The coronavirus, or COVID-19, is wreaking havoc on the aerospace and defense industry and is taking a huge toll on air travel demand. As a result, Airbus is contemplating a large A320 production cut. Image
According to Reuters, Airbus is contemplating a large A320 production cut due to the fallout of COVID-19. Airlines are currently scrambling to preserve cash amid a huge drop in global air traffic caused by travel restrictions and closed off borders. Many airlines have either suspended all flights or reduced their flight schedule by as much as 60-95 percent. Airbus is reportedly examining scenarios that include cutting the current monthly output of 60 A320 family jets by up to 50 percent for a period of three to six months. Reuters also reports that A320 suppliers have been asked to reduce deliveries by 40 percent, a reduction that is compatible with the production of 36 jets per month.
Prior to COVID-19, Airbus was targeting a 5 percent rate increase to 63 jets per month from 2021 and was also discussing a further ramp-up with its supply chain that could have brought the production rate up to as high as 67 aircraft per month, or 804 per year, by 2023, putting the company within reach of a total of 1,000 jets delivered per year. Those plans have now been shelved.
According to an analysis published by IATA, revenues are expected to fall by 68 percent and airlines may burn through $61 billion of cash reserves during Q2 2020, while posting a quarterly net loss of $39 billion. On top of unavoidable fixed costs, many airlines have to refund sold tickets. Among nations providing aid packages to the industry are the United States, Australia, China, Colombia, New Zealand, Norway, and Singapore. Recently, Brazil, Canada, Colombia, and the Netherlands have relaxed regulations and are allowing airlines to offer passengers travel vouchers instead of refunds.
A final decision on an A320 production cut is expected at the company’s annual shareholder meeting on April 16. It is expected that Airbus will seek to avoid mandatory layoffs and instead make use of short-time working schemes at facilities in France and Germany.
Airbus is also studying major cuts in the production of A330 and A350 widebody jets. Suppliers on the A350 program are being instructed to run at half speed, equivalent to five aircraft per month. The monthly A330 production rate could be reduced to two down from 3.5.
By the end of February 2020, Airbus reported a backlog of 7,670 jets, of which 6,756, or 88 percent, were A220 and A320ceo/neo family narrow-bodies. This represents 8.9 years of deliveries at the 2019 production level.
While a slew of airline bankruptcies could certainly put a dent into Airbus’ order book, most of the damage will likely be caused by the ongoing uncertainty and reduction in near-term business activity. Even in bankruptcy, airlines will often choose to retain their orders as they may need the capacity in the future, but would cancel or seek to postpone near-term deliveries until air traffic volumes normalize.
As for U.S. airlines, carriers emerging from Chapter 11 reorganization have cleaner balance sheets and thus, while not obligated to, are more likely to make good on their orders assuming they need the capacity.