Aerospace players cut production as orders dry up

Based on previous recovery trend, aerospace segment may rebound and reach double-digit growth in next 3 years on air travel necessity

by SHAHEERA AZNAM SHAH/ pic by MUHD AMIN NAHARUL

MALAYSIAN aerospace companies have been forced to cut production as orders for plane parts dry up following manufacturing shutdowns at global aircraft makers The Boeing Co and Airbus SE.

Malaysia is an important player in the aircraft components market and is currently the largest component supplier to Airbus in South-East Asia and fifth-largest globally.

Boeing announced last week another 60 cancellations of its 737 Max orders for June, on top of the 47 cancellations announced earlier as airlines withdraw from order commitments due to the fallout on air travel from the Covid-19 pandemic.

Boeing said customers had cancelled 355 orders of the 737 Max in the first half of 2020.

Meanwhile, Airbus is looking at an imminent restructuring plan involving thousands of layoffs as the European planemaker reduces its production by 40% in the next two years.

Malaysian Aerospace Industry Association president Naguib Mohd Nor said local aerospace players have suffered between 30% and 40% decline in revenue since the pandemic hit the economy in March.

“Local manufacturers of aircraft parts have been forced to cut production due to shutdowns of aircraft manufacturing, particularly by Boeing and Airbus.

“With some of the airlines cancelling their orders, it will put extra pressure on the suppliers, especially on their production and internal operation, if the pandemic crisis doesn’t recover,” he told The Malaysian Reserve.

Naguib said the pandemic has also disrupted the industry’s workforce, with an estimated 1,000 workers in the component manufacturing segment already laid off through retrenchment and contract discontinuation.

He said the aerospace industry could terminate between 3,000 and 5,000 workers if the pandemic crisis continues, mostly from maintenance, repair and overhaul, manufacturing and support services.

“The workers in the local aerospace industry are mostly Malaysians. The truth of the matter is that unemployment is going up and it will continue for about a year as the economy recovers.”

He said the impact on aviation will continue until international borders are opened.

“The airlines are not taking up orders as they are heavily geared with loans and leasing contracts, they are only going deeper into debt.

“Thus, they hold their options to take the aircraft and obviously it will affect the supply chain as deliveries are now reduced.”

However, Naguib said based on the recovery trend during the previous crisis, the aerospace segment is estimated to rebound and reach double-digit growth in the next three years due to the necessity of air travel.

“From the 1960s onwards, the aviation industry has shown to record a double-digit growth after a crisis such as SARS (Severe Acute Respiratory Syndrome), MERS (Middle East Respiratory Syndrome) or financial crisis.

“The factor driving the trend is the need for air travel as it serves a function in global connectivity and is no longer considered a luxury.

“Statistics today showed that only 20% of the world population has been on an aeroplane, which means there is a market for the remaining 80% of the population.”

Naguib added that the expected recovery of the aviation industry will provide a spillover effect onto the aerospace market, which has been growing exponentially in Asia Pacific and South-East Asia.

“If you look at the growth of the aerospace industry in the last five to ten years, the big growth has been in Asia Pacific and South-East Asia as this is where the economic growth has been happening.

“It will still be uncertain until the economy recovers, but when it does, the aviation sector is expected to recover quickly as the airlines have been favouring the low-cost business model.”

According to the Airbus’ Global Market Forecast for 2019-2038, the aviation traffic has been resilient to external shocks and records higher rate of growth every 15 years since 1978 after the oil shock during the Iranian Revolution — an incident which led the crude oil price to double within 12 months.