Continued international travel restrictions impact all aspects of the aerospace sector, including OEM’s, carriers and specialized component manufacturers.
The global impact of the COVID pandemic has been dramatically felt by the global aerospace sector, which almost overnight suffered a catastrophic collapse in demand, which resulted in an 80% decline in air traffic and over 60% of the global airline fleet grounded. The impact on the airlines and its key component supply chain has been immediate and is expected to remain in place for some time.
With a rebound expected in 2021–and forecast demand only expected to hit pre-pandemic levels in 2024–suppliers to the sector need to revisit the underlying assumptions that underpin their existing financial plans and ensure key stakeholders continue their support. This is according to Kroll, the world’s premier provider of financial advisory services to the sector.
Vijay Merchant, Senior Director, Restructuring Advisory, Kroll, stated: “The aerospace sector is of tremendous economic value to the UK economy. It is the world’s third biggest sector, employing over 120,000 people, with an annual turnover in excess of £35 billion. When the pandemic hit, the demand for new aircraft ceased, existing orders were either canceled or deferred and the ongoing need for spare parts also came to a halt.
“For supply chain manufacturers throughout the UK, the challenge then became how to protect cash, adjust to new levels of demand in highly complex production schedules and integrated supply chains, and manage canceled orders and reduced build rates. To date, some 15,000 jobs have been lost or are at risk.”
Dafydd Evans, Managing Director, M&A Advisory, Kroll, added: “The UK is a dominant force in the global aerospace sector and an important strategic partner to key OEMs and allies. In addition to being at the forefront of technology and new developments, UK corporates supply some of the most complex components that remain critical to the manufacture and on-time delivery of aircraft to airline operators.
“Whilst the immediate drop off in air travel and a large number of grounded aircraft have posed an unprecedented challenge to the financial and commercial viability of suppliers, we are confident that with the right support from key stakeholders that the continuity of supply chains will be achieved and that the industry will return to growth and a new level of supply/demand balance.
“Understanding your financial health and key areas of vulnerability will be critical in ensuring long-term survival and ensuring you stand to benefit from the inevitable return to growth in the coming months and years ahead,” added Evans.
Kroll has highlighted four core areas businesses throughout the aerospace supply chain need to act on now to ensure longer-term viability:
- Understand your cash position and talk to lenders: Work with your accountant or financial director to get on top of your current financial position; after all, you cannot change that position until you know what it is. Work with experts to identify what is owed and with who, and do not forget to analyze the historic performance of the business to illustrate its underlying strength.
- Get ahead of HMRC: Work with experts such as Kroll when negotiating with HMRC on Time-To-Pay. There are numerous tax deferral schemes now in place from VAT to Corporation Tax, and while you may have negotiated a repayment schedule back in 2020, now is the time to reopen those discussions.
- Communicate throughout the supply chain: Given many airlines are simply unable to fly at anything like pre-pandemic levels, it makes sense that suppliers to that industry are also impacted. Business owners throughout the supply chain should explore conversations about debts together and hand-in-hand with financial advisors as a means of navigating cash flow.
- Consider M&A opportunities: The history of previous downturns suggests that firms may be quick to react to new market paradigms, and those that move quickly will likely benefit from first-mover advantages, primarily the ability to buy low and ride sustained growth from the early stages of market recovery.
Kroll helps businesses establish best practices across the entire value chain, including assisting with a range of transformational human resources initiatives, accessing emergency funding, maximizing cash flow management, Time-To-Pay arrangements in the context of HMRC tax commitments, and proactively ensuring all suppliers and creditors are properly managed. This is supplemented by a team of experts in M&A for those looking to build volume and economies of scale and to capitalize on market conditions as supply chains evolve.