Narrow-body aircraft manufacturing throughput to modestly improve: Moody’s
21 May 2021
Modest improvement in manufacturing throughput for narrow-body aircraft is expected over the next few quarters in anticipation of domestic and near international travel recovery, Moody’s Investors Service said.
The rating agency said improvements in suppliers’s metrics would be mainly supported by Boeing Company’s 737 MAX and Airbus SE’s A320neo.
“The recovery will accelerate during 2023, as narrow-body production rates continue to ramp up.
“We expect supply chain in supporting the 737 MAX and the A320neo to reach a rate of 47 per month and 40 per month respectively,” said Moody’s in a report today.
This was in comparison with a historical high of 52 per month for the 737 MAX supply chain in early 2019 and a historical high of around 60 per month for A320 supply chain in the same year.
Moody’s said suppliers with more exposure to narrow-body platforms would likely be able to more quickly restore their credit metrics.
It added that widespread increases in air travel was likely to begin in the second half of 2021 and accelerating through 2022.
“This positive demand trend will run for many quarters, into 2023, as coronavirus vaccinations increase and governments around the globe lower barriers to entry for travel.”
However, the recovery in credit quality for the aerospace supply chain will substantially lag the uptick in air travel.
“This lag is largely attributable to the long-cycle nature of the aerospace supply chain, which is both capital and manufacturing intense.”
Moody’s said many suppliers had large fixed overhead cost structures and would not see a significant improvement in their credit metrics until aircraft production volumes increased materially.
However, Moody’s said suppliers with larger exposure to wide-body aircraft would experience more severe and prolonged sales and earnings pressures.
It said industrial markets had experienced significant disruptions, but compared to commercial air travel markets, their severity was more muted and the path to recovery would be considerably faster.
In contrast, defence end-markets, while experiencing some modest disruptions, had remained largely unscathed from the impact of the coronavirus and will continue to grow.
However, Moody’s said suppliers with greater exposure to commercial aerospace would continue to face more pronounced near-term top-line and earnings pressures and a slower road to recovery over the next 12-18 months.
“The path to recovery for suppliers is determined by their exposure to different aircraft types. In particular, the mix of narrow-body (single-aisle planes) and wide-body (twin-aisle) aircraft will determine how long they will be impacted by the aerospace downturn.”
Based on Moody’s forecasts, long-distance travel and the use of wide-body aircraft that are primarily used for long-haul flights would be the slowest segment of passenger air travel to recover.
The announcement of significant production rate cuts by aircraft manufacturers during 2020 reflected industrywide expectations of an extended aerospace downturn for long-distance travel.
Moody’s said Boeing and Airbus SE had reduced production rates of wide-body platforms by roughly 50 per cent during 2020 and build rates for these aircraft will remain at fundamentally lower rates for the next few years.
Meanwhile, Moody’s said original equipment manufacturers (OEMs) and tier-one suppliers are likely to financially support downstream companies facing near-term liquidity pressures. This support is likely to be in the form of payments or more favorable/quicker payment terms, access to vendor financing and, in one or two cases, allowing some suppliers to maintain a build rate that is higher than the broader supply chain to minimise overhead fixed costs weighing on earnings.