Transcript Blog- The Global Impact of the Coronavirus Pandemic on Aerospace and Defense Industry
Travel bans have been put in place all over the world to slow the spread of the coronavirus. Glenn McDonald, Principal at AeroDynamic Advisory, and Torsten Welte, Global VP of Aerospace & Defense and Travel & Transportation at SAP, respond to the drastic change in operations for the aerospace and defense industry in this episode of Industry Insights by SAP.
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Welcome to the industry insights by SAP podcast series. My name is Josephine Monberg and I am your host. You are now listening to the Cobra 19 special edition of our show. Welcome to our podcast.
Hello everyone and welcome to this episode of our podcast. We are taking a closer look at how different industries are being impacted by COVID 19 and today we are taking a closer look at aerospace and defense industry and I’m sure that industry specifically seeing a lot of impact of our current global pandemic. And to do this, I have with me in their virtual home studios, Glenn McDonald, who’s principal at aerodynamic dynamic advisory and Torsten Welte who’s head of aerospace and defense and travel and transportation at SAP. So thank you both for being with me today. Um, if I turn it over to you first, Glenn, can you just quickly tell us a little bit about what you do?
Yeah, thanks Josie and thanks. Thanks for having me on the podcast. Um, as you mentioned, I’m a principal with aerodynamic advisory and we’re a boutique consultancy focused on the aerospace and aviation markets. So corporate strategy, mergers and acquisitions and advising clients on strategic technologies.
And where in the world can you be found apart from, of course, at home?
Uh, our clients are primarily in North America. We do have a global client base. Um, unfortunately, uh, not much travel right now. So we’re working from our homes in Ann Arbor, Michigan.
Okay, well, great to have you. And over to you Torsten, what does your role include at SAP?
Yeah, thank you Josie, Jen, and thanks for organizing this. Um, at SAP, um, I look after the aerospace and defense as well as the travel transportation industry. So aerospace and defense is all the manufacturing sites. Uh, all the commercial as well as the defense site. Uh, on travel, travel and transportation, you have basically the travel side, which is people transport and transportation. It’s non-people transport and it’s all motive areas. And what we do in our group is basically looking at trends, uh, things that our customers looking as constraints or problems or issues and looking at our SAP portfolio and see how we can help with them with existing products or with new products. And also, um, basically managing several of influence counsels.
Hmm. And where in the world can you be found right now?
Yeah, I’m, uh, I can be usually found in Seattle, Washington, but, uh, due to some business trips I had, um, I, uh, didn’t get necessarily stranded, but I’m right now in, in Germany, uh, in my hometown that I grew up with close to the black forest.
Okay. So similar situation to me typically located in New York, but right now it can be found in Denmark in specifically in Copenhagen. So thank you both for sharing a little bit more about you. Let’s dive right into it. So, I mean, you are covering an industry that I’m sure is being massively impacted by our current global pandemics. So maybe starting with you, Glenn, can you tell us a little bit about the impact that you’re seeing on aerospace and defense industry?
Yeah, you’re, you’re right, Josie. It is a massive impact and it’s, it’s multilayered. I mean, we have it at the top level, the travel bands, um, specifically in international travel, um, between many countries. Uh, then layered on top of that, the economic impact of COVID, which is making people want to travel less for leisure and for business. And then, uh, layered on top of that, I mean, we have the impact of, of, of social distancing, which even if we had the money and time to travel, um, people are, are afraid of, of flying and afraid of being on an airplane, packed in with, with, um, other passengers and not able to social distance. So, uh, you know, depending on which, uh, which data you believe in, which estimates you’re looking at. Um, air travel is down something like 96%, um, globally this month in terms of the number of passengers flying per day.
Massive, massive impacts. What about you, Torsten? Can you comment on that? What are you seeing?
