Airlines start to accept reality, will Airbus & Boeing?

UNITED Airlines Executive Chairman Oscar Munoz yesterday seemed to offer up the first signs of really understanding that airlines will have to accept the most drastic changes in their history.

He told CNN that, “The stark reality of what we’re facing is dire”.

He accepted that UNITED, and probably most of the other airlines would need to cut their staffing levels by a minimum of 30%, and expected it to get to 50%. “This is, by far, orders of magnitude larger than anything we’ve ever seen.” He added.

It isn’t just about staff, airlines are having to face the facts that they have vastly too many aircraft. United shuttered Compass and some 90 active aircraft and plans to add almost 30 more. Like many others they’ve retired whole classes of aircraft like the 767 and 757, plans for new aircraft have been put off.

The disruption in international travel isn’t limited to the US. Airlines repeatedly start up or plan to reintroduce international routes only to find they have no passengers or new quarantine regulations that make flights unviable. The number of cancellations or curtailed frequencies are quietly dropped after weeks before a major burst of publicity announcing their resurrection.

One a day lands at Heathrow T5, but its mostly a handful of passengers and cargo

Chinese airlines, the first to experience major quarantines, have started to see business return domestically, but international routes, while resumed in some areas are carrying few passengers. Restrictions on arrivals into China because of strict testing or medical certification hamper real progress.

Around the world airlines are seeing that their hopes and aspirations are all too frequently unmet by the speed of quarantine changes, and a lack of passenger enthusiasm to sit in a sealed container with people who may or may not obey the mask wearing rules.

Munoz, whose experience is considered almost legendary in US airline circles, also added that he honestly felt that at least one of the US airlines and several well known names around the world, would inevitably fail.

I absolutely agree with him, I said so some two weeks ago. The V shape downturn and rapid uptick in economic activity hasn’t happened. That’s the case in the US especially, because the Covid Pandemic was never taken seriously by Trump and still isn’t. Because of the failure to grasp it and deal with it, Covid is running amok and the death toll keeps on rising. Its reached levels that now exceed the deaths from the Atomic bombing of Hiroshima in August 1945 (146,000) and is racing towards 200,000 with no end in sight. Until this ends, airlines will never get their passengers back.

Virgin Atlantic has done what it needs to survive. But will it really last in such harsh times?

At Boeing and at Airbus, they have both made drastic, (compared to 2019) cuts in their production rates and the planned increases that they had urged their suppliers to go for. Vast amounts of money had been borrowed and invested by supply chain industries for a ramp up in aircraft production that seemed to me then, almost insanely optimistic.

Supply chain industry executives kept trying to argue with both Boeing and Airbus that they were putting themselves at huge risk, that even a slight economic downturn would see them loosing money and cutting back what they were being asked to expand to meet.

In some respects the Covid pandemic dropped right before many of them spent further billions increasing production again to meet 2021 goals. But all of them have been left with debts and expanded facilities, expensively trained skilled and semi-skilled workers laid off, and stock levels they have to pay to carry for months or years on parts nobody wants.

Airlines like SIA are struggling and burning through billions supporting idle aircraft

Now the analysts are turning to Airbus and Boeing and asking how they can even justify the new production targets they’ve set. Who is going to take on the 6 787’s that will be built every month? Or the 6 A350’s? Or the 31 737’s? Really who wants these aircraft in these numbers, when virtually every airline has said its not taking a new aircraft that it doesn’t contractually have to any time soon? In some cases anytime in the next three years or longer, many won’t be taking anything at all.

The vast network of support industries that hold up the aviation sector, the maintenance companies, the spares supply chains, they’re seeing huge reductions in service bookings and parts demand. Aircraft aren’t flying, servicing is delayed, contracts are being dropped or renegotiated.

If you have any doubt about how serious that end of the situation is, Rolls Royce laid it out last week. They supply thousands of engines on full maintenance leasing contracts. They make money based on hours flown, and that income has dropped by 75%.

Apply that to the number of landing gear tyres for example – usage has dropped by 80%, fewer take offs and landings means fewer tyres. And so it goes on.

Boeing and Airbus are being overly optimistic if they think they can sustain even their reduced build rates. Neither wants to blink first. The consequences for them not sustaining the rates they’ve set are the loss of more trained staff, government pressure over unemployment, and the knock-on effect to the supply chain industry which may never recover.

The alternative is to build it and park it at their own expense. Provided government is willing to pay (which it won’t be), to sustain an artificial market, they’ll be fine. Then there’s the question of what will they do with all the aircraft? The airlines, when the market starts to pick up, will simply say they want to pay even less for aircraft sat about for months or years, and they’ll have to be sold at a huge loss. Nobody really wins here and without any question, something has to give.