Aviation value chain faces collapse
SA’s lockdown, which is set to lead to the demise of several airlines, could have devastating consequences for downstream industries such as equipment manufacturers, airport and aerodrome operators, flight schools, aviation insurance, financing, and aircraft maintenance firms.
SA’s lockdown, which looks likely to lead to the demise of several airlines, could have devastating consequences for downstream industries such as equipment manufacturers, airport and aerodrome operators, flight schools, aviation insurance, financing, and aircraft maintenance companies.
The airline support industries contribute close to R50bn to GDP, employing 23,000 people whose jobs are all on the line, industry stakeholders say.
The airline industry, which contributes about R180bn to SA’s economy and has eight players, will remain largely locked down as the government battles to contain the spread of the coronavirus.
Though lockdown restrictions were eased last week, national borders remained closed and interprovincial travel is still strictly prohibited, which is likely lead to the collapse of more airlines. Already, SA Express, a regional arm of SAA, has tumbled into provisional liquidation. This week, no-frills airline Comair announced it will enter business rescue.
According to Leon Dillman, CEO of the Commercial Aviation Association of Southern Africa (CAASA), the whole support and supply chain plus the direct and indirect beneficiaries of aviation such as the tourism industry have been hugely affected by the lockdown.
CAASA represents nonscheduled commercial air transport operators and many of their key suppliers, among others airport and aerodrome operators — both Airports Company SA (Acsa) and non-Acsa airports on international, regional and local level.
Dillman says only about 10% of non-scheduled activity is continuing under level 4 lockdown regulations, including chartered flights, trading in aircraft and aircraft spares, and other aviation commodities.
Under normal circumstances the aviation profit margins are extremely low (2%-10%), depending on the type of operation). Dillman says keeping aircraft on the ground is extremely expensive as this includes parking/hangar fees, scheduled maintenance costs, financing (repayment), and crew salaries.
“By implication, aviation companies are not just losing out on possible profit, but [being grounded] is costing them huge sums of money.”
The economic loss to the sector is about R1bn a week.
“In my conversation with various flying schools who are unable to use their aircraft for training flights and who are unable to train various foreign students; charter companies that have zero tourist or VIP flights; fuel companies that are not |supplying aviation fuel, and [many other] companies, it is clear that many of these companies will be forced into business rescue or to file for bankruptcy,” Dillman says.
He estimates that should the lockdown remain in place until the end of May, about 50% of all aviation companies will fold.
Johan Steyn, the co-chair of the Commercial Aviation Manufacturing Association of Southern Africa, which represents about 100 companies in the aviation and space sector, says up to 3,000 skilled employees could lose their jobs in component manufacturing alone.
“It is my view that the smaller niche products and nimble companies will be able to survive the storm — mostly,” said Steyn, who is also CEO of Aerosud, an aeronautical engineering and manufacturing company. “Larger entities — like Aerosud — will see a massive reduction in opportunity,” he said.
“I know of no effort from government to intervene or support the sector. Unfortunately, this sector has still not been able to attract any attention at government level, even though it is an excellent export sector which used to have great opportunity, but that window has probably passed forever.”
Aviation expert Linden Birns points out that due to the Covid19 crisis, overnight the demand for travel and aeroplanes has evaporated, leaving supply chains exposed and vulnerable.
Until March, demand for air transport resulted in the market expanding by about 4.5% (compound) annually which meant a doubling in the size of the industry every 10 years, Birns says.
This had been a steady trend since 1970 with the advent of the wide-body jetliners such as the Boeing 747, Douglas DC-10 and Lockheed Tri-Star, which ushered in the era of cheap mass air transport and with it affordable holidays, hotels and resorts.
Birns says that demand for air transport led the aircraft and engine manufacturers to crank up their production rates. Airbus and Boeing, the biggest two, were delivering about 70 new jets a month before the crisis and were preparing their suppliers to increase output to raise the tempo of new aircraft deliveries to even higher levels.
“But now the tempo is being dialled back as Airbus and Boeing cut back production by almost two-thirds and may yet make further cuts,” Birns says.