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Summary
- The global aerospace industry has just recorded its worst quarter this year with the lowest number of new orders recorded
- Job redundancies in the sector are expected to rise further if the situation persists. Industry experts also warned over delayed Brexit deal
- Boeing and Airbus are already burdened for achieving the carbon-neutral pledge by 2050
Not just the airline carriers, but the aircraft manufacturers are under immense pressure due to the coronavirus pandemic. With the lowest number of new orders recorded, the global aerospace industry has just seen its worst quarter this year.
Due to the coronavirus crisis, the UK has already lost thousands of jobs all over its supply chain. According to the aerospace and defence lobby group ADS, the aircraft manufacturers received only 13 orders in July and August. According to some media reports, the situation is grim, and nearly 10 per cent of the workforce in the aircraft manufacturing sector could lose their jobs in the near future. Airbus had recently announced to cut its workforce by 15,000 across the globe.
Also read: Covid -19 Battered UK Aviation Sector Still Has the Hope of Government Support
Moreover, the UK government has not been focusing on aircraft certification standards as the Brexit deadline is approaching fast. The battered sector is in dire need of a bilateral agreement with Europe in order to mitigate the risk of existential crisis. Notably, the UK’s aerospace sector is a huge contributor to global exports and generates a lot of employment opportunities. The aircraft manufacturers, such as Boeing and Airbus, are already burdened for achieving the carbon neutral pledge by 2050; and therefore, are investing in developing green aircraft technologies.
Also read: Rolls-Royce records losses; Aviation Sector Woes Seem to Continue
The devastation caused by the coronavirus pandemic across the world does not seem to be ending anytime soon with the United States witnessing a fresh new high. Most countries are grappling with a renewed wave of infections along with the US presidential elections round the corner. In the UK, uncertainties in the economic environment continue to loom large as the Brexit deadline round the corner. Another lockdown and a stock market crash, not so impossible in the future, may damage the economy further.
Also read: Global Aviation Industry Likely to Have A $314 Billion Of Coronavirus Impact
A quick analysis of Rolls-Royce and Meggitt to understand how well they are prepared to tackle the lower demand.
Rolls-Royce Holdings Plc (LON: RR.)
- Rolls-Royce Holdings Plc started the year (2020) on a positive note. The coronavirus pandemic weighed heavily on the company’s performance during the first half of the year and its medium-term growth objectives.
- The sector was worst hit, especially the Civil Aerospace segment, as the skies remained closed and the fleet was grounded due to the travel restrictions across the world.
- Power Systems were comparatively less affected as compared to the Civil Aerospace category. Conversely, the defence segment remained resilient without much material impact; however, industrial markets were suppressed. ITP Aero was affected as severely as Civil Aerospace.
- With cost-reduction measures in place, Rolls-Royce is expected to reap the cash flow benefit of over a billion pounds in 2020. The company did not recommend any final dividend payment for the first half of 2020.
- The outlook seems to be a bit gloomy as the company expects a gradual recovery to kick in the civil aviation activity towards the end of the second half of 2020. However, recovery in Power Systems is expected by the end of 2021. The revenues are also likely to reach similar levels in 2021 as they were seen in pre-pandemic times.
Despite the odds in the trading environment, the defence segment is likely to remain untroubled. Furthermore, the FTSE 100 listed aircraft engine maker expects a large engine delivery to increase post 2022. However, as of now, they look to remain below 2019 levels in the next five years.
This year’s underlying revenue is projected to be lower by a third than 2019. The engine maker has already announced nearly 3,000 job cuts. The company is taking all the required actions to bolster liquidity. On a YTD basis, Rolls-Royce shares were down by 64.22 per cent.
Meggitt Plc (LON:MGGT)
- The first half-year performance of the aerospace and defence company Meggitt Plc stood in line with the expectations. Meggitt expects neutral cash flow in 2020. However, the first half of 2020 performance was impacted by the catastrophe caused by the coronavirus pandemic severely impacting the civil aerospace business due to travel restrictions that led to the unprecedented reduction in global air traffic activity.
- In the defence segment, the company continued to perform strongly and accounted for 43 per cent of the Group's revenue during the first half of the year.
- The company expects unprecedented challenges in the trading environment to continue during the second half of 2020. The company also expects the market to recover in the civil aerospace sector as commercial airlines are resuming gradually.
- Overall, Meggitt seems to be well-poised to see through the critical period and could deliver long-term, profitable growth upon successful recovery.
Meggitt has a robust liquidity position with headroom of £856 million on committed facilities and net debt of £1,000 million. It has strong cost optimisation mechanisms in place which can reduce costs, protect cash and restructure, if necessary. The company has shown an initial sign of recovery, with an active fleet recovery of 67 per cent by the end of July. Also, the company recorded a slight recovery in air traffic. In April, Meggitt announced to axe nearly 2,000 jobs due to the coronavirus impact. On a YTD basis, Meggitt shares were down by 53.32 per cent.
The coronavirus pandemic has caused severe disruption in the global supply chain and the consumption in end markets. While the demand has lowered along with the average number of travellers. The sector is prone to various risks such as fluctuations in foreign currencies, oil prices, interest rates, and other macroeconomic factors. Delaying trade agreements with Europe could potentially add to the woes of the UK aerospace sector.