Yeah, I see a big impact also from a, from a, of course what Glenn said from a traveling perspective and the demands in traveling, but also see the impact done on the companies. Right. Um, lots of the commercial airplane manufacturers, um, shut down their production or slow down their production. Um, we also, in addition to that, a lot of people heard about, uh, the Boeing max issue, the grounding of and not being certified aircraft for over a year. Um, so that’s even layering too to Glen’s, uh, challenges that he mentioned. Another layer on top. Um, so a lot of things in, in the industry is already being impacted by those two magic, magic massive events. And so we see a lot of the suppliers being impacted and we see a lot of uncertainty what’s happening afterwards, even if, if everybody goes back into the, into the here, what’s happening with, uh, all the different aircraft and things that are, uh, parked out there. Um, on a good side, um, a lot of the defense companies have jumped in to do a lot of work for medical work. So, uh, that’s a positive side on it. Uh, the good thing is a lot of the defense companies were also under, uh, restricted work, so they were able to actually bring most of the manufacturing people back to work on stuff. So that’s the positive side on this, right. But, um, massive, massive impacts on keeping people safe. Uh, and balancing that. The economic impact.
Mm. Well, I’m happy that there is a positive side because I do think it’s one of the industries that we’re hearing a lot about in the news and just of course constantly learning about the negative massive impacts that there are, um, on the industry. So you just touched on it now, Torsten, what the industry’s doing to respond and I guess also reimagine themselves then. Glenn, can you talk a little bit more about what you’re seeing in terms of how the industry is responding?
Yeah, it’s, um, it’s certainly early days and I think we do have to differentiate between what the airlines are doing in the airline ecosystem and then what the manufacturing ecosystem is doing. You know, from, from the airline point of view, we have seen, uh, government assistance programs, uh, pop into place, you know, in the news in the last day or so. And it was announced that the government of France and the Netherlands are supporting air France KLM to the tune of 7 billion Euro. Um, so that will keep them afloat for the foreseeable future. In the U S we have the cares act, which is providing upwards of $50 billion in grants and loans to the U S airline industry. So that, that certainly, um, buffering things in the near term and providing a floor where people are still employed. Um, I think beyond that, um, the big question is, will airlines have the financial resources to keep taking delivery of new aircraft?
What happens when they parked their old fleet? You know, what happens to the whole aftermarket ecosystem. Um, so I, I think to date, um, production has been impacted because of factory shutdowns and things purely due to COVID, but it’s still a little bit too early to tell what the longterm implications are going to be for production. Uh, certainly, um, the forecast we were looking at at the beginning of this year, um, you know, Thorsten and I were at a conference in early February where that look was, uh, was fairly rosey. And I think that that’s all that’s all changed where we won’t need to get back to that level of their craft production and manufacturing activity for in our estimates. And for about the next four to five years before we returned to 2019 levels.
I mean, it’s really just, I believe it’s, it’s an industry that’s totally going to be reimagined more longterm and I’m sure that companies, um, businesses and this industry is doing a lot to try to respond. Are you towards, maybe, do you have any examples of what airlines or just businesses in this industry’s doing to respond?
The industry itself, as you know, if you look back, is the core of a lot of the innovations that we have. To get an aircraft into the air, it takes a lot of engineering skills, a lot of physical skills, knowledge about the physics of the world, period. Um, that got people closer to each other, right? Understand how the world works and how different cultures work. Uh, that way we can now travel within hours from one continent to another. Um, with hypersonic stuff coming out, uh, soon again, uh, we’ll be even faster satellite businesses, right? Without those, we couldn’t be on this call, right? Because everything works off of satellites and other communication pieces. So did the industry is very creative, innovative itself. We just went through a very dramatic aspect. So the creativity itself is centered more around keeping care of the employee on businesses.
Um, there are efforts going on right now to, uh, within the airline, um, airlines to see how do you restart, uh, their operations. Um, the OEMs like Airbus and Boeing, especially on the Airbus side, are working on finding out how we can help the industry overall. Um, how we can make it safer. Um, you know, all these discussions. Um, but also looking for their own people, right? To make sure that they work in a safe environment. They keep track of the clean standards, the distance, all those kinds of things. So there’s, there’s a lot of creativity in regards to keeping people working creativity in regards to working with their supply chain and their suppliers because there’s a financial issue, uh, out there. Uh, if you shut down, uh, major branches of manufacturing, it will impact thousands of companies, uh, that are already on a very, you know, fragile financial situation.
