The aerospace industry is facing unparalleled disruption and uncertainty emerging from the continued grounding of Boeing’s 737 Max and the COVID-19 pandemic.
Some Michigan manufacturing companies that have grown their operations in the aerospace supply chain over the past decade will not survive this crisis, according to Tony Vernaci, president of the Rochester-based Aerospace Industry Association of Michigan (AIAM).
“There are going to be some companies that won’t be able to weather the storm,” Vernaci told MiBiz. “They’re going to wind up probably closing their doors.”
The health and economic effects of the coronavirus outbreak are expected to linger, and air travel will not recover from the damage that has already been done for years to come, according to executives at the industry’s biggest manufacturers.
Last month, after reporting that revenue dropped by 26 percent in the first quarter of 2020, Boeing Co. CEO Dave Calhoun told shareholders the negative effects of the coronavirus pandemic are likely to affect the company through at least 2023.
Next month, in the first wave of “several thousand” job cuts, the company is permanently slashing about 16,000 employees. Production of commercial aircraft will slow, including the troubled 737 Max, the 787, the 777 and the 777x.
Calhoun said suppliers that had been gearing up to expedite production after the 737 Max eventually receives clearance to return to service will now face even greater challenges.
“The plans they have made and the investments they have made around the future, not dissimilar to ourselves, they now have to tear up and start over and resize themselves to accommodate that new future,” Calhoun said.
Airlines are also reporting breathtaking freefalls. Globally, airlines are forecast to lose $314 billion this year, according to the International Air Transport Association. In the U.S. alone, passenger traffic is down 95 percent and 2,800 planes are grounded, Calhoun said.
Moreover, airlines are slowing down or stopping payments, deferring airplane orders and postponing delivery of completed orders from Boeing. Deliveries dropped 66 percent in the company’s first quarter.
The drastic job cuts at Boeing are likely to spur thousands of local layoffs. In a letter to employees, GE Aviation President and CEO David Joyce laid out a plan for a 25 percent permanent reduction to the company’s global employee base of about 52,000 people.
Information about local cuts is not yet available, according to Jennifer Villarreal, GE Aviation’s communications and media relations leader based in Grand Rapids. GE Aviation employs about 1,000 people in West Michigan.
It’s difficult to overstate the effect even small disruptions at Boeing or European competitor Airbus can have when they ripple down to local manufacturing suppliers in the sector, AIAM’s Vernaci said. The organization is already in talks with some “overwhelmed” and “exhausted” members.
“Our job is to try to help these companies understand that there could be other options before filing bankruptcy or closing their doors, so don’t give up yet,” Vernaci said.
He predicts the shuttering of local aerospace companies to start this year and bleed into 2021.
“I don’t think it’s going to be a landslide or a freefall of companies going under, but some of the companies that were undercapitalized or with poor cash flow and just leveraged very highly, they’re going to have a tough time,” he said.
In the wake of inevitable exits in the sector over the coming years, Vernaci said he will work to keep the state’s aerospace supply chain as intact as possible.
“If a company isn’t able to hang on and survive the storm, that’s business for other people to pick up,” he said. “There will be opportunity for some, which is unfortunately at the price of the misfortune of others.”
Opportunities for aerospace suppliers may also lie in cuts to internal manufacturing programs at Boeing.
“These companies were having a tendency to try to bring more of the things they were doing in the supply base back in-house,” Vernaci said. “That’s going to change now because to bring it in-house, that means more complexity and pieces for them to manage.”
As manufacturers across all industries learned from the Great Recession, diversification can aid survival in a turbulent economy. Several aerospace manufacturers in West Michigan also supply the medical device, automotive and defense industries.
“The aerospace industry got so big in Michigan because suppliers got tired of the automotive rollercoaster and said, ‘OK, we’ve got to saddle something else up because we have all of our eggs in automobiles and it’s feast or famine,’” Veranci said. “That made a lot of companies become a lot smarter about who and what they do business with.”
Although the automotive industry doesn’t seem to be a beacon of opportunity this year — vehicle production and auto sales are forecast to plummet in 2020 — medical device production might increase because of the ongoing health crisis. Meanwhile, defense manufacturing remains at least relatively stable.
Military and defense contracts helped offset losses related to commercial airline production at GE Aviation, according to Chairman and CEO Larry Culp.
“The rapid contraction of air travel has resulted in a significant reduction in demand as commercial airlines suspend routes and ground large percentages of their fleets,” he said during the company’s first-quarter earnings call. “On the other end of the spectrum, demand for our military business remains strong. To that end, we rebalanced some of our capacity to meet this increased demand.”
Under the Trump administration, the federal government is still “pumping more into their defense spending,” according to Vernaci. In fact, some local defense manufacturers have seen an uptick in orders recently, he added.
“That’s a good thing and I think time will tell how much the government can keep piling up more and more debt and putting out more stimulus and spending more,” he said. “But there’s opportunity in everything if you choose to look for it.”