Fitch Ratings-Warsaw, London-23 March 2021: European commercial aerospace original equipment manufacturers (OEMs) have been supporting their supply chains during the pandemic by producing more aircraft and engines than they delivered to the troubled aviation sector, Fitch Ratings says. This led to significant working capital outflows in 2020, which we expect to gradually reverse later in 2021 and 2022.

The global aviation sector has been under severe stress since the pandemic began and we do not expect passenger traffic to recover to its 2019 levels until 2024. This will affect airlines’ fleet-planning decisions and consequently aircraft production and delivery rates. Despite Airbus’ aircraft deliveries declining by 34% in 2020, both Airbus and Rolls-Royce still acted to support smaller, financially more vulnerable manufacturers in their supply chain by procuring substantially more parts and assembling more aircraft and engines than could be delivered. For example, at end-2020, Airbus had approximately 100 finished and undelivered aircraft on its balance sheet. A convergence of production and delivery rates is unlikely before 1H22.

We expect Airbus’s production of large commercial aircraft to remain stable yoy in 2021, at no more than 650 units, still well below the 2019 level of over 860. Production could increase slightly in 2022, depending on the strength of the recovery in air traffic and the easing of global travel restrictions. More than 80% of planes produced are likely to remain single-aisle units (A220 and A320 family) and we expect this segment to see most demand for increased deliveries in late 2021 or 2022, given our expectation of a quicker recovery in domestic and regional air travel than in long-haul travel. We expect Airbus to produce about 47 A320s a month by end-2022, from the current rate of 40 a month.

The ultimate quality of aircraft order books should become evident throughout 2021 as, for the past 12 months, airlines were taking a “wait-and-see” approach to the effects of the pandemic, opting to defer deliveries rather than cancelling them. This is due to the negative consequences of cancellations, which result in airlines losing their deposits and being forced to the back of a long queue (up to seven years, in some instances) when they re-order. Over the coming 12 – 18 months, we expect far more cancellations than in recent years, especially in the wide-body segments used for long-haul travel. While this might cause a material decline in the size of the backlog, the contraction is unlikely to have a rating impact unless it exceeds 25%.

The size and diversity of the backlog have been among the underlying credit strengths in the commercial aerospace sector, providing good visibility into revenue expectations for companies most exposed to the commercial aerospace segment such as Airbus, Rolls-Royce and MTU Aero Engines. At end-2020, Airbus had a backlog of nearly 7,200 units.

Cash-generating capacity is the most important factor currently affecting ratings in the European aerospace sector. Significantly weakened cashflows have driven recent downgrades and the Outlook revisions to Negative, while we monitor improvements in cash generation for any potential positive rating or Outlook actions. For example, a key driver for potentially revising the Outlook on Airbus’s rating to Stable would be the company’s capacity to generate funds from operations that equates to at least 9% of revenue. This would demonstrate that the company had adequately adjusted its cost base to the lower production rates announced in 2020, and stabilised the pricing environment for commercial aircraft.