filtration; require crew and passengers to wear masks; and consider other, more expensive changes, such as cabin redesigns.

Strategic Risks

Large aerospace firms are also getting hammered by the travel drought, which is particularly worrisome for Western governments. Airbus, run by a consortium of European Union countries, and U.S.-based Boeing are considered strategic businesses that make significant economic and security contributions. The two companies produce more than 90 percent of the world’s commercial airplanes—a major high-tech export for both the EU and United States—and employ tens of thousands of highly skilled engineers and technical staff. Moreover, these businesses are critical to the survival of a constellation of smaller suppliers.  

Some industry leaders fear that fledgling Chinese aerospace companies, with support from Beijing, will step into any void left by their U.S. and European rivals and could scoop up companies with deep expertise at rock-bottom prices. And if geopolitical tensions with China intensify in the years ahead, Beijing could look to transition its fast-growing market to domestically produced aircraft and cut Boeing and Airbus out altogether.

A Grim Forecast

The most pressing questions for the industry are: When will governments loosen their restrictions on international air travel? And when and to what extent will passengers start booking trips again? Many analysts and business leaders are not hopeful. Famed investor Warren Buffett, CEO of Berkshire Hathaway, announced earlier this month that he sold all the conglomerate’s shares in several major U.S. carriers, totaling more than $6 billion in stock. “The airline business—and I may be wrong and I hope I’m wrong—I think it has changed in a very major way,” he said at his company’s annual investors meeting. Days later, Boeing CEO David Calhoun predicted that one of the four big U.S. airlines would likely not survive the year.

A pivotal moment could be October 1, when a ban on layoffs by U.S. airlines ends. Retaining employees was one of the conditions that airlines accepted as part of the federal bailout. European carriers have already made heavy cuts, and many feel their U.S. counterparts will be compelled to follow.

For Boeing and Airbus, the fear is that many of the world’s struggling airlines will make do with what they have rather than purchase new aircraft, particularly with a weakened incentive to improve fuel efficiency while energy costs are so low. In recent months, Boeing has had clients cancel hundreds of orders. Declining production at the aerospace giant has the potential to ripple through its vast supply chain, hitting clusters of companies in and around Seattle and Southern California. The firm was already reeling from the grounding early last year of its 737 MAX planes following two deadly crashes. That aircraft is such a valuable product that when Boeing paused production in December 2019, analysts projected it could cut 0.4 percent from U.S. economic output in the first quarter of 2020.

Boeing has announced plans to cut about 10 percent of its workforce of about 160,000 people this year, mostly from its commercial jet division, and more layoffs could be on the way. “While we currently expect two to three years for travel to reach 2019 levels, it will be a few years after that until the commercial market returns to long-term trend growth,” said Calhoun.