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The 101 Of Doing Business In China, To Marriott, Delta, Qantas And More.

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The furor raised by the apology letter from the CEO of the hotel chain giant Marriott has once again triggered the ever-stopping discussion on conducting business in China. After a questionnaire was sent out in Mandarin to its loyalty program members, mainland Chinese members found themselves in disbelief when a whopping 5 options was provided when asking which country does its members are residing in? In addition to China,Hong Kong,Macau and Taiwan, Tibet was also listed alongside the country list where in theory, the Chinese government has always stated the historical fact that Tibet is an integral part of China, so is Taiwan. What seems so outward right to many of its members in mainland China, might just happened to be one of the most controversial and sensitive topic in geographic politics.

Picture from Travel daily Media

There is little to no need to talk about politics here, in simpler terms, the rest of the world have opposite opinions towards many territory disputes related to China, but for Marriott, such deliberate action on stating Tibet as a country in Mandarin and send it to its Chinese members is provoking the remaining dignity of so-called “face” in Chinese social norms. Although it remain unclear whether the action was done by an upper management team or bottom down staffs. A small work around would be to list your countries category into destinations or using a subcategory under China. These has been what hundreds of thousands of international corporations done to keep their penetration into the sweet sweet China market. In contrary, not only didn’t Marriott fix up the situation right away, their twitter handle happened to liked a tweet by a free-Tibet activist account thanking them for recognition. As a result, Marriott’s websites(including SPG) and apps are all shut down for a week by the order of the The Shanghai arm of the Cyberspace Administration of China.

What has happened to Marriott is not a rare case, however we have to reflect on the fact, a boycott led by millions of Chinese netizens will not only harm Marriott’s brand, but the thousands of local staffs who are working under their name, while in reality, Marriott today only owns around 40 hotels worldwide, the 100+ properties in China are largely owned by real estate developers, so in the end, a handful staff working for their royalty programs and those who report directly to Marriott would still be sitting in their offices sipping coffee and chitchat to pass the day by.

The heat didn’t just cool down from there, a new list of foreign corporations doing business has been gathered by the share “wisdom and power” of Chinese netizens, namely Delta and Qantas, was also caught up in the nationalistic activism, like Marriott, Delta also listed Taiwan and Tibet as a country, alongside China, Hong Kong and Macau.

Picture from Delta website

No one is the beneficiary here, until this moment, all of the aforementioned companies have issued public apologies and fixed their website according to the administration’s rules. Again, I am not trying to discuss politics here due to how complicated and contentious the situation is.

As an international corporation, the fundamental guideline to follow is the law at the country you are operating, especially in a marketplace like China, they must know that what has done couldn’t benefit them in any positive way.

Albert K. Field Albert is my name, and travel the world is my game. I began my passion for travel at a very young age, I started this website as a strong means to further explore the world of frequent flyers programs (FFP). The relationship between customers and service providers in the aviation and hospitality industry always seems to be in opposition, however, since the introduction of United Airlines’ Frequent Flyers Programm since 1972*. This has significantly eased the middle spectrum between 2 parties. While the aim of airlines is still to generate more revenue; but for us,as consumers, are also given the opportunity to participate in the bargaining and exploiting from service providers. Living in a world of globalization where big data becomes vital for simulating successful economical activities, most of us will have to travel to other locations whether willingly or unwillingly, while you hearing all this fascinating stories about others, In fact, you too, can blend into the trend. It may not sound like how media illustrates, but indeed there are possibilities for us to have more spontaneous travel without getting held back by financial situation. My website consists of reviews of airline premium cabin products,airport lounges and stay reports of 5-star hotels and their executive lounges across the globe. In addition to all of that, I care the most about their frequent flyers program and loyalty program, which also includes banking partners. Plus, I spontaneously put up reviews and news update regarding premium water brands and restaurants. The purpose of this website is to share all of this information with my audience as well as inviting you to be part of my journey.

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Market Analysis

How Much Did European Airlines Lose In The First Quarter?

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Park SWISS Air Lines Fleet At Zurich Airport
As the domestic situation in China gradually eases, the pandemic situation continues to ravage the world outside of China, the United States and Europe are still the centre of the global pandemic. In Europe, Italy, Spain, and Germany have just passed the peak of the pandemic, but the situation of the British pandemic has not yet slowed down. It has become the first country in Europe with more than 30,000 deaths. The suspension of the European aviation industry caused by the pandemic continues, and airlines of various countries are still in dire straits.
How Much Did European Airlines Lose In The First Quarter?
How Much Did European Airlines Lose In The First Quarter?

