Different verticals have been reflecting varying dynamics in the COVID-19 situation. Pockets of the healthcare industry are soaring with significant investments being pumped in, while the already bleeding transportation industry is striving to stay afloat. As expected, with air passenger traffic plummeting 94 percent globally, the capital-intensive commercial aerospace industry has been sustaining itself on a shoestring and holding on to its rapidly depleting cash reserves. Some expect the commercial aviation industry’s recovery to pre-pandemic levels could be as slow as three to five years, thus compelling industry stakeholders to find and hook onto new revenue channels other than the conventional fleet services.
The two major airframers, Airbus and Boeing, which were ramping up their production functions to meet the increasing demands a few months back, have retreated. They have axed their global workforces, reduced investments and aborted production due to the sudden drop to negligible demand for new aircraft. France, which is the home to Airbus and several other A&D majors and represents one of the global hotbeds of aviation technology innovations, is vulnerable to this lurking threat of mass layoffs. The French government has consistently declared a series of measures directed towards reviving the French aviation industry. These measures span loan guarantees, wage subsidies for laid-off workers and an investment fund for small enterprises.
While the fund provides some breathing space to the European aviation industry, Airbus has been in a slightly better position to sustain its operations in these dire times. The French behemoth is also expected to come back stronger after the pandemic due to the following reasons.
- Dominance in the single-aisle segment: The single-aisle, or narrow-body, jet segment comprises more than 75 percent of the global commercial aerospace market by volume. Airbus’ significantly successful A320 series of single-aisle jets had gained a strong customer base and had been quite well positioned in the market against the Boeing 737MAX before the pandemic hit. The recent crashes of Boeing narrow bodies had added to Airbus’ momentum and provided the necessary push for it to be the forerunner in the single-aisle market. Airbus’ acquisition of the Bombardier C-Series product line has reinforced the position of the French juggernaut in the single-aisle market.
- Resort to “keeping the lights on:” The overarching engineering cloak across aerospace products and services is poised to change. The post-pandemic era, whenever it might be, will witness a change in product lifecycles for most aircraft components, from small interior consumables such as in-flight entertainment systems to huge turbojet engines. The OEMs are expected to keep their manufacturing service lines live with minimal production and inspection activities, mostly directed towards the aftermarket. While the OEMs are expected to avoid new technology/product programs completely, innovation may emerge from sustenance exercises. The need to operate manufacturing plants with a minimal workforce can pave the way for augmented reality and virtual reality (AR/VR)-enabled inspections. Airbus has been one of the pioneers in deploying mixed reality (MR) across functions of crew training, maintenance and marketing. It can thus be expected to implement MR with more dexterity, and to effectually enable a paperless manufacturing environment with minimal operational touchpoints.
- Aligning recovery with environmental viability: Despite the ripples of slowdown, Airbus has been living up to its commitment towards environmental viability. A portion of the French government’s $17 billion rescue fund will be directed towards progressing with the planned development of greener aircraft of the future. Almost half of the recovery fund was directed for aiding the national flag carrier, Air France-KLM, which has typically been an Airbus-inclined carrier. The aid will be in the form of loans and guarantees, as a recompense for the carbon emission reduction commitments and domestic route service continuance.
Not all sunshine and rainbows for Airbus
Despite of its technology prowess and successful product lines, Airbus’ road out of this difficult situation may not be a cakewalk. Some of the reasons are as follows.
- Hiding the WTO scar: While Boeing has reportedly been avoiding accepting U.S. government subsidies, the proposed rescue fund by the French government may create a more adverse situation for Airbus instead of a possible lifeboat. The U.S.-filed WTO case against Airbus on launch aid allegations would be strengthened if Airbus accepted help from the French government fund, and could result in reparations across several business levels at a time of airline belt-tightening.
- Overshooting the caution mark: The investment in Bombardier’s C-Series product line (which has been rebranded as the A220) may have increased the Airbus footprint in North America, but the jetliners are yet to be adopted widely. Airbus may have to bear the brunt of this investment risk, which is intensifying in this dire situation, while its American competitor held onto cash by refraining from the planned acquisition of the Brazilian plane maker Embraer. As a recursive measure, Airbus would need to work on a strategy of seamlessly integrating the acquired Bombardier features into its single-aisle portfolio.
- Sidestepping a balanced portfolio: Airbus has typically been a commercial aerospace market-focused stakeholder, which subjects it to the volatilities of the global economic turbulence. Boeing’s balanced defense business partially neutralizes this risk with its world-class products, multidimensional research-heavy programs and cross-border acceptance.
Airbus would thus need a razor-sharp strategic blueprint to evade these hindrances.
Overall, the product design and manufacturing engineering innovations would revolve around cost and dictate the market susceptibility for the aerospace vertical as a whole and for every single application. The aerospace industry typically has been crowded with technologies that often did not make it to commercialization. Presently, innovations or R&D projects that are too futuristic may discourage their investors due to the uncertainty of the projected ROI. Airbus has been considerably well balanced in its investments with respect to sharpening its technology prowess and bringing in disruptive innovations, such as all-electric configurations, to its product lines.
