Boeing and Airbus Brace for Prolonged Downturn

 

Already hurt by the yearlong grounding of its 737 MAX aircraft, Boeing reported its second consecutive quarterly loss. PHOTO: ANDY RAIN/EPA/SHUTTERSTOCK

4/29/20

By Doug Cameron and Andrew Tangel
The Wall Street Journal

Aerospace companies outline survival plans as airline customers reel from near-collapse of air travel

The world’s biggest aerospace companies outlined survival plans that include thousands of job cuts and raising fresh funds as their airline customers reeled from the coronavirus pandemic and the near-collapse of global passenger air travel.

Boeing Co., rival Airbus SE and their engine supplier General Electric Co. detailed their initial responses to the crisis that has engulfed the industry after travel restrictions and fear of flying grounded more than half the global jet fleet.

The once-booming aerospace industry has suffered one of the fastest and sharpest changes in fortunes, forcing the manufacturers on both sides of the Atlantic to prepare for a sustained period of reduced demand for their planes that, optimistically, could take three years or more to reverse.

“We will be a smaller company for a while,” Boeing Chief Executive Officer David Calhoun told investors Wednesday. Already wounded financially by the yearlong grounding of its 737 MAX aircraft, the company reported its second consecutive quarterly loss alongside plans to cut jetliner production and shed 10% of its workforce.

Mr. Calhoun outlined a modest near-term plan: catering to airliner retirements instead of fleet growth, and holding off on designing new aircraft. The airlines and leasing companies that helped Boeing and Airbus build up a trillion-dollar order backlog of more than 13,000 jets are already starting to cancel deals and defer new aircraft until a hoped-for recovery in airline travel.

Delta Air Lines Inc. and Deutsche Lufthansa AG , which have already idled most of their jet fleets, are among the carriers that have said they expect to emerge—with government aid—far smaller than before the pandemic crippled the industry.

Airbus CEO Guillaume Faury said Wednesday the European plane maker plans to “right-size” its business, embarking on a wide-ranging cost-reduction effort and cutting jetliner production initially by a third, having struggled in recent years to keep up with demand for its planes.

Suppliers such as GE and Safran SA, which together make engines for both plane makers and supply spare parts and interiors such as aircraft seats, are cutting costs and laying off staff.

The International Air Transport Association, a trade group, expects passenger air traffic to halve this year compared with 2019, ending a decadelong growth surge driven by low-cost airlines and the demand in emerging markets.

Aerospace suppliers have been among the hardest hit by the pandemic because grounded planes don’t require as much maintenance or spare parts. Larry Culp, GE’s CEO, told investors that visits to its repair shops will likely be down 60% in the current quarter from a year ago.

“This is an unprecedented decline in the aviation market and is likely to be challenging for a while,” Mr. Culp said in an interview Wednesday. “We are well aware that it may take a while” for air travel to recover.

Boeing’s services unit, which the company once envisaged would triple in size to have $50 billion in annual sales, is also suffering.

Airbus, which had been gaining market share because of Boeing’s MAX woes, was in better financial condition than its U.S. rival, and said it can reshape itself without government support.

Boeing plans to raise cash and support a supply chain of about 17,000 companies. It burned through $4.7 billion in cash during the latest quarter and said it is considering applying for federal stimulus help, as well as borrowing more from private lenders. The company didn’t detail what type—and how much taxpayer aid—it might seek in coming weeks.

Both plane makers said they were optimistic that airline traffic would resume their long-term growth paths. They just don’t know when.

“We believe this industry will recover,” Mr. Calhoun said, with federal backing for the U.S. airline industry and overseas government efforts providing crucial support for the broader industry.

The planned production cuts outlined by Boeing and Airbus provided suppliers with more certainty about short-term demand, and the sector rallied on the plane makers’ outlooks. Boeing, whose shares have fallen 60% so far this year, closed up almost 6%; Airbus rose more than 10%.