European airlines suffered severe losses in the first quarter

Last week, European airlines released their first-quarter financial reports. We selected the biggest three European full-service airline groups as representatives, combined with the quarterly report data released by the airline and related media reports, and compared them with the first quarter data of 2019 to see how hard it is for the major European airlines in the first quarter.

The first quarter is traditionally the off-peak-season for European and American airlines. Most European airlines also had negative operating profits in the first quarter of 2019. Europe’s largest aviation group, Lufthansa Group, had an operating loss of 336 million euros in the first quarter of last year; AF & KLM, which consisted of Air France and KLM, had an operating loss of 286 million euros in the first quarter of last year. British Airways’ parent company, IAG Group, had an operating profit of 135 million euros in the first quarter of 2019, the only profitable one among the three major aviation groups.

Lufthansa Group
Lufthansa Group Begins Route Network Resumption, Targeting Over 1,800 Weekly Flights

In 2020, under the impact of the pandemic, it is not difficult to foresee a large operating loss in the first quarter of European airlines. From the end of February, the pandemic began to spread rapidly in Europe. In less than a month, the European aviation market fell directly into the “freezing point” from the off-season.

According to media reports, the Lufthansa Group lost 1.2 billion euros (about 1.3 billion US dollars) in the first quarter of 2020, which is the adjusted EBIT loss, (Adjusted EBIT Loss, note: Lufthansa Group’s operating profit and loss was calculated as Operating Result before 2013, and it was called Adjusted EBIT Profit / Loss since 2014) which is four times the 2019 loss. The adjusted profit before interest and tax in Lufthansa’s 2019 financial report was 2 billion euros, which means that Lufthansa lost 60% of its operating profit for the entire year in the first quarter. Carsten Spohr, CEO of Lufthansa Group, described the operation in the first quarter of this year: “At the moment, we are only flying about 3,000 passengers a day. In terms of flight schedule, our company has gone back in time to where it started in 1955 – a decade after the Second World War and following a 10-year ban on flights. In less than 65 days, we have returned to the flight plan levels of 65 years ago. That is extremely bitter, devastating and painful. The Lufthansa Group’s quarterly report for the first quarter of 2020 was originally scheduled to be released on April 30 but was later postponed due to the impact of the pandemic until the second half of May, so the details of the loss are not yet known.

Parked KLM Fleet, Image Rights: Marco Spuyman
Parked KLM Fleet, Image Rights: Marco Spuyman

In the first quarter of this year, Air France & KLM’s operating losses (Income from current operations) amounted to 815 million euros, nearly three times the operating losses in the first quarter of 2019. Due to the increased risk of international pandemics and the introduction of travel restrictions, Air France and KLM, which has a large number of international routes, significantly reduced its capacity in the latter quarter of the first quarter, and revenue in the first quarter fell by 15.5% year-on-year. In addition to the main business loss of 815 million euros, the Air France KLM Group’s loss in the first quarter of 2020 also included 46 million euros caused by fleet adjustments, aviation fuel-hedging losses of 455 million euros, deferred income tax of 173 million euros, and exchange rate losses of 148 million euros, financial expenses of 164 million euros. Eventually, the Air France-KLM 2020 first-quarter net loss (Net income for the period) amounted to 1.8 billion euros. The drop in oil prices caused by the “crude oil price war” that began in March had a greater impact on Air France and KLM. Due to the decline in demand, Air France and KLM were forced to cancel a large number of jet fuel hedging contracts to cope with the low consumption of jet fuel in the future, resulting in huge jet fuel hedging losses.

IAG Group’s operating loss in the first quarter of 2020 was 535 million euros. IAG Group CEO Willie Walsh said that before the end of February, the group’s business development trend is good, but since March due to the impact of the government’s border restrictions, most losses occurred in the second half of March. In addition to operating losses, the IAG Group also experienced huge jet fuel and exchange rate hedging losses in the first quarter, as high as 1.325 billion euros, in addition to 22 million euros in non-operating losses. IAG Group’s net loss before tax for the period in the first quarter of 2020 (Loss before tax for the period) reached 1.882 billion euros.