And by, you know, doing creative things, innovative things, working with them. It will help them to, to float through this crisis. And um, it’s also be, it’s also going to be extremely interesting to see how this supply chain will recover because they plan for in some airplane production rates of 60, and now they’re down to 40 or even further down. Right. So the creativity has to come. It has to come in regards to optimizing your processes, especially when there’s a lot of labor. Um, how do you basically more efficiently work? How do you more efficiently collaborate and uh, reduce some of the overhead?
Hmm. And Glenn, you spent a lot of time, I mean you do the same Torsten but advising companies. So what do you tell them right now? What’s your advice?
Yeah, for the company is that, that have the ability and have, um, came into this in a strong financial position. I completely agree with Torsten and that now is the time to invest in improving efficiency and coming out of this stronger. On the other side, it’s always a challenge with companies balancing the immediate need to cut expenses and reduce your, your cash burn with, um, the, the need to invest for the future. And I think the, you know, the companies are forward looking, we’ll find ways to make those investments as far as they can in, in this crisis. Um, especially around, um, you know, implementing some of the industry 4.0 or IOT principles and manufacturing and, and reducing, reducing labor costs, simplifying their supply chains. You know, it’s something we’ve seen in aerospace where we evolved this very complex global supply chain network and first with the trade war and now with COVID, we’re seeing some of the downsides, some of the riskier things that can happen with that global supply chain network. So I think it’s something for the larger tier ones and OEMs, uh, to start to try to optimize that to, um, to, you know, reduce that risk and reduce costs at the same time.
TorstEn, if I can ask you about kind of the role that technology plays in helping businesses future prove in terms of coping better or coming out of COVID 19. Uh, could you talk a little bit about that?
Absolutely. I think, um, if we, if we take just a little step back, um, I think in the past, especially in the airspace world, we have a lot of engineering and a lot of tribal knowledge, a lot of work experience. Uh, COVID is truly an, I think everybody agrees to a situation where there was no playbook, there is not something that we can refer back to. We had other crisis, the financial crisis a couple of days ago. It was chernobyl, reunion of 34 years ago or 35 years ago. We had crisis as in the past and we recovered, right? We had also over the last, I would say 10, 15, 20 years, a very steady growth in the market. So a lot of people knew exactly what happened and it was very much in a linear, uh, way of working in it. The reason why I bring this up is because a lot of people are kind of at a point of I, I can’t make a decision based on an experience, right?
I can’t make it out of the guts. Uh, so the, the, the fact of having information available that enriches your decision making is going to be very, very keen independent. If you’re in manufacturing, if you’re in supply chain or if you’re in finance, it is going to be, um, very, very critical to have as much as their information as possible to enrich your knowledge pool so you can basically make the right decision. So that’s step number one. I would say the other piece is like when Glen and I prepared for this podcast, we chatted about very specific pieces of information that we had. So that collaboration of understanding what’s happening in the market is very, very critical. So building on top of each other’s knowledge is going to be very, very, very critical as well. So this entire collaboration piece, you know, how do I collaborate with my supply chain?
How do I collaborate with my customers? What will they be willing to stay to the order but delay it or you know, help in financial situations. That is going to be critical, right? The collaboration with a very complex supply chain, like the aerospace and defense world where we have 50,000 suppliers, in some cases that’s going to be massively critical. But you can only do that if you have technology employees, right? The digital transformation in all of those elements and segments and layers, uh, we’ll probably, uh, accelerate after this, uh, way stronger than we expected because of the fact that a lot of people see I need to have that information. I cannot make the decision on the face on that anymore.
Glenn, do you have anything to add to that?
Yeah, I mean, I agree. I agree with you Torsten. I think the supply chain visibility is one of the key things to me where, uh, let’s face it, we’re going to have some supplier failures here over the next few years. Um, and smaller tier threes that don’t have good access to capital or maybe we’re constrained because of the 737 max grounding and production shutdown to begin with. And then you layer this on top of that. Um, I, I think for the tier ones and OEMs to be able to quickly identify where are those pain points in the supply chain and either go in with assistance or, um, do more dual sourcing or just be able to be proactive to avoid further production shutdowns that that will kind of cascade on top of the COVID impact. Um, so that supply chain visibility, I think is one of the key areas where we can use technology in the near term to, to improve our situation.