For airlines, the pace of recovery hinges on securing emergency cash and addressing the patchwork of national travel restrictions imposed as the pandemic ripped across the world.

Airbus CEO Guillaume Faury said the European plane maker plans to ‘right-size’ its business.
PHOTO: BALINT PORNECZI/BLOOMBERG NEWS

IATA, the trade group, is coordinating a series of meetings with governments this week to standardize policies such as the health screening of passengers and staff at airports and onboard aircraft. Some carriers, , such as Lufthansa, are already requiring that passengers and crew wear masks.

Airlines now expect barely 10% of pre-pandemic flying in the current quarter. The busy summer travel season in which many carriers usually make the bulk of their profits isn’t expected to herald much improvement, but carriers are starting to make tentative plans for a resumption of flying later this year.

Domestic markets are expected to be the first to reopen, partly because national flying policies can be coordinated and passengers may be wary of traveling overseas. International routes that typically use larger planes could take several years to reach pre-pandemic levels, said Alexandre de Juniac, CEO of the IATA.

The production cuts reflect those expectations. Boeing said Wednesday that by 2022 it will halve production of its 787 jetliner to seven a month and trim output of the larger 777, which is typically used on longer routes.

Boeing plans to resume 737 MAX output this quarter at a low initial rate, rising to 31 a month next year. It had planned to produce about twice as many MAX jets before regulators grounded the aircraft in March 2019 following two fatal crashes.

It is planning for regulators to clear the restart of deliveries from the third quarter. The Federal Aviation Administration has said it has no timeline for approving the MAX and would clear it to carry passengers once the agency deems the aircraft safe.

Boeing, which employed 161,000 staff as of Jan. 1, said it plans to reduce head count by 10% this year, including what Mr. Calhoun said would likely involve involuntary cuts. The company, which is also a major defense contractor, said most of the cuts would come from its commercial-airplane and services arms.

Reduced plane deliveries and sales of spare parts combined with the impact of temporary factory closures and the continuing impact of the 737 MAX crisis led to a quarterly loss of $641 million. Sales fell to $16.9 billion from $22.9 billion.

GE is cutting 10% of the 52,000 employees at its aviation unit and plans to furlough thousands more. Mr. Culp said it would look to make some of the immediate cuts permanent, while GE’s aircraft leasing business is preparing to repossess some of the 1,000 jets in its fleet from customers who have fallen behind on payments.

Airbus plans to furlough staff in France, Germany and the U.K. after eclipsing Boeing last year as the world’s biggest plane maker by deliveries. Airbus said its focus now is cash preservation, as airline customers defer and cancel orders.

Airbus said it burned through €4.4 billion ($4.78 billion) in free cash in the first quarter with the impact set to worsen in the second. It reported a net loss of €481 million during the period, compared with net income of €40 million a year earlier. Revenue fell 15% to €10.6 billion.

“We think our capacity to compete and be strong on the long term is intact, if not improved, as the impact of Covid-19 on our main competitor, on top of the previous difficult situations they had to manage, is probably making us stronger,” Mr. Faury said.

First among Airbus’s potential advantages is its A320 family of jets—a single-aisle rival to the Boeing 737 MAX—including a new long-range variant still in development. The two models once competed fiercely for orders from airlines, which prized their fuel efficiency and flexible range.

Boeing said the pandemic has complicated its own plans to develop new aircraft. Mr. Calhoun said the company will have to wait for a market recovery before designing all-new aircraft tailored to airlines’ needs: “It’s going to take us a while to sort that out.”

— Benjamin Katz and Thomas Gryta contributed to this article.

Write to Doug Cameron at doug.cameron@wsj.com and Andrew Tangel at Andrew.Tangel@wsj.com.

The original story can be found here: https://www.wsj.com/articles/boeing-and-airbus-brace-for-prolonged-downturn-triggered-by-coronavirus-11588199021

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