The first quarter has been very bleak, but for the European aviation industry, “the second quarter will be worse” (Lufthansa Group CEO Carsten Spohr said pessimistically in his speech).


Halfway through the second quarter, but the fight for survival still isn’t over

The aviation industry shut down caused by the development of the pandemic will continue. Whether they can survive the long winter in the second quarter will determine the survival of airlines around the world.

As we all know, the operating costs of airlines are divided into fixed costs and variable costs. Even if the airlines ground a large number of flights without variable costs, the fixed costs still need to be paid, including aircraft leases, station expenses, and MRO, employee salaries, ticket refunds, administrative expenses, etc. The level of operating profit and loss reflects the severity of the impact of airline operations caused by the pandemic.

So, how is the viability of European airlines?

We use the loss of each aircraft of each airline company as the evaluation basis in the first quarter, and compare the company management capabilities and cost control capabilities of each airline company. It can be seen that the operating losses per aircraft of the Lufthansa Group and the KLM Group are relatively large, at 1.6 million euros and 1.5 million euros respectively; while the IAG Group’s operating losses per aircraft are 900,000 euros.

The large single-unit loss means higher operating costs, It also means that airlines face greater risks during this special period of the pandemic.

Operating Profit/Loss Q1Fleet SizeOperating Profit/Loss / Fleet Size
Lufthansa Group-1200760-1.6
Air France&KLM-815554-1.5
IAG Group-535595-0.9

European representative airlines ’ratio of operating losses in the first quarter of 2020 to the total number of aircraft of the group (unit: millions of euros)

In the predicament, European airlines are trying to live in this “survival race”, while airlines with high management level and strong cost control ability are easier to survive, and those with poor management ability and higher costs, if they want to successfully overcome this difficulty, then more external assistance are needed, or an urgent deeper cost reform.


Lufthansa Group
Lufthansa Group Airlines
Lufthansa Group Airlines

Lufthansa Group, which had an operating loss of 1.2 billion euros in the first quarter, is still facing the situation of almost all aircraft being parked. Lufthansa is expected to continue for more than a month in this situation. Earlier this month, chief executive Carsten Spohr told employees that the company was burning through €1m per hour. Carsten Spohr had told the media in March that Lufthansa had raised € 5.1 billion in current assets and had obtained a credit line of € 800,000. However, due to the high cost, just a few days later, Lufthansa announced that its current assets could no longer cover the subsequent costs and also could no longer be financed in the capital market. Its self-owned fleet worth about 10 billion euros is also difficult to monetise. Aviation analyst Daniel Roeska speculates, “Evidently, credit markets are all but closed even to the group with the largest unencumbered fleet in Europe,” There may be only two roads Lufthansa facing now, government bailout or bankruptcy.

Park SWISS Air Lines Fleet At Zurich Airport
Parked SWISS Air Lines Fleet At Zurich Airport, Image Rights: EPA

Lufthansa Group has requested assistance from the governments of Germany, Austria, Belgium, and Switzerland. After close communication, it has been confirmed that the German government will provide 9 billion euros in relief aid. As a condition, the government will acquire a 25% stake in Lufthansa, but it will not participate in company management. The Swiss government has also agreed to provide 1.5 billion Swiss francs (1.52 billion U.S. dollars) in loans to Lufthansa subsidiaries Swiss and Edelweiss. If Lufthansa Group can get the loan as early as possible, Lufthansa can escape the fate of the likes of Virgin Australia. Lufthansa expects that the flight volume will be effectively restored in June, however, they are not optimistic about the market expectations in the next 2-3 years. In the follow-up, Lufthansa will reduce the size of the company, lay off 10,000 of its 130,000 employees, and reduce the fleet size of more than 760 aircraft to about 660. Earlier, Lufthansa had closed its low-cost carrier, Germanwings, and retired several aircraft in advance.


Air France KLM Group
Air France KLM Group
Air France Will Resume 30% Of Its Flights From July

Air France & KLM has suffered severe losses due to declining demand and jet fuel hedging in the first quarter, but with capacity cut reduced by 95% year-on-year, the second quarter will be the most difficult stage. Since the impact of the pandemic, Air France and KLM have vigorously reduced costs by reducing group activities expenditures and salary cuts. In the second quarter, it is expected to save 350 million euros per month. As of March 31, Air France and KLM raised liquidity (Liquidity position) amounts to 6.4 billion euros through revolving credit facilities, aircraft mortgage financing, and sales of Sabre shares. These funds can support Air France and KLM operations til the third quarter. Since Air France and KLM have the support of the French and Dutch governments as shareholders, their survival seems to be guaranteed to a certain extent.