Hmm. And now let’s talk a little bit about what we are doing to help what SAP is doing to help. Because we are offering, you know, solutions that typically would cost money, but we’re offering them for free now to help our customers cope. Torsten, have you seen anything in terms of how companies in your industry are taking advantage of these offerings? I’m just thinking if there’s anyone listening right now, this would be a good time to kind of share that. So they might get information about how they could also get help from SAP.
Yep. So I, I think, um, so it was the, um, one aspect of this is, you know, to recognize that we’re all in this together and we will have a completely different world after. Um, there are several, um, really good organizations within the aerospace and defense where we are part of like the AIA in the US or, uh, PNA, which is Pacific Northwest where planning and I met a couple of times. Uh, those are organizations that really corral around all the members, uh, to really bring them together to exchange what’s happening. So being part of the community and listening help and helping out, uh, you know, understanding what’s happening, that’s going to be critical. But, uh, we have SAP, we took even one step further. Um, as most, uh, no, we offer from a employee’s safety perspective and also from a care of your employees, a survey that, uh, all of our customers can take advantage of it for free so they can check in with their employees when they work at home, what their needs are, what they can do with it. Um, as Glenn mentioned before, the supply chain issue is super, super, super critical. Uh, we have several offerings in that area. One of it is, uh, the fact that, uh, if you need a demand for specific or if you have a demand for a specific product, you can go over to Ariba discover and, and match those things over there or offer things that you have right. Um, and for a lot of the defense companies, that’s what they did in recent times. But we also, uh, offered the integrated business planning tool, uh, out there for a period of time to our customers. And there’s, there’s also other tools out there for training purposes. So if you have to train people, if they have to re, uh, come back to the workforce such as, uh, the furloughed people like the flight attendants and flight crews, right?
When they come back, they have to train and retrain and recertified, uh, because they may have to switch to different aircraft. How can you get that information to them? So there’s, there’s a lot of things and, and by the way, from a training perspective, um, don’t underestimate that because a lot of processes will completely change. A lot of health related things will come in that we have to incorporate in our new processes. So this learning piece will probably pick up, um, in the next couple of weeks even more. So that’s just a couple of them, but they’re way more out there.
Yeah. So actually let’s talk a little bit more about the future and what the future holds. I’m not sure how dark and gloomy it’s looking, but I’d love to get your thoughts on it. So maybe starting with you, Glenn, what do you see in terms of what the future holds for aerospace and defense industry?
Yeah. Well, let’s start with the, um, the, the negative here. Um, w right now we have over 50% of the fleet, uh, global jetliner fleet is parked and that 50 or 45% that’s still flying is flying at dramatically reduced utilization. Um, we estimate there will be upwards of 5,000 aircraft surplus aircraft in the fleet, um, until late 2022 when, uh, that traffic starts to come back and that’s, um, scenario is looking more optimistic by the day, um, given, you know, given, given what’s going on with reduced travel demand. Um, so really it depends on when we’ll get a vaccine, right? That that’s really the driving factor for air travel is the vaccine and the availability of that vaccine globally where people will feel comfortable, people in businesses will feel comfortable, uh, traveling for business and pleasure again. Um, so our, our kind of nominal scenario today is, is that 7,000 aircraft parks, uh, traffic, especially international traffic doesn’t return until 2023.
Um, one of the questions we get asked all the time now is in this scenario, why would anybody take delivery of a new aircraft if I’m going to be parking my as it is, why wouldn’t I just use the aircraft that I have? And fuel has never been cheaper than it is today. So the advantage of a new, more fuel efficient aircraft has disappeared overnight. Um, so there will be some, some airlines that we think will still take delivery regardless. Either there’s contracts that they can’t get out of, or airlines like Southwest where they’ve been waiting for new aircraft for years and they need them regardless or Ryanair. Um, but we think deliveries will be dramatically reduced. It could be 40 to 60% reduction in new aircraft production depending on the model. So, uh, you know, as, as Torsten said, and then as we talked about earlier, um, we’ve had this situation where suppliers have capitalized, they’ve built up their capacity for high production rates because, um, people like, like us have been telling the supply chain for years, Hey, production rates are going up.
