10 top risks the aviation industry is facing 2021

10 top risks the aviation industry is facing 2021

In 2019 the aviation industry had entered an air travel golden age due to an expanding middle class in emerging economies. Over the course of the following 20 years, the global aircraft fleet was expected to double to approximately 45.000 aircraft whilst new aircraft platforms and engines are emerging as a result of changing customer demand and the industry’s relentless pursuit of cost reduction; an entry-into-service period which has been characterised by a series of teething issues. The promising and profitable future ahead comes with

a series of challenges that threatened sustainable industry growth. However fast-forwarding to today with the unprecedented international crisis in the wake of the coronavirus pandemic that promising future is under threat. The IATA (International Air Transport Association) estimates that the global industry will lose US$252 billion in 2020 with further losses of $15 billion in 2021. However, the COVID-19 has rapidly changed the current reality and future of the industry itself.

In January 2020 Ernst & Young (E&Y) realised a study about the world’s major Aerospace & Defense (A&D) companies; among them, Boeing, Airbus and BAE Systems named “Top 10 risks in aerospace and defense,” in 2020 and beyond. We take a look into the findings of the report and compare them with our current COVID-19 reality.

Understanding the types of risks in the aviation industry

In 2019 the supply chain directly connected to the aviation industry was struggling to keep up with the increasing demand in production, volatility of the geopolitical and economic environment, and the growing labour shortage lurking in the background.

These risks promised to affect the very core of the aviation industry and present new issues for the airlines. However, COVID-19 has changed the report findings dramatically. The aviation industry has faced many crises before. However, none can be compared to the economic hit that airlines are currently facing. The question is, can the industry recover?

Airline’s strategic initiatives will be tested even further, their financial position is under threat, and their global operations are being pressured like never before. In addition to all the whole industry will need to adapt to new compliance requirements in the different markets in which they operate.

Risk No. 1: Geopolitical and economic environment Volatility

Most airlines have a global footprint and are, thus, vulnerable to external factors, such as political tension and economic conjunctures. In the case of the commercial aviation sector, political stability and sustained economic growth are, according to E&Y, major underlying factors driving long-term growth in air traffic. Although the global economy has risen from the ashes of the financial crisis in 2007-2008 and the economic outlook is reasonable, uncertainty remains.

The US-China trade dispute is causing instability in markets around the world, and economies have started to show signs of a potential slow-down in —including China, the world’s largest economy that recently reduced its GDP growth target. In Europe, the financial markets have, likewise, experienced a series of disruptions lately, mainly due to concerns about certain Eurozone countries’ ability to reduce their budget deficits and pay off their sovereign debt obligations.

The economic slow-down that COVID-19 is causing is resulting in tightening in the credit markets; low liquidity; and extreme volatility in the credit, currency, commodity and equity markets this is causing airlines to review their order intake strategies and postpone (or even cancel) existing orders. And when orders cancelled, there will be a domino effect across the industry, putting the aviation sector as a whole in danger. Covid-19 is a reality that’s very lucky to continue and combined with the looming uncertainty of Brexit and its impact on the aviation industry. These changes to the geopolitical landscape could end the aviation industry in 2020-2021. COVID-19 could prove to be one of the significant challenges for the aviation industry in the years to come or its downfall.

Risk No. 2: Managing the supply chain

In 2019 the A&D industry experienced significant growth in demand. And consequently, as of January 2020, a record number of new aircraft deliveries were set to keep the supply chain in the next 8-10 years extremely busy. To meet the demand, the entire supply chain must ramp up their efforts and investments, ensuring timely deliveries while, at the same time, maintaining high quality and keeping costs somewhat controlled; a challenging task that could leave many suppliers financially vulnerable.

With such a vast network of suppliers, small mistakes and delays can cause a chain reaction and, as a result, budgets and schedules could spin out of control. There’s also a risk that companies will have disputes with suppliers or subcontractors related to work specifications, quality of supply or customers concerns, E&Y reports. The 2019 demand growth was already increasing the pressure on the production capacity of OEMs and very few and limited suppliers. When we look at these smaller and crucial suppliers, the risk of production disruption or complete failure is even greater.

E&Y study points to three additional risks that could pose a threat to the efficiency of the aviation industry supply chain:

1. Niche parts and processes pose a greater risk to delivery: the industry depends on a small number of suppliers, leaving the industry in a challenging situation if the suppliers fail to deliver. However, airlines can mitigate the risks by working closely with the suppliers to understand the stability and detect potential disruptions before they develop into full-scale disasters.
2. Risks associated with low-cost countries: as of 2019 OEMs, airlines and MROs were establishing new connections with local suppliers with many significant cost benefits attached. However it, too, could expose the aviation industry to critical issues, such as IP violations, delays and quality issues.
3. Implementation of new programmes and technologies requires investment: the capital needed to develop new initiatives and new technologies must be recouped on volume production. However, the significant investment can leave companies more financially exposed, putting the entire aviation supply chain at risk.

Risk No. 10: Competition

Boeing and Airbus, as of 2019, had the industry duopoly – leaving very little room for new players in this market. In the supply chain, consolidation continues to increase due to OEMs seeking stronger suppliers with access to capital. The MRO industry and broader aftermarket were also undergoing changes.

Governments are weary that COVID-19 has all the makings of an environement that can lead to most world airlines bankrupcy. Many governments were quick to support the industry with bailouts however campaigners have already demanded that any airline bailout be linked to tax reform. Leaked EU papers in 2019 suggest that ending kerosene tax exemptions in Europe could raise €27 billion (US$29 billion) in revenues every year. National governments might seek to collect such sources of revenue.