Although the government-declared fund presents a level of indemnity for the French aviation workforce, it cannot completely neutralize the need for cost optimization through aggressive job cuts. The Airbus backlog of 7,621 jets at the end of May 2020, which the manufacturer was striving to overcome, has been reduced significantly due to several order cancellations. Shelving its production ramp up plans to manufacture more than 800 aircraft by 2023, and switching production to just sustain activities has compelled the behemoth to abruptly abort various programs. This is expected to continue for at least the remainder of 2020. The A330 and A350 production plans also have been scarred by declining demand, resulting in an impactful 6,000-employee furlough across Europe. However, compared to other airframers, Airbus had less order cancellations and its A320 product line still flaunts a healthy pipeline. The company has also refrained from pulling the plug on A220 (the rebranded Bombardier C-Series) production.
Can outsourcing help?
While these kinds of tectonic shifts due to COVID-19 are short-term, the underlying engineering/manufacturing stakeholders have learned their lesson from the pandemic and have been planning to fire all pistons towards sustenance after the global recovery. The engineering service suppliers such as Altran (Capgemini), HCL and L&TTS have had longstanding relationships with the aerospace OEMs and are expected to play a big role to help the industry recover faster.
Engaging outsourcing service providers by OEMs has moved beyond a mere cost benefit for most verticals, and aviation is no exception. It has evolved to an overall value proposition across the product excellence value chain for faster time to market. The French government’s rescue fund can be appropriately utilized through a cost restructuring of the outsourcing landscape for Airbus as well as the French carriers. With the reduction in manufacturing plans, the OEMs can fire up captives in emerging economies. By fluidizing the workflow between the offshore captives and the onshore facilities, a more holistic and intertwined functioning can be realized across the organization. While the new aircraft production activities take a backseat, the OEM may consider tapping opportunities in the aftermarket. The grounded fleet globally would require thorough maintenance to support efficient airborne activities after the pandemic. Consistently, Airbus should engage technology-enabled practices like AR/VR-driven condition maintenance and the latest non-destructive testing technologies to analyze component airworthiness. The outsourcing service providers are typically proficient with these kinds of top-notch technologies, so Airbus can join forces with its outsourcing partners to combat the competition from the MROs. Several of Airbus’ existing partners, such as India-based Tech Mahindra, have robust, in-house aircraft health monitoring systems (AHMS) offerings, which have already been tested successfully on the A220 models. These technologies can be scaled up for remote monitoring across fleets to bring down MRO costs for the operators. Furthermore, the old aircraft refurbishment market has been thriving due to its cost competitiveness compared with new jetliners. This has jacked up the associated markets, such as aircraft component testing, thus necessitating robust non-destructive technologies for older components that can be retained, and for new composite-based parts. Airbus should leverage the structural engineering excellence of outsourcing players to effectually pursue the opportunities offered by this thriving market.
ISG Provider Lens™ deep-dives into these changing industry nuances pertaining to the manufacturing horizontals in its upcoming Manufacturing Industry Services study. The study offers an inside-out view of various dimensions of modern manufacturing technologies and the outsourcing imperatives.
To conclude, Airbus needs to align its strategy with the fluctuating dynamics of the aviation industry dictated by the economic, political and social impacts of the COVID-19 pandemic. The company is in a potentially more favorable position than its major competitor, with fewer cancellations, and is even recording some new orders. Its sovereignty in the single-aisle segment and increased outsourcing-driven growth strategy practiced over years send out the right message for revival in the industry, instead of an SOS for help. Switching to a reinforced, maintenance-heavy business strategy from a manufacturing-driven strategy can help Airbus bolster its growth plan for the post-pandemic era as well as help it to combat the hostilities of the current situation, enabling it to tugboat the European aviation industry away from the cloud of uncertainty.
- ISG Provider Lens™ Engineering - Service Partners - Global 2019-20 - Aerospace Manufacturing Engineering
- ISG Provider Lens™ Engineering - Service Partners - Global 2019-20 - Aerospace Product Engineering
- ISG Provider Lens™ Engineering - Service Partners - U.S. 2019-20 - Aerospace Manufacturing Engineering
- ISG Provider Lens™ Engineering - Service Partners - U.S. 2019-20 - Aerospace Product Engineering
- ISG Provider Lens™ Engineering - Service Partners - Germany 2019-20 - Aerospace – Manufacturing Engineering
- ISG Provider Lens™ Engineering - Service Partners - Germany 2019-20 - Aerospace – Product Engineering
About the author
Avimanyu brings around 8 years of experience in market research and consulting. At ISG, Avi has been working on research deliverables directed towards engineering services outsourcing/offshoring markets outlining the digital makeover of industries. Prior to ISG, Avimanyu’ s engagements were focused on providing strategic recommendations to both public and private sector clients across Europe, Middle East and Asia Pacific across commercial aerospace, energy and automotive industries
Research Focus : Software Defined Networks(SDN) and Engineering Services (ES)
View reports by Avimanyu