Today’s global economic downturn has spared few industries. So while companies at the top of the aerospace sector food chain appear to be weathering the crisis, airlines are among the hardest hit.

Figures released by the International Air Transport Association (IATA) paint a grim picture. According to IATA, airlines cut international passenger capacity by 4.4% in the year to March 2009, resulting in an average load factor of 72.1%, some 5.4% below the figures one year earlier. Freight demand remained “relatively stable” at -21.4% compared with one year earlier. International revenues for March were impacted with an even worse decline of up to 20%.

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Meeting demand

Giovanni Bisignani, IATA director-general and CEO, calls such continued drops “unprecedented and shocking”. He says: “Airlines cannot adjust capacity to match demand.”

Even leading global carriers such as Lufthansa and Emirates are bracing themselves for the worst. Although Lufthansa posted a strong 20.9% increase in operating profits in 2008 – its second highest ever – Lufthansa Cargo chairman Carsten Spohr warns that 2009 will reveal a different scenario. Consequently, airline networks are being right-sized by taking fewer wide-body aircraft to strategic primary hubs and using feeder aircraft for places previously serviced by the larger jets.

“Given the weakness in the market for both passenger and cargo, these capacity reductions are necessary,” says Neel Shah, vice-president of cargo for US-based Delta Airlines.

The slowdown has also resulted in a dramatic grounding of aircraft. Figures from Ascend, consultants to the global aerospace industry, reveal a record 2300 jet airliners, more than 11% of the global aircraft fleet, are now ‘parked’.

Of this figure, more than 450 aircraft belong to European carriers, and 230 to Asia-Pacific airlines. In December, Cathay Pacific announced plans to ground two Boeing 747-400BCFs for 12 months in the California desert and delay several new freighter aircraft deliveries. The airline has also delayed construction of its Hong Kong cargo terminal, which had been scheduled to start operations in 2011.

Since mid-2008, North American carriers have announced fleet reductions totalling nearly 800 aircraft. “With new deliveries still likely to be about 1000 this year, subject to financing, airlines also have to park older aircraft to avoid more surplus capacity,” says Chris Seymour, market development head at Ascend.

Fleet reductions are impacting upon aircraft manufacturing. In February, two airlines cancelled their orders of Boeing’s much-hyped 787 Dreamliner aircraft: Moscow-based S7 cancelled its order for 15 787s, a deal valued at $2.4bn, and Dubai-based LCAL cancelled

16 orders. Boeing has 895 orders for 787s and orders for the aircraft are more than two years behind schedule. Meanwhile, Boeing is slashing the production of its twin-aisle 777 aircraft from seven to five planes a month.

 

Growth markets

Although Boeing has been retracting operations in the US, the aircraft manufacturer recently broke ground on an expansion that will double the size of a joint-venture factory that produces composite plastic aircraft parts in the Chinese port city of Tianjin.

Boeing is investing $21m in the expansion of Boeing Tianjin Composites, a joint venture with Aviation Industries of China that manufactures composite panels for aeroplanes.

Carolyn Corvi, vice-president of aeroplane programmes at Boeing Commercial Airplanes, says the investment is a “major step toward expanding our footprint in China” and will enable “our Chinese partners to enhance and leverage their commercial capacity and capabilities”.

 

Boeing expands in India

Boeing has also expanded its presence in India with a new research and technology centre in Bangalore. The Boeing Research and Technology-India centre is intended to help sustain the company’s competitive technological edge, while enhancing India’s aerospace capabilities.

The goal of the centre is to advance aerodynamics, electronic networks and aero structures. It will employ a team of scientists and engineers, and will partner with Indian R&D organisations, including universities and government agencies.

A big attraction for Boeing is the exceptional talent pool in India. “It has the second largest pool of scientists and technologists in the world,” says John J Tracy, chief technology officer at Boeing.

Boeing already has two advanced research centres in Europe and Australia. With outstanding orders in India for 100 aeroplanes worth $17bn over the next five years, the company has a steady stream of deliveries coming to India. Boeing is also hoping to win up to $31bn-worth of defence projects in India, according to reports.

The new centre in India aims to bring in $105bn-worth of revenue over 20 years from the commercial side (Boeing Commercial Airplanes) and $31bn from the military arena (Integrated Defence Systems) over 10 years. Boeing expects to strengthen its collaborative partnerships with companies such as Wipro, HCL, Infotech and Tata Consultancy Services through the new laboratory. The aircraft manufacturer is also a partner of premier institutes and research labs such as Hindustan Aeronautics, National Aerospace Laboratories, Indian Institute of Science and Bharat Electronics.

 

Airbus eyes China

Airbus may slow down production if the economic situation continues to deteriorate. Like its rival, Boeing, Airbus opened a new production line in Tianjin, China, that will help the company to meet expanding Chinese aerospace needs and worldwide demand in the next decade.

The plant is the firm’s first outside Europe. “Our goal is to produce four planes per month by 2011, but I wouldn’t be surprised if we achieved this earlier,” said Airbus CEO Thomas Enders recently.

The Tianjin plant is a direct replica the Airbus site in Hamburg, Germany. A major intention of the plant is to keep the European supplier competitive with Boeing, which has historically dominated the market in China. Boeing makes aircraft components in China, however, it has no assembly lines outside the US. Airbus executives estimate that China will need up to 2800 planes in the next two decades, 11.6% of global demand.

Like Boeing, Airbus has expanded in India with its high-tech research centre. This is responsible for developing advanced modelling and simulation crucial to the design and production of aircraft such as A380 and A350. The centre employs about 300 workers.

Airbus is also moving into the African market. Aerolia, a branch of Airbus, has signed an agreement with the government of Tunisia for the construction of a plant south of the capital Tunis. The factory is to become operational sometime next year. Aerolia is a French leader in the aerostructures sector, and is responsible for the construction of all the front segments of Airbus planes.

The new battleground for aerospace manufacturers may well be on new soils as mature markets retract and recover from the economic downturn.