With certification steps entering into the final stages, the 737 MAX is expected to return to revenue service by year-end.…
Opinion: Third Party Suppliers, as Well as the Airlines, Are Taking a Hit
The impact of the pandemic on airlines globally has been well documented. With many airlines reporting 70 to 90 percent reductions year-on-year (YoY) in scheduled flying, airline planners and analyst have been sent scurrying to mitigate the financial and human impacts.
But the losses seen by the airlines extend well past the airlines themselves. As airlines work to restart their operations, airline managers should be concerned about the COVID-19 driven economic impact on some of their key partners.
Aviation suppliers and service providers are seeing enormous losses due to the reduction in flying by their airline customers. The losses have driven some companies to eliminate headcount and trim poor performing sectors of their business. The list of company names is both big and small, some of whom are Fortune 500 entities.
The total impact could be as much as $60 million (75% reduction) in supplier services sales according to a report published by Reuters.
Airlines require extremely complex coordination with hundreds of service providers and suppliers to support their flight operations. Although some of these services are provided internally by the airline’s employees, especially at their hubs and home bases, the vast majority contract out significant amounts of the work to 3rd parties. Fuelers, caterers, gate agents, maintenance, and many more accounts for tens of thousands of people who come together to support an airline’s flying day.
Nearly all airports have undoubtedly seen record shortfalls. The self-proclaimed busiest airport in the world, Atlanta, Georgia’s Hartfield-Jackson, has perhaps been hit the hardest.
Atlanta’s airport manager recently reported the airport’s concession and rental car revenues declined by $42 million in the fiscal quarter ending March 2020, a time when the pandemic’s impact hadn’t fully matured.
The airport reported the closing of 310 of its 347 concessioners and dozens of gates because of the lack of traveling customers. Atlanta’s 110 million annual passenger traffic volume dropped 97% YOY for April.
Ground support companies like Swissport, a worldwide provider of cargo and ground handling services, employ 8,500 airport workers who support over 835 aviation companies, 230 million passengers, and nearly four million fights every year before the pandemic.
Because of the flying downturn, Swissport made redundant over 4,500 jobs and has had to close some of its’ airport locations giving airport managers pause on how quickly the airport operations can be restarted when they try to woo airline traffic back.
“While some areas of the business have been busier than others, across the company, revenue has almost been completely lost. As of May, it’s down by more than 75%, and we still have bills to pay,” a Swissport company official told the Press Association.
3rd party aircraft maintenance providers have been equally hit hard and their return to profitability may be slower than some of their business colleagues.
Aircraft maintenance giant Lufthansa Technik reported an earnings decline of $4.4 million during the first quarter of 2020. This is directly attributed to the reduction in needed maintenance services by their airline customers that are directly tied to aircraft not flying.
Industry experts also believe that airlines will be driven to cannibalize parts from parked aircraft to save on repair costs. This could cut demand for 3rd party repair services by as much as half for some companies.
In a report published by Forbes, over the next 10 years through 2030, Forbes estimates the size of the Maintenance, Repair, and Overhaul (MRO) market will be $150 billion less than originally forecast.
Airline caterers are likely to see significant losses as well that will impact their workforces although published reports are not yet available. Several airlines have eliminated food and beverage service on all but the longest international flights and even curtailed alcohol sales in the interest of reducing touchpoints between passengers and crew.
To help stem revenue loss from decreased sales, some caters are even pre-packaging “airline food” for sale to persons looking for quick and easy meal options in their homes and offices. Gate Gourmet, a major caterer to the airlines, recently announced the program in a few select markets. Sales figures are not available but the idea is innovative and helps keep staff employed and may even change the stigma associated with airline food quality.
Niche Service Providers
While the big companies with the biggest losses garner most of the press, smaller companies who serve a niche aviation market stand to have the most to lose.
When flying ceased, one of the first cuts made by many of the airlines was to terminate its contractor teams. Many contractors that were hired to handle special programs and projects were released with little notice.
Shortly thereafter, airlines began trimming their workforce through voluntary and involuntary employment termination programs. But this may eventually work to the advantage of some of the niche contractors.
One contractor company official I spoke with said he is optimistic about the future. He related that he believes the airlines reduced staffing size a little too much (intentionally) and will eventually need to start looking to contract labor to backfill.
Airlines may face supplier challenges as they look to restart large scale operations because of the economic impact on their key partners from the pandemic. Aviation, both private and commercial, is a big contributor to many local economies. Local and national government leaders, regulators, and industry, including 3rd party suppliers, would be well served in starting the dialog now to ensure a speedy return of the economic benefits to the communities they serve which are provided by airlines, cargo, and business aviation.
- Opinion: Will Passengers Return to the 737 MAX? - July 8, 2020
- Austrian Airlines Trades Planes for Trains on European Route - July 6, 2020
- FAA Moves Ahead With MAX Recertification After Completing Test Flights - July 3, 2020
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