Risk No. 4: Workforce

Due to the influx of new technologies and processes and the relentless focus on cost reduction, companies in the aviation industry will require, perhaps more than any other industries, a talented, engaged and increasingly specialised work-force in the future. The issue of work-force shortages in the aviation industry is genuine indeed, and it will be a challenge for the industry in the future as well.  Because of the highly specialised nature of the aviation industry and its business-critical processes, companies must hire and retain very specific, highly skilled personnel. Ineffective succession planning, a lack of diversity and limited options for talent mobility are, according to the study, the major challenges for talent management in the aviation industry. The labour shortage was looming, and the aviation industry was struggling to attract new kinds of talent to help drive new innovations forward, such as data scientists.

Risk No. 6: Ability to perform in key contracts

The major OEMs in the industry are typically involved in multimillion-dollar contracts and have huge backlogs with tight deadlines. Failure to deliver on any of these can lead to significant negative implications are affecting financial performance as well as brand value.

According to E&Y report, one airline has refused the delivery of a series of Airbus A320 NEOs since December 2015 due to performance issues with the engines of the aircraft. The two parties are now negotiating to change the initial order for a different aircraft and another engine option.

The challenge for the entire aviation supply chain to deliver on time is more complex than ever before, as Boeing and Airbus both plan to ramp-up their production capacity to unprecedented levels in the years to come. An open business culture, ambitious but realistic targets and a strong focus on project management is vital to mitigate this risk in the aviation industry, E&Y concludes.

Risk No. 5: Compliance

The aviation industry always had to follow a long list of compliance requirements and regulations, from design to maintenance, from pilot training activities to passenger safety. These are critical to ensure OEMs (Original Equipment Manufacturers) and suppliers products and services are of the highest standards and guarantee operators and passenger safety. Aviation organisation own a series of intellectual property (IP) portfolios (such as patents, unpatented know-how, data, software, trademarks and employees and suppliers confidentiality contracts). However more often than not these measures prove that it is not enough to deter the misuse of IP. And IP laws vary from country to country, so IP infringement risks are always higher for organisations that operate in a large number of foreign countries. These risks are likely to continue throughout 2020.

Risk No. 7: Inability to innovate

The aviation industry is well known for its inability to innovate and traditionalist views towards business paradigms. However the demand from passengers is constantly evolving, pushing the industry to adopt to new philosophies, work processes and technologies. With business processes decades old according to E&Y report the aviation organisations that fail to upgrade current technologies and embrace innovation would likely face a series of challenges in the next coming years and fail to stay competitive.

R&D should be used by organisations as a primary tool to manage risks through the diversification of investments. With the pandemic, all travel comes to a holt which many climate activists welcomed the opportunity to point out the dramatic fall in carbon emissions. But others worry that the industry will stop innovation and sustained change altogether.

Risk No. 9: Inability to capitalise on M&As

Supply chain mergers, acquisitions, partnerships and collaborations are a hot topic in the aviation industry. According to the study from E&Y, these can complement a company’s existing products, technologies, services and customer base and the value of business opportunities from M&A and partnerships outnumber the cost of potential liabilities; overvaluation of the acquired business, failure in achieving synergies, inability to retain talent, and financial challenges.

There are challenges and risks; however, at the same time, failing to collaborate with other businesses could pose a real threat. So managing and maintaining any partnership will be a key challenge for the aviation industry in the coming years. And the COVID-19 only magnified this need.

Risk No. 9: Cybersecurity exposure

The risks of cyber breaches increase as airline organisation fail to have appropriate cybersecurity measures in place asOEMs, and MROs pursue big data analytics and implement predictive maintenance. According to the E&Y report, cybercrimes cost an estimated of approximately US$400 billion per year. Making it essential for the aviation industry prioritise strong IT-infrastructures to defend their cyberspace from unwanted intruders.

As our digital world develops even further with COVID-19, the risks and consequences of cyber-attacks are magnified by the complexities of our integrated value chain. However this digital nterconnection across the value chain, will easily cascade across the network and affect everyone involved with a company that suffers a cyber attack – increasing the risk for the entire aviation industry.

Risk No. 10: Customer demand fluctuations

The global airline industry was grounded for several months, during a worldwide lockdown. Currently, with some routes managing to operate, there is evidence of a gradual domestic air Chinese market rebound. However, 2020 will certainly not see the 4.6 billion annual passengers of 2019. The long-term trend of ever-rising air passenger numbers year on year that E&Y report predicted has been brought to a halt.

As terminals remain empty and aircraft remains parked airlines will soon consider putting any orders on hold. According to IATA’s Chief Economist, Brian Pearce International demand is not expected to return to 2019 levels until 2023-24.

Before this pandemic, the aviation faced increasing pressure to act on climate change. IATA Forecast Predicted 8.2 billion Air Travelers by 2037 (double the ammount of passenger as of 2018) increasing the aviation industry share of global emissions to 22% by 2050.

Many critisised the well-off minority with a questionable necessity and resort to social shame whilst UN’s ICAO regulators responded with their Carbon Offset and Reduction Scheme for International Aviation (CORSIA) scheme. This well intended plan has been thrown into disarray by the COVID-19, yes the industry has come to a standstill and demand took a hit, once flights resume, emissions could grow much higher than anyone predicted.