On July 31, AMT held the economic update webinar, “Aerospace & Automotive Outlook.” John P. Heimlich, Vice President and Chief Economist at Airlines for America (A4A), and Mike A. Jackson, Executive Director, Strategy and Research at OESA, led an in-depth discussion on the state of the economy and the airline and automotive sectors’ projected recoveries. While the numbers continue to appear grim at this point in the pandemic, they also provide crucial clarity and focus concerning what to expect moving forward.
A World A-Hurtin’
While many areas around the United States and the world have begun to re-open, both Heimlich and Jackson stated that the coronavirus sat at the center of the global recovery. They stressed that no large-scale recovery could take hold until a vaccine or cure was made widely available. With many businesses remaining closed or at reduced operational capacity, the unemployment rate in the United States continues to be a cause for concern. Globally, all geographies with the possible exception of China is expected to see negative GDP growth; while China will contract greatly, it should still experience slight growth. Heimlich cited the S&P prediction of a 4% drop in world GDP, which was backed up by Jackson, who quoted Wells Fargo. Overall, while earlier data and forecasts suggested a sharp decline followed by an equally sharp upwards trajectory – a U- or V-shaped recovery – experts now expect to see a more gradual rise from the trough that closely resembles a Nike “swoosh.”
Planes of Existence
In recessions, businesses often cut travel first among cost-saving measures, and 2020 is no different. Add to that the hurdles of possible infections and quarantine protocols and the difficulties of the aerospace industry Heimlich summarized makes perfect sense. Passenger airline volumes for U.S. carriers are drastically low, registering a drop of 73% domestically from last year. International volume has plummeted 90% from a year ago. Illustrating this paradigm shift is the fact that video communication company Zoom now possesses a larger market cap than airlines. With a third of airline fleets remaining idle – a positive increase from mid-May’s 50% level – airlines are burning roughly $5 billion a month, an improvement from $10 billion a month in the springtime. Heimlich projected that passenger travel may not return to 2019 levels until 2023.
So what do these issues mean for the manufacturing technology industry and its supply chain? Higher debt and lower revenue numbers mean the airline industry will have less money to spend on upgrading aircraft. Companies like Boeing and Airbus will likely have to cut production – and already have, to different degrees – as airlines reduce or forgo new aircraft orders. While the timeline for passenger travel recovery is consistent with past crash cycles, it also means that airlines will be struggling for years, which indicates a turnaround in aerospace production levels would likewise be delayed.
All Revved up and Nowhere to Go
Jackson discussed the current state of the automotive industry, noting that it works through very cyclical booms and busts. He discussed oil prices, consumer spending, housing starts, high unemployment, etc., all the while pointing out that these tangential sectors trickled down into auto sales. For instance, if more people are working from home, then fewer miles and less wear and tear mean less vehicle maintenance. Thus, fewer cars need to be repaired or purchased. Less business travel means that there are fewer rental cars or taxi rides. Because real estate has contracted as well, fewer people need to rent or purchase moving trucks. Overall, demand for transportation is just low. This has all added up to a huge drop in vehicle sales, particularly light vehicle sales for 2020 – from 17 million units sold in 2019 down to around 12.6 million sold in 2020.
Some immediate relief does seem to be coming, however, as many automotive factories are returning to work after lengthy shutdowns and slowdowns. While Jackson expects some recovery in 2021, automotive sales levels would not be expected to reach 2019’s levels for years. He projects 14.4 million units to be sold in 2021, and 15.5 million in 2022. Transformative technologies will experience some collateral damage, as Industry 4.0 research and development may have to be put on pause for the automotive sector. Because the automotive industry is seeing less activity due to slowdown in other sectors, its supply chains will also see less activity. Additionally, the OESA supplier barometer is extremely negative in light of the current pandemic and economic condition.
Long Live the King?
Due to its cyclic nature, the automotive industry was predicted to experience a bit of a rough year before the pandemic, so some of the downturn was already expected. However, there is some cause for optimism, as Wall Street has shown an increase in investor interest in electric vehicles. For instance, Tesla has now become the most valuable global carmaker, overtaking Toyota. With the interest in sustainable solutions rising in recent years, this development may prove to be a golden opportunity for EV companies like Tesla, and by extension, to the suppliers in its value chain. Those suppliers that can adapt to this changing dynamic in the auto industry will position themselves to direct the future of the auto industry.
If you found this webinar or recap helpful, make sure to check in often with AMTNews.org. Our Economic Forecasting Webinar updates will continue in November. And for a deeper dive into what to expect from the economic recovery, AMT’s virtual MTForecast event will be held in October. Stay tuned for more information and directions on how to sign up for these sessions.