Recovery in Aerospace, Defense, and Airlines Threatened by Economy, Supply Chain, and Sustainability Costs, says AlixPartners Report

14 June 2023

Airlines’ debt-to-EBITDA ratio is up by 50% vs. pre-pandemic levels; profitability in commercial aerospace has declined 28% since 2021; 42% of consumers surveyed are likely to travel shorter distances this year and 48% are willing to pay more for ‘sustainable’ travel—but sustainable alternatives could cost the industry as much as $50 billion per year

NEW YORK (June 14, 2023) – Three years after the start of the pandemic, the aerospace, defense, and aviation industries are rebounding, thanks to resurgent demand and rearmaments connected to the war in Ukraine. However, this recovery is likely to be hindered by continued supply-chain challenges, labor shortages, rising interest rates designed to combat inflation, and all-new environmental challenges—challenges that will require aggressive, proactive responses to ensure sustainable and profitable growth. That’s according to a new study released today, the 2023 AlixPartners Aerospace, Defense and Aviation Outlook, by AlixPartners, the global consulting firm.

Airlines Sector

Regarding airlines, the report finds that all major regions of the world are now on track to regain their pre-pandemic levels of air traffic—including Asia, following China's more-recent reopening. Overall, says the study, revenue per passenger mile has reached 85% of the peak recorded in 2019. But, according to an international AlixPartners survey of 2,700 consumers (including in the United States, the United Kingdom, Germany, Switzerland, Sweden and Saudi Arabia) that’s part of the report, the pandemic has changed travel habits—as 42% of those surveyed are likely to travel shorter distances this year verses last and 48% are willing to pay more for “sustainable” travel.

Partly as a result of all these trends, airline profitability globally will reach only 1.0% of revenues in 2023, says the report—and that’s after nearly $190 billion in losses from 2020 through 2022. Meanwhile, says the report, the overall debt of airlines worldwide has increased by 12%, despite numerous financial restructurings, and airlines’ debt-to-EBITDA ratio has increased by 50% since 2019, rising to 3.7x from 2.4x in that time.

"As a group, airlines are carrying a dangerous debt load right now, and that’s and issue that they are going to have to deal with aggressively in the year ahead,” said Eric Bernardini, Global Leader of the Aerospace, Defense and Airlines Practice at AlixPartners. “Add to that changed travel habits, low-cost carriers eating away at the market share of traditional carriers, and new regulations in Europe and elsewhere leading to higher ticket prices, and you have a recipe for some less-than-optimal conditions in the year ahead.”

Commercial-aerospace Sector

In commercial aerospace, the AlixPartners study finds that overall sector profitability, as measured by earnings before interest and taxes (EBIT), has declined a whopping 28% from 2021, with massive write-ups from lessors offsetting growth from aircraft and engine OEMs. It also finds that the aerostructures and the cabin sub-sectors are generating negative profit.

This, notes the report, comes at a time when sector ramp-up requirements in commercial aerospace are tougher than ever, with the commercial-aircraft backlog at volume leaders Airbus and Boeing up 4% from a year ago, representing almost eight years of production. The study also predicts that the coming ramp-up will face significant challenges from supply-chain weaknesses, including in some cases the financial weakness of individual companies; workforce and skills shortages; and issues related to the sector’s high debt levels.

“This will be the fastest and steepest ramp-up the commercial sector has ever faced, and it’s not at all clear that OEMs and their supply bases are adequately prepared for it,” said Bernardini. “We especially see risk in the supply base, where many companies are insufficiently prepared to meet the necessary increase in working capital associated with the ramp-up.”

Defense Sector

Turning to the defense sector, the AlixPartners study finds that while military spending reached an all-time record level last year of $2.1 trillion, due in large part to the war in Ukraine and its reverberations worldwide, that sector will likely continue to suffer from an unavailability of qualified labor, a fragmented supplier base and challenging financing. The report also finds that U.S. companies now account for 40% of arms exports globally, but notes that all defense companies should look for ways to refine their focus on the most-profitable programs.

“In a word, the defense industry needs to become a whole lot more agile in order to meet today’s rapid, significant, and often-unpredictable increases in production volume,” said David Wireman, a Partner and Managing Director in the Aerospace, Defense and Airlines Practice at AlixPartners and a former executive at defense contractor Lockheed Martin Corp. “Today’s uncertain geopolitics demand nothing less than that—but I’m not sure most companies in the defense sector, especially in the lower tiers, are really at that point yet. Many don’t even have adequate production capacities.”

Sustainable Aviation

In terms of environmental and sustainability challenges facing companies in all sectors, the AlixPartners report asserts that a new, more-radical approach must be taken if companies are to achieve their own “net-zero” emissions targets. And, says the report, this approach must particularly impact the medium- and long-haul aircraft classes, as flights of more than about 620 miles account for 80% of total emissions.

The report suggests that fleet replacement with “new-generation” aircraft—currently representing 17% of the total fleet—is the most accessible solution in the short term, as each new-generation aircraft offers fuel savings of around 20%, which could reduce emissions by 11% by 2030 (not to mention the fact that fuel costs otherwise eat up 25% to 30% of airlines’ revenue). The report also notes that while new Sustainable Aviation Fuels (SAF) might be the easiest emissions-reduction solution to implement, their required massive investments—around $50 billion per year—would present a major challenge.

The AlixPartners study also details several “advanced-propulsion” programs currently being explored by both established industry players and start-up companies, including battery-electric and fuel-cell propulsion options, but note that these options face several sizable hurdles as well, including cost and well as technological feasibility. The report also examines recent public-policy initiations worldwide, such as the Inflation Reduction Act in the U.S. and the Fit for 55 emissions-reduction target in the European Union, might affect the transition to sustainable aviation.

"From the commercial side to the defense side to sustainability, all sectors should be taking more of what we at AlixPartners call an ‘industrial’ approach to their businesses," concluded Bernardini. “It’s time to stop just ‘fighting fires’ and instead to put in place systems—including production systems, workforce systems and cost-control systems—that are both robust and flexible. That’s the way to take full advantage of this unique period in time, and for companies to ensure both their short- and long-term future.”