Air France and KLM has received good news recently as the rescue promised by the French and Dutch governments finally has a more clear path: The French government announced that it will provide 7 billion euros in aid loans to Air France, of which 4 billion euros will be guaranteed by the French government and will be issued by a consortium of 6 French banks and other international banks. With a term of 12 months, Air France and KLM have the right to extend the loan by a year twice; Another part of the 3 billion euros will be provided by government-managed funds for a period of 4 years. The bailout condition from the French government is that Air France needs to develop into a global environmentally friendly airline with the lowest carbon emissions. Ben Smith, CEO of the Air France Group, thanked the French government in an interview, “the loans will allow Air France-KLM to get through the most difficult period of the next few months, during which our liquidity risked reaching a critical level, and to continue operating for 12 to 18 months, based on assumptions of the reopening of the market.” In response, Ben Smith promised to halve carbon dioxide emissions by 2024.

Air France Fleet Operation
Air France Fleet Operation

The Dutch government’s loan plan is also being developed, and promises that the loan amount will be between 2 billion and 4 billion euros. At the same time, the Dutch government has also put forward some conditions for the loan, including the suspension of shareholder dividends and bonuses, and reduction of executive salaries . For assistance from the Dutch government, Ben Smith said that the Dutch government should provide assistance in proportion to the size of Air France and KLM.


IAG Group
IAG Group Airlines
IAG Group Airlines

Since the pandemic, the IAG Group, which has been profitable for seven consecutive years, has also suffered a great deal. During this period, the IAG Group raised liquidity through methods such as furloughs, salary reductions, and extension of the revolving credit limit period. Although it has been said that it does not seek special loans other than general loans given by government, IAG Group still seems to be experiencing difficulties in temporary capital turnover. In early April, the IAG Group submitted a loan application to the British government. It has obtained a loan of 300 million pounds from the British government. This loan assistance belongs to the British government’s “Coronavirus Corporate Financing Facility (CCFF)”, which aims to implement emergency assistance by providing short-term( from one week to one year ) bridge loans for large companies from one week to one year. For the IAG Group, this is the second government bailout received-last week, IAG Group’s Iberia and Vueling received 750 million euros and 260 million euros respectively of government-backed loans. According to reports, the IAG Group has 10 billion euros of liquidity at the end of April, which has surpassed most of its competitors and will become an important guarantee for the IAG Group to successfully overcome difficulties.

British Airways At Heathrow
British Airways At Heathrow

At the same time, IAG CEO Willie Walsh also said that the IAG Group needs to “reshuffle” to meet the challenges of future uncertainty. One of the measures to “reshuffle” is that British Airways will lay off 30% of its staff, involving about 12,000 employees. In addition, British Airways grounded all routes at London Gatwick Airport in early April, and recently said that after the outbreak, British Airways may not resume Gatwick Airport routes, giving up its base position in London’s second largest airport. British Airways Chief Executive Officer Alex Cruz wrote in a letter to employees: “As airlines, like other industries, we will face the new normal in the future, with” unusual “as usual.”


In addition to the three major full-service airline groups, low-cost airlines in Europe are also striving for survival.


Ryanair
Ryanair Aircraft Livery
Ryanair Livery

In April, Ryanair operated only 600 flights, compared with originally planned 76,000 scheduled flights. Throughout the second quarter, Ryanair is expected to be operating at the same level similar to April. The number of flights performed will be only 1% of the original plan, and the number of passengers is expected to be less than 150,000, only 0.5% of the original plan. Ryanair disclosed to the media in March that it has 4 billion euros in cash and equivalents and can support 18 months in a state of suspension. In its latest market outlook released recently, Ryanair once again stated that it does not need government’s targeted assistance. Although Ryanair did not disclose its latest liquidity amount, Ryanair, which has been profitable for more than ten consecutive years, has higher than average survivability and corporate management. In the early stage of the pandemic, Ryanair quickly took emergency measures, including stopping recruitment, postponing payment, and stopping stock repurchases. Ryanair also believes that the market will be difficult to recover in the short term. In order to cope with the market downturn in the future, it will also reduce the scale of operations, including layoffs of 3,000 people, a 20% salary reduction, and the closure of some European bases. At the same time, Ryanair is negotiating with Boeing to reduce the delivery of Boeing 737 series models in the next 24 months, and is negotiating with its A320 aircraft leaser to reduce the number of future aircraft leases. As of June 2019, Ryanair has 87 operating bases, 16800 employees, and 455 Boeing 737 aircraft, as well as 16 leased Airbus A320 aircraft.


