Middle market companies that supply products and services to the commercial aviation industry are not flying high in these turbulent economic times, according to a report issued by Danbury-headquartered Alderman & Co.
The report, titled “Impending Crisis in the Commercial Aviation Industry Supply Chain” polled 65 companies that included manufacturers, distributors and providers of services including maintenance and repair; these companies average approximately under $100 million in annual sales.
On a year-over-year measurement in May, the respondent companies recorded an average revenue decline of 35%. At the moment, the companies are managing to remain operational, with 35.4% stating they have sufficient liquidity at the moment and 26.2% believing they “probably” have sufficient liquidity.
Still, the past few months for the airline industry have been brutal, with year-over-year passenger traffic down 81% as of mid-June. The report’s respondents predict airline passenger traffic will not return to pre-pandemic levels until 2022. But with funding from the federal Payroll Protection Program coming to a close with no immediate renewal in sight, the commercial aviation supply chain cannot rely on bank loans to keep them afloat.
“Banks don’t want to lend to companies that can’t pay them back,” said Bill Alderman, CEO of Alderman & Co. “Although that is pessimistic, the suppliers would not be able to pay them back until after 2022.”
Alderman noted that different suppliers will be able to recover their revenue streams quicker than others.
“If you sell jet fuel, then in 2022 you’ll see your revenue go back to a very good level very quickly because the airplane needs jet fuel to take off,” he said. “But if you manufacture seats for aircraft, you’ve got to wait another two or three years before your sales pick up. There are thousands of airplanes parked now and they don’t need new seats — they’ve got plenty of seats. They just need some jet fuel.”
Despite the dire straits, only 11% of the companies in the report said they were looking to create new business development opportunities in other industries.
“Business people are saying, ‘Well, we can’t sell any of those jet engine parts, go call on the ventilator market and see if they want us to make some parts,’” Alderman said. “A lot of that 11% were looking into medical and pharmaceutical. Others were looking into things related to 5G build out, such as manufacturing new cell towers. They are exploring other ways to try and use their services and their production for demand that exists elsewhere.”
Most of the commercial aviation industry suppliers were having difficulty trying to remain optimistic. When asked if they were more concerned now versus 30 days ago regarding the state of their industry, 48% said they were more concerned while 40% said they were less concerned and 12% had no change in their opinion. However, Alderman expressed surprise that the level of pessimism was not higher.
“What I found sort of surprising, but not overly surprising, was their level of optimism and entrepreneurial will to get through this,” he said. “I think this is an entrepreneurial group. They deal in aviation, they manufacture parts and if they do something wrong it kills people. It’s a life or death industry. They’re not making toilets — they’re making aircraft parts. And, so, this group is a very ethical, hardworking but optimistic group, like the Wright Brothers themselves.”
Still, Alderman acknowledged the troubles facing the industry are not disappearing any time soon.
“The reality is this pandemic is horrific,” he said. “It’s very disruptive to the airlines more so than probably any other sector of the economy because that’s how this virus literally spread to America. And I think it’s going to be bad — that’s what the survey data tells us. If the government will again inject trillions of dollars or a portion thereof into the sector, the sector will survive. But there’s no demand right now.”
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