Industry Trends Spell Fundamental Changes For Commercial Aviation

OCTOBER 17, 2002, 10:00EDT
LONDON, -- Industry trends already in place prior to the September 11th terrorist attacks, primarily related to the global economic downturn, will drive fundamental change in the business model for the commercial aviation industry. This transition, which will cascade through the supply chain, may occur slowly -- over the next eight to 10 years -- or rapidly, in the next three to four years, if driven by trigger events such as major new terrorist attacks or war with Iraq.

This expected structural shift and its supply chain impacts are among the findings of new research released today by the Society of British Aerospace Companies and A.T. Kearney, the management consulting subsidiary of EDS.

The effects of a reduction in the demand for and prices of airframes are expected to cascade through the supply chain, the SBAC and A.T. Kearney found, with volumes and prices being significantly depressed for the next two to three years. Prices will be 25 to 35 percent lower than in 2000, according to the study.

"The commercial aviation industry clearly faced significant challenges even before September 11th," said Duncan Craig, A.T. Kearney vice president and leader of the firm's European aerospace practice. "The supply chain was focused on cost reduction and restructuring, but the impact of passenger demand had not yet translated into reduced aircraft demand. September 11th's impact was to accelerate the decline in the economics of traditional carriers, and the ripple effect throughout the industry."

Prime manufacturers will focus sharply on cost in response to volume and price reductions, the study found. The SBAC and A.T. Kearney predict manufacturers will become more involved in collaborative partnering on large programs and much more attentive to cost reduction, both on the operations and sourcing sides. They also are likely to move into more profitable revenue areas such as MRO and aircraft finance.

Manufacturers will also face new accounting and finance issues, the study found, including increased balance sheet risk from sales financing and difficult decisions on where to take profits from after-market equipment sales.

"It's a buyer's market for commercial aircraft," said David Marshall, Director General of the SBAC and chair of the research committee. "We believe passenger demand will not recover for at least two years, pushing out a recovery in aircraft demand for two to three years."

The study foresees opportunities for suppliers to move up the value chain, to supply whole modules and sub-systems, as manufacturers increase outsourcing. They will have greater design authority and a greater system integration role. At the same time, suppliers will face cost pressures on two fronts: overall price pressure as airframe price reductions cascade down the chain; and pressure on spare part sales, as consolidation in the MRO market creates greater negotiating power.

The SBAC and A.T. Kearney see the global MRO market consolidating in three ways. Prime manufacturers will enter the market or expand their presence, seeking a new source of revenue. Airlines will develop and expand their own internal capabilities, as a means of reducing costs. Third-party MRO providers will globalize, in search of scale. This consolidation will lead to increased buying power for these players and an accompanying reduction in inventory pools.

The 12-week study, launched at Farnborough International in July 2002, has involved a combination of detailed desk-top analysis and nearly 50 interviews with aviation leaders in government and across all industry sectors, including operators, manufacturers, suppliers and airport operators.

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