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Medium term history

Prior to COVID-19, the aerospace sector had been relatively buoyant, with record order books building across the industry over the last 10 years and several major new aircraft models going through final assembly phases. This, we anticipated, would lead to the focus of businesses within the supply chain being away from sales and development activities towards driving efficient and cost-effective production and order book delivery.

Current outlook and challenges

COVID-19 has had a severe impact right across the sector. Reported impacts include:

  • Delayed delivery or cancelled orders for new planes
  • Demand for new build aircraft up to 40% down on pre COVID-19 levels with an expectation of volumes not recovering for 2-4 years, depending on platform. Reduced flying hours leading to earlier aircraft retirements and reduced operating fleets, impacting demand for aftermarket parts and MRO service
  • Lockdown and social distancing measures have impacted on supply chains, movement of personnel and day-to-day operations

As the acute phase of COVID-19 passes and the economy emerges into the new reality, the aerospace sector is likely to be one of the slowest to recover. Aviation demand will be subdued for the foreseeable period, with airlines unlikely to be seeking to increase aggregate capacity in the near-term. The risk of corporate failure within the supply chain is similarly elevated, necessitating careful risk management to reduce financial and operational exposure.

There remain other challenges within the sector:

  • Brexit – inventory stockpiling in anticipation of Brexit had already placed liquidity pressure throughout the UK supply chain. Regulatory alignment of aviation and associated sectors as part of the Brexit deal remains undecided
  • B737 Max – though COVID-19 has served to mitigate the impact of the model’s continued grounding, uncertainty around its return places further pressure on scheduled delivery dates
  • Changing business models – COVID-19 will likely accelerate a change in business model for many airlines, which may see a smaller proportion of business-class travellers. This, in turn, will impact on the economics within the aerospace sector and demand for specific variants
  • Climate change – environmental regulations will force innovation across the sector as airlines move from large wide-body planes to fuel-efficient narrow-body jets
  • Trade barriers – global trade barriers may impact on exports to specific countries/regions

Stress and distress temperature rating

Aerospace sector temperature assessment as at 1 June 2020, covering medium term history and outlook:

Graphic showing the Aerospace sector stress and distress temperature rating

Key trends across the sector right now

  • Crisis response to COVID-19
  • Planning for wider geopolitical uncertainty and security threats
  • Innovation in face of growing environmental concerns
  • Specific UK industry response to Brexit and supply chain impacts
  • Continued focus of production methods and cost control

Case studies

Major aerospace transformation programme

As Programme Development Partner we stood up a team, supported by specialist subcontractors, to work alongside a dedicated client team.

We undertook financial and operational baselining and used this in our assessment of operating model transformation options. We then created a ‘CEO room’ to communicate ideas, obtain buy-in and ensure the programme was understood by the organisation.

Outcome

The programme identified significant efficiency benefits for the client at c.£900m over 10 years and accelerated significant amounts of cost savings in areas such as fuel consumption, charter usage, engineering function manpower and the selected use of outsourcing of non-core functions.

Contract renegotiation and cost reduction in equipment spares programme

We supported the client in identifying and implementing major savings for their equipment contract portfolio.

KPMG was engaged on a contingent fee basis, with a savings target of 10% of the total portfolio value (c.£400m) to support a wider efficiency programme. KPMG prioritised efforts and which contracts to target to realise meaningful results in the short term and successfully implemented savings of 15-20% across those contracts.

Outcome

KPMG used both their proprietary contract cost reduction methodology and high-quality big data analytics to unlock value that was previously not evident to the client.



KPMG UK's national sector teams

Contacts on this page are specific to KPMG Restructuring sector capability. Our Restructuring sector contacts also work as part of KPMG’s national sector teams that comprise members from across our wide range of practice disciplines, e.g. Deals, Consulting, Tax and Audit. To find out more about KPMG’s wider views in this sector, click here.

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