You need to capitalize, uh, for that higher rate. And now, um, you know, they’re capitalized for that and rates are being cut from, from reduced levels. Um, so it’s going to be a struggle for a lot of smaller suppliers to survive. So in the future, you know, we expect to see more consolidation in certain parts of the supply chain that are very fragmented today. The tier two, tier three machine shops and manufacturers, um, that could be private equity, participating in that to roll up suppliers. It could be, um, mergers or, or JVs or um, or suppliers failing and, and the strong ones I’m surviving and expanding. Uh, but it certainly will be a four to five years of turmoil and the supply chain and instability person, you brought up a good point. We have defense as well and we luckily defense kind of provides a stable floor for us in aerospace where we don’t expect that to go away. And in a, in an era of, you know, increased deficit spending and, and um, kind of bug budget realities that are thrown out the window with COVID. Um, we don’t expect cuts to defense in the next few years so that that will provide a little bit of a floor for some suppliers.
And thank you for kind of dividing it into the two because of course they are very different. Torsten, do you want to take out your crystal ball? Do you have any, any thoughts on what holds or what the future holds for aerospace and defense?
It’s a resilient industry. It’s, it’s not easy. It’s not easy to design an aircraft and just bring one to the market that takes years and years and years and hopefully, um, you know, people, they cherished the fact that they can travel and experience different cultures. So I, I believe, well all my friends that I talked to, they all want to go back and go on vacation or see different places. So the people, it’s not that people lost a trust, it’s just a matter of, you know, when can I get to my next destination? So I think there, there, as Ben said, it will take some time. Uh, so people really feel comfortable vaccinations come in and those things. So there will be a pickup back. Again, it’s just a matter of time and what the amount of of travelers will be. That’s going to be critical.
I think on the other side, um, a lot of the companies, uh, lost a little bit of the focus and uh, went into way too many different things, um, and probably invested or did too many things to do to do many different areas. I think coming out of this will probably drive a lot of focus. Um, it will also drive a lot of collaborations instead of competitiveness. Um, I think we will see a lot of in a tier two, tier three, uh, areas where there’s a lot of collaboration and hopefully, you know, the what was before, uh, programs that was very competitive from a price perspective. We’ll turn a little bit more to let’s make this happening, that’s make this work. Um, I think as CEO of Airbus a couple months ago said, we have to keep our, uh, our factories open because if we don’t, uh, we will hurt our supply chain.
So that was that kind of spirit, those kinds of, uh, you know, actions. Uh, we’ll help, we’ll help thousands of people, we’ll help thousands of families. Um, so I think that will drive and I think there’s so much innovation within the industry and so much determination to make things work. Um, we will see more and more innovations come out. And I think this, this time also has shown people that they can’t work from home as an example. Right? Technology is there to help them to do things right, to push them a little bit forward. Um, we will probably see the technology adoption in much greater term than it would be before because we had also dealt with a, um, an average age, um, you know, an aerospace defense world that is way over 50 in some cases. And the adoption, and I have to say that in my age group is probably lower than in, in other age groups. So the, you know, this will probably help with, uh, that element as well. And I also believe that, uh, this will open a lot of new spaces for younger engineers to step in, right? Uh, where when they can shine now and have these, uh, these discussions where in the past probably age trumped over, um, some create ideas
on those words. Torsten and then Glen, thank you both so much for coming on our podcast and sharing about what’s going on in the aerospace and defense industry. Um, I am leaving this conversation quite optimistic and um, I hope that everyone listens, uh, in the field the same and uh, to those who listened to this episode. Thank you so much for listening in. Hopefully I’ll see you on the next episode. Please subscribe to our channel industry insights by SAP. Open SAP apples on the podcast to learn more about what SAP doing to help you cope in COVID 19. You can go to sap.com about global health safety and find free access to select SAP software tools to support your business in much more. Stay safe everyone.