Parked Ryanair Fleet
Parked Ryanair Fleet, Image Rights: Chris J Ratcliffe/Getty Images

Not only did Ryanair not apply for assistance, it also repeatedly opposed the targeted assistance of governments to airlines by various countries, and believed that all government assistance to airlines is contrary to EU law. For example, the French government only refunds aviation tax to airlines of “French nationality”, but other airlines (including Ryanair) that also serve French routes do not enjoy the benefits of tax refunds. Such a policy violates the EU competition law. At present, the targeted assistance issued by European governments to airline companies has exceeded 30 billion euros. In addition, Ryanair also believes that the recovery of consumer confidence after the pandemic will require a long period of low fare stimulation. If they continue to provide targeted assistance to full-service airlines, the market will be completely distorted after flight operations return to normal, high-cost full-service airlines can still adopt low-cost sales, which is very unfair to the airlines such as Ryanair that have been working to reduce costs and provide passengers with low-cost tickets for 20 years. To this end, Ryanair called on the governments of the EU member states to reduce or exempt passenger taxes, take-off and landing fees for the entire industry, or to provide salary compensation for employees throughout the industry, which would be a better method than targeted assistance to flag carrier airlines.


EasyJet
EasyJet Aircraft Livery
EasyJet Livery

Since March 30, EasyJet has grounded all aircraft. The full grounding has continued for more than a month. Recently, EasyJet announced that it has raised enough reserve funds to survive a suspension period of up to 9 months. EasyJet carried out scenario analysis of the impact of flight suspension on the pandemic lasting 3 months, 6 months and 9 months respectively. In these three cases, the required financial support is 1.2 billion pounds, 2.2 billion pounds and 3 billion pounds, and designed a plan to reserve funds in three ways: reducing expenditures, delaying aircraft delivery and multi-channel financing. At present, the weekly operating cost of EasyJet has stabilised at 30 million to 40 million pounds (daily, the weekly operating cost is 120 million to 130 million pounds); In addition, in consultation with the aircraft manufacturer, the short- and medium-term delivery plans for a total of 24 aircraft were postponed. As of March 31, EasyJet had cash of £ 1.4 billion. Through multi-channel financing, EasyJet also received a guaranteed retained cash flow (RCF) of £ 400 million, and £ 600 million of the Coronavirus Corporate Financing Facility (CCFF) unsecured loans, 400 million pounds of fixed-term loans, and 400 million to 550 million pounds of sale-and-leaseback (SLB), bringing EasyJet’s nominal liquidity to 3.3 billion pounds.

Johan Lundgren, CEO of EasyJet said, “EasyJet is still looking at other sources of funding and assistance”, and Johan Lundgren is very confident in the unsealed tourism market. We will act immediately when demand recovers. “I do think there will be demand for holiday passengers. I think the lockdowns we have seen in countries mean a lot of people want to go out and have a holiday, though it depends on what restrictions are in the countries.”


Grounded Boeing 737 MAX aircraft are seen parked in an aerial photo at Boeing Field in Seattle, Washington.
Airbus, Boeing & Entire Supply Chain Are Threatened By Deepened Pandemic Impacts

When will the European aviation market recover?

For the European aviation industry, there are more airlines struggling to survive, and one of the beliefs that allows them to persevere is that the European market demand in July will be the first major recovery and rebound in the summer peak season, and at present, European countries are also drafting policies for reopening after the pandemic. Therefore, European airlines plan to resume flights gradually in the third quarter. In the third quarter, Ryanair expects flights to return to 50% of the originally planned flights, IAG Group expects to resume 45%, Air France and KLM expects to resume 20%, and Lufthansa has not yet started the recovery plan, however, it has said that it will restore the capacity of 160 aircraft in June (currently 60 in operation).

