Omicron highlights risks to commercial aerospace recovery
The rapid spread of the Omicron variant highlights that our assumptions behind the global commercial aerospace sector’s recovery remain vulnerable to renewals of travel restrictions, Fitch Ratings says.
However, it is too soon to incorporate the effects of Omicron into our aircraft orders and delivery forecasts until more is known about the variant’s severity and the regulatory response.
Commercial aircraft makers have been benefiting from a gradual return of air travel and a slow but steady increase in new aircraft deliveries in 2021. The sector is dependent on a recovery of global airline traffic, which we expect to approach 70% of 2019 levels in 2022, although the recovery will vary significantly by region.
Any tightening of travel restrictions to prevent further spread of Omicron may delay the air traffic recovery and cause the deferral of scheduled new aircraft deliveries.
The new strain is a good example of why Fitch’s base case is for global airline traffic not to fully recover until end-2023. The new variant is unlikely to be the last and periodic concerns about virus mutations will be with the industry for several years.
Our base case is for passenger aircraft deliveries from Boeing, Airbus and Embraer to materially improve to about 1,450 in 2022, up from about 1,000 in 2021, but still below the 2018 peak of more than 1,600.
The 737MAX has returned to the air in more than 175 countries in 2021 and our forecasts assume that China recertifies the aircraft by early 2022. Much of the delivery increase depends on the continuation of air traffic improvement, minimal operational disruptions, steady or increasing production rates, and avoiding the reinstatement of broad travel restrictions.
Global supply-chain disruptions are an obstacle for the aerospace sector’s recovery and may be exacerbated by new pandemic outbreaks. The timely delivery of parts and equipment surfaced as a moderate issue in 2H21 for some commercial aerospace suppliers and we believe this is likely to remain a concern until at least mid-2022, although we continue to view this as a temporary challenge.
Airlines’ financial health remains a material factor for the aircraft makers which could impact deliveries as well as new orders. Most carriers maintain liquidity balances well in excess of pre-pandemic levels due to sizeable capital raising and government support through the pandemic.
Rebounding demand caused the industry to stop burning cash, allowing most carriers to begin deploying excess liquidity towards paying down debt or funding aircraft deliveries.
Capital spending will be material, but investments in aircraft are a key component of airline strategies focused on lowering fuel burn, addressing climate concerns and increasing efficiency requirements. We expect that over time modernising fleets will contribute to recovering profitability of the sector.
