In the wake of continuing economic turbulence, aerospace companies are restructuring their businesses to remain competitive. Major aerospace manufacturers have been relying on retrenchment as a step to handle the near-term projected reduction in customer demand as well as the impact of global economic slowdown. The exhibit below lists some of the major announcements in the last couple of months in the aerospace industry.

Major retrenchments announced last quarter

Apart from job cuts, aerospace majors are also witnessing delayed deliveries. Delays in Boeing’s 787 and 747-8 have pushed first deliveries up to 2010, while Bombardier’s CSeries is not planned to be in service until 2013, and Airbus’s A350 until 2014. Pratt & Whitney had an engine qualification test failure for Lockheed Martin Corp's F-35 fighter jet last month. Issues like fuel costs, order cancellations or deferred customer demand due to dried-up corporate profits, personal wealth and aircraft financing, erroneous supply-chain management, design flaws have been cited as the common reasons and concerns for these delays and failures.

Recovery measures

Hard hit by the global economic downturn, world leaders in the aerospace industry are presenting conflicting views of recovery. Boeing expects a gradual recovery in the hope that the global economy will recover in 2010, followed by airline traffic in 2011 that will record growth in 2012. Airbus, on the other hand, is quite positive that the aviation industry will bounce back in 2010 itself and will show growth in 2011. This year, Airbus also revised their forecast for the period between 2009 and 2028 to sell 25,000 passenger and cargo planes with a total value of USD 3.1 trillion, as compared to their previous forecast of estimated 24,300 planes to be sold over the period between 2007 and 2026.

Industry experts say that Airbus and Boeing are likely to slow production rates this year, but their new product plans might remain unaffected. Much to the relief of the suppliers, Boeing Commercial Airplanes revealed in late September that it has commenced work on the stress point problem of the aircraft B787 and first aircraft, making way for the test flight later this year. Boeing also admitted that its supply-chain policy regarding parts and software for the B787 was flawed, and it would take necessary steps in future projects. However, the company reassured that it was still committed to the outsourcing production system. Boeing is also focusing on emerging markets as per forecast made by Airbus which claims that Asia-Pacific will be the largest aircraft demand driver in the next 25 years ensuring overall future aircraft demand. Recently, Boeing signed a $2.1 billion contract for eight P-8I warfare planes with the Indian government and is also looking to bid for defense projects worth $31 billion over the next 10 years in India.

Will outsourcing continue to be an attractive option?

Though the current state of the aviation industry appears gloomy, industry estimates for the short term as well as the long term appear optimistic. The current approach of most aerospace players is that of caution in the hope to maintain stronger balance sheets, higher liquidity and spreading delivery backlog risk both in terms of products and geographies.

Several aerospace companies have been outsourcing their services to large Indian IT/BPO vendors and will continue to derive cost benefits from outsourcing. Apart from developing strong domain expertise, IT BPO and engineering services companies at this stage will need to partner with the buyers rather than just being service providers, as buyers now seek to share business risks in the changing business environment. Despite temporary slack, given the fact that the demand for engineering services is expanding, outsourcing will still remain a significant contributor to overall growth and profitability for aerospace businesses globally.