A new report from global consultancy Oliver Wyman suggests that after a truly turbulent 2020 for the global aviation industry, 2021 may be another rough ride. But early signs indicate which segments could lift the fleet back off the ground.
In its newly released Global Fleet and MRO Market Forecast 2021-2031, Oliver Wyman’s analysts note that even pre-pandemic, global aviation was facing a downward trend in projected profits due to slower economic growth (global GDP has historically been a key aviation demand driver).
But slowdowns were being observed in airline passenger travel (as well as in freight cargo) as early as 2019. That year, freight ton kilometers (FTKs)—a commonly used performance metric for the cargo segment—dropped below 2017 levels, due to trade tensions between the U.S. and China, along with the E.U.
According to figures from the International Air Transport Association (IATA) and cited by Oliver Wyman, 2019 aviation industry profits lagged early year projections by 30 percent.
Even that laggardly profit number—$26 billion—will be a high bar for the industry for the foreseeable future.
Per IATA, total aviation losses for 2020 likely exceeded $118 billion globally. At least 20 airlines around the world filed for bankruptcy protection, while more than a dozen others have ceased operations. And while governments worldwide have provided more than $170 billion in financial support for airlines since the onset of covid, Oliver Wyman’s researchers say that with global air travel demand stuck at half of 2019 levels, more support will be needed.
Overall, while the industry will take less than half of the hit it did in 2020, and growth could pick up in the second half of 2020, neither the airline, aerospace or MRO (maintenance, repair and overhaul) subsegments are expected to catch up with pre-covid projections by the end of the 10 years. With the exception of China, where domestic air travel regained pre-pandemic levels in November 2020, Oliver Wyman says most global carriers are likely to burn through millions in cash daily for much of 2021. Some will face grueling restructurings and consolidation.
Map shift
Meanwhile, although the largest fleets have historically been based in North America and Europe, the largest gains over the next decade are likely to come from developing economies in Asia and the Middle East.
Per Oliver Wyman’s research, as of January 2021, these regions had recovered to 87 percent of pre-pandemic fleet size, compared to 80 percent for the rest of the world. The firm now anticipates that over half of total fleet growth through 2031 will happen due to increased travel in developing regions that, as of 2021, account for less than one-third of the global fleet.
They say there’s no question that the overall global fleet will be smaller, and this will have ripple effects across the industry. Early aircraft retirement may reduce aerospace sales of new parts, due to increased competition from a supply glut of used components and so-called green-time engines (which are operational for only a limited period of time after being retired) harvested from retired aircraft. Oliver Wyman says it could take up to three years for the market to work through its excess of used serviceable material.
And for MRO companies, a smaller fleet means less work. Demand is expected to be 33 percent, or $60 billion, below combined pre-covid projections for 2020 and 2021. Oliver Wyman’s long-term growth forecast for MRO is now at roughly half of pre-pandemic expectations, a reduction in demand estimated at $95 billion from 2021-2031.
Slow liftoff
However, there are signs of relative strength and investor opportunity. While near-term demand is very low, Oliver Wyman says that this weakness, combined with a longer-term growth outlook of 3 percent projected CAGR during the ten-year period, presents an attractive entry point for private equity investors, and interest in MRO from that segment is keen.
There are also early indications that the nascent recovery is being led by demand for narrowbody (single-aisle) aircraft. While narrow body production forecasts are currently at 40 percent below 2018 levels for 2021, Oliver Wyman expects narrowbody planes to recover to within 10 percent of its original pre-pandemic projections by the final years of the forecast period.
This is being driven, in particular, by demand for the Airbus A321LR (long-range), which has remained resilient even amid the pandemic. The aircraft, which has the longest range of any single-aisle jetliner, was optimized to serve transatlantic and other routes previously flown with Boeing 757s or widebody aircraft, with the added benefit of providing airlines with increased scheduling flexibility.
Oliver Wyman says deliveries of narrowbodies in 2021 will also be bolstered by decisions by the U.S. Federal Aviation Administration (FAA) and European Union Aviation Safety Agency to re-certify the Boeing 737 MAX for commercial service. More than 20 737’s have already returned to carrier fleets since the recertification, but there are 400 to 450 more MAX aircraft, built in 2020, that are stuck in Boeing’s inventory undelivered or not sold.
Finally, the firm notes, the number of narrowbodies in the global fleet will be expanded by almost 400 737s that airlines have kept in storage since the plane was grounded due to safety concerns back in March 2019.