EasyJet Fleet Parked At Southend Airport, Essex
EasyJet Fleet Parked At Southend Airport, Essex, Image Rights: John Keeble/Getty Images

However, most airlines are soberly aware that the pandemic has triggered an economic recession, and it will take two to three years for the market to fully return to the level before the pandemic. In the future, the prospects for economic development in Europe will be more uncertain, and the risk of recession will increase, which will inevitably affect the long-term demand level of the aviation market. In the context of the economic downturn, the market capacity has shrunk and mergers & acquisition trend has intensified, and the European aviation industry will likely change dramatically. Since 2018, the European aviation industry has Monarch airlines, Thomas Cook Airlines, Flybe and other airlines have gone bankrupt one after another. This indicates that the European aviation industry may have entered another round of mergers and acquisition. The arrival of the pandemic will accelerate the reshuffle and reorganisation of the European aviation industry.


<strong>Institute For Aviation Research</strong>
Institute For Aviation Research

This article is authorised and translated from IAR’s research publication, the Institute for Aviation Research is an independent think tank that promotes research into aviation. For more info please go to their website below.


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Airlines

Airbus, Boeing & Entire Supply Chain Are Threatened By Deepened Pandemic Impacts

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Grounded Boeing 737 MAX aircraft are seen parked in an aerial photo at Boeing Field in Seattle, Washington.
For many years, aircraft manufacturers and suppliers in the upstream of the aviation supply chain enjoy higher protection due to technical barriers, and the level of competition in the industry is much lower compared to the lower end of the supply chain. However, the COVID-19 pandemic has caused a large-scale blow to the demand side of air transportation, making it difficult for aircraft manufacturers and suppliers to escape.

Since February, the COVID-19 pandemic has swept the world. As the closest link in the aviation industry chain to public travel needs, airlines bear the brunt. As the air transport markets of various countries are shut down like dominoes, an unprecedented large-scale grounding of the global fleet is taking place. According to Cirium’s updated data on April 17, 64% of the world’s 26,000 aircraft in service are grounded. As can be seen from industry figures, the current A330, A340 and B787 series grounding ratios of the wide-body aircraft have reached 90%, and due to the busy cargo aircraft, the B777 grounding ratio is slightly lower, about 75%. Also, more than half of the A320 and B737 series of narrow-body aircraft are grounded. Due to the possible deep damage to the global economy caused by the pandemic, the depression is expected to last longer, and it is difficult for air travel to recover as before in a short period.

-Airbus-


At present, the damage to Airbus’ commercial aircraft orders has begun to appear, and the aircraft delivery volume has also been greatly affected by the pandemic. In the first quarter of this year, Airbus cancelled 66 aircraft orders, with a net increase of 290 orders and a monthly average net increase of 97, which was higher than last year’s monthly net orders for 66 aircraft. Net orders include 248 A320neo, 42 A220 and 4 A350, while cancelled orders include 29 A320neo, 16 A220, 17 A350 and 34 A330neo. However, if we only look at the March data, Airbus received a total of 60 gross aircraft orders, while 39 aircraft orders were cancelled, and the net order volume was only 21, far below the average of 66 aircraft per month last year.


In terms of delivery, Airbus originally planned to deliver 880 aircraft in 2020, slightly higher than the 863 aircraft delivered in 2019. However, in the first quarter, Airbus delivered a total of 122 aircraft, including 31 in January, 55 in February, and 36 in March. The three consecutive months of delivery were lower than the average of 72 in 2019. Delivery level. The aircraft delivered included 91 A320neo, 14 A350, 8 A220, 5 A320ceo, and two A330ceo and A330neo each. In late March, Airbus’s factories in France and Spain were shut down due to the pandemic. Airbus’ original production and delivery plans were disrupted. At the end of March, it announced the cancellation of the original 2020 production plan and delivery plan. Aviation analyst Sandy Morris predicts that Airbus’ delivery this year will likely drop to 650, and it may drop to 600 in 2021.

DeliveriesCancellationsNet OrdersBacklog
A2208-1642529
A320ceo50061
A320neo91-292486159
A330ceo20036
A330neo2-4-4287
A35014-174569
A3800009
Total122-662907650
Airbus orders and delivery in the first quarter of 2020

As of March 31, Airbus had 7,650 reserve orders, including 6,220 A320, 529 A220, 323 A330, 569 A350XWB and 9 A380, this is still a positive increase compared to 7,482 reserve orders at the end of 2019. After the outbreak, due to tightened airline funding and declining travel demand, the market’s demand for new aircraft will also decline, and the number of new orders is expected to decrease significantly. The current situation may be just the beginning.

Although the impact of the pandemic is not very obvious from the perspective of the number of aircraft orders, the market will remain pessimistic after the pandemic has become a consensus in the industry. Aircraft demand is expected to shrink in the future. To this end, Airbus has announced a reduction of one-third of its output to adapt to market changes. Its most popular single-aisle aircraft A320 production will be reduced from 60 per month to 40 per month. For dual-aisle aircraft, the monthly output of the A350 will be reduced from 10 to 6, and the average monthly output of the A330 series will be reduced from about 4 to 2. According to Reuters, this is Airbus’ largest production adjustment to date. At the same time, Airbus’s measures to reduce production also brought the question of whether the A380 will be stopped in advance. The airline that operates the largest A380 fleet, Emirates, has significantly reduced its routes, and its business model of using Dubai as a hub to deploy a global route network may be severely tested in the future market environment. Guillaume Faury, CEO of Airbus, said that “it was too early to make any decisions on individual products.”. As for Airbus’ production cut, “Manufacturers are always very careful about changes in production rates in either direction,” said Sash Tusa of Agency Partners. “They will not change unless they can sustain the rate for two to three years.” Investors watch production rates closely as a guide to future profits and cash flow. It can be seen that Airbus’ decision to reduce production implies Airbus’ expectation that the market demand for the aircraft will remain sluggish for a long period of time in the future, and it also ends the period of continuous increase in Airbus’ output over the past decade.


While reducing production to adapt to changes in market demand, Airbus still focuses on maintaining flexibility in responding to future markets. They maintain daily information communication with their suppliers, including A330 and A350 engine suppliers Rolls-Royce, and A321 neo’s Leap engine supplier Safran France, in order to obtain the latest situation of the suppliers and prepare for recovery at any time. Guillaume Faury, CEO of Airbus, said that he could not predict when rates would rise again, as there remained too much uncertainty about the duration of the crisis. “It is not unlikely things will get better in 2021 but we don’t know exactly when.” At present, Airbus’s French and Spanish factories have been partially resumed.

Airbus think they have a more robust financial base to cope with this protracted crisis. As of December 31, 2019, Airbus held 12.5 billion euros in cash (Net Cash) and 3 billion euros in credit facilities (RSCF), and 22.7 billion euros of cash was invested in high-rated securities. Financing Liabilities is 10.1 billion euros, and its available working capital is 25.7 billion euros. At the same time, Airbus also announced the suspension of shareholder dividends to retain 1.4 billion euros of funds, and postponed employee pension payments. Airbus recently also received another 15 billion euro credit line, of which 5 billion euros are current credit lines, making its current total liquidity has exceeded 30 billion euros.

In addition to the funding methods that have been implemented, Airbus has also retained “back-up methods” in case of unexpected needs. Since Airbus once acquired a German bank as Airbus Bank in 2014, Airbus can use some financial means to maintain cash flow. In addition, Airbus said it can also obtain funds through bond issuance. Airbus has not applied to the government for large-scale capital assistance, but Airbus is maintaining communication with the French and German governments, or will participate in the government’s existing assistance projects to pay the wages of workers who have been furloughed. Airbus has a total of 135,000 employees worldwide, and salary expenses account for about 20% of its total cost. Airbus has not yet proposed any layoff plan.

-Boeing-



The 737MAX incident has caused Boeing’s total delivery volume to drop by 53% in 2019, and the impact of the 2020 pandemic is worse. Boeing cancelled 196 aircraft orders in the first quarter, with a net loss of 147 aircraft (excluding the 160 aircraft that were removed from the list due to ASC 606 in the first quarter). The model with the most serious cancellations was B737MAX. Customers including Air Canada, Gol Airlines, Smartwings and Avolon cancelled a total of 191 orders for 737MAX. Another 4 B787 and 1 B777 aircraft orders were cancelled. Boeing delivered a total of 50 aircraft in the first quarter, and the average monthly delivery volume of 17 aircraft was much lower than last year’s average monthly delivery volume of 31 aircraft. As of March 31, the number of Boeing aircraft reserve orders was 5,428 (if there were 379 aircraft orders removed by ASC 606, it would be 5049 aircraft). In addition to commercial aircraft, Boeing’s military aircraft business has also been greatly affected. Boeing delivered 39 military aircraft in the first quarter, compared with 60 in the first quarter of 2019.

DeliveriesCancellationsNet OrdersBacklog
737NG501853
737MAX0-191-1914354
74700017
767100286
7776-1-167
777X000309
78729-425542
Total50-196-1475428
Boeing orders and delivery in the first quarter of 2020

The factory shutdown caused by the pandemic is the main reason for affecting the delivery schedule of Boeing. Boeing closed the commercial aircraft plant in Puget Sound on March 25 due to confirmed positive test of coronavirus in the factory and then announced on April 2 that it will close the military plant in Philadelphia for at least two weeks. After a lapse of nearly a month, at present, Boeing announced that it plans to resume production at some factories on April 20, and restart production of B737, B747, B767, B777, B787 and other aircraft models, 27,000 employees will return to work, but Boeing’s South Carolina plant will still be shut down.

In order to adapt to the decline in demand caused by the pandemic, Boeing has proposed a plan to lay off 10% of its employees globally, including the voluntary departure of employees, early retirement and termination. Boeing has 160,000 employees worldwide, and people familiar with the matter said that most of the employees to be laid off may come from the commercial aircraft business segment. In a letter to all employees on April 2, Boeing CEO David Calhoun proposed to solicit voluntary leavers from the entire company and distribute compensation for those who leave. The layoffs suggest Boeing’s pessimistic expectations for the next few years and concerns about the uncertainty of the pandemic’s development, David Calhoun said, “It will take time for the aerospace industry to recover from the crisis, when the world emerges from the pandemic, the size of the commercial market and the types of products and services our customers want and need will likely be different. We will need to balance the supply and demand accordingly as the industry goes through the recovery process for years to come. It’s important we start adjusting to our new reality now.”

In response to the outbreak, Boeing also used various methods to raise funds. Before the outbreak, because Boeing 737MAX was grounded worldwide, Boeing was already plagued by tight cash flow. From 2018, the profit fell by nearly 12 billion US dollars, and the loss in 2019 was nearly 2 billion US dollars. The advent of the pandemic has made Boeing’s financial problems more serious. On the one hand, Boeing previously submitted US $ 60 billion in aid funds to the US government on behalf of the US aviation manufacturing industry, and is waiting for the government to arrange specific assistance plans; on the other hand, Boeing also requested Lazard and Evercore to seek investment in the capital market. The US government’s “two trillion dollars” aid plan (CARES Act) also includes $17 billion in targeted rescue funds for the defence military industry, and Boeing may also benefit from it. Analysts believe that Boeing needs to raise at least an additional 20 billion US dollars to be basically enough to cover all costs and debts this year.

Since the beginning of the year, Boeing’s market value has been venting all the way. On April 10, Moody’s Investors Service has downgraded the senior unsecured debt ratings of Boeing and its finance arm Boeing Capital Corporation from ‘Baa1’ to ‘Baa2′ and the outlook is negative, Moody’s senior vice president and lead analyst Jonathan Root said: “The coronavirus is likely to become a significantly greater pressure point on Boeing than the long-running 737 Max crisis.” Moody’s said that the “near-term impact of the coronavirus is acute. The potential for order deferrals and cancellations is a material risk factor, fueled by expected significant reductions in airlines and aircraft lessors’ fleet sizes and/or orderbooks for indeterminate time periods.”



The pandemic has had a huge impact on upstream companies in the aviation industry, but at the same time, the business of these manufacturing companies is also more diversified. When the civil aviation sector is seriously affected, the stability of other business sectors may become an important factor that determines the survival of enterprises: Airbus and Boeing have both civil and defence business modules. Although the civil aviation market is currently in a downturn, the orders for defence military industry may be more stable; and Roll-Royce and GE are involved in a wider range of business areas. It is understood that Rolls-Royce’s defence and power system business segments are affected by the pandemic, and GE’s business in the fields of power, new energy and health will also effectively complement the aviation field. We will continue to pay attention to the follow-up operations of these representative enterprises in the upstream of the aviation industry chain.


<strong>Institute For Aviation Research</strong>
Institute For Aviation Research

This article is authorised and translated from IAR’s research publication, the Institute for Aviation Research is an independent think tank that promotes research into aviation. For more info please go to their website below.


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