The slow recovery in global demand and new Delta risks hardly bode well in the short run

Strongly hit by the Covid-19 crisis. Transport equipment as a whole, especially aerospace, suffered a sharp fall in 2020 as global air travel ground to a halt for several months. European and Asian manufacturers were worst-hit in comparison to their US counterparts because the latter can always count on large US defense spending. Overall, global aerospace output went down by a scarring -20% that neither new ships nor rolling stock manufacturing could make up for. Airlines have gone through a real storm for two years: They posted a terrible negative operating margin rate of -26% last year and are expected to post a loss above -5% once again in terms of operating margin over 2021 due to the lagging recovery in air travel demand. This gloomy picture in the downstream is set to weigh on the upstream aerospace industry. Shipbuilders as well as truck manufacturers continue to rely on ‘force majeure’ to extend delivery dates when they encounter supply bottlenecks, while railway producers are searching for ways of holding up in these difficult times as demand in the long term is positively oriented.          

A slow output recovery in 2021 regardless of the rising strength of domestic air travel. In terms of global output, we expect a partial recovery for the sector over 2021 in spite of the bolstering US defense activity. As demand for civilian jets is driven by air passenger traffic in the end, the slump in air travel from the outbreak has brought on large cutbacks in aircraft production rates and slowed down the sector recovery to the point that the global aerospace market is unlikely to exceed its pre-pandemic level in the next two years. Besides, global tourism activity is falling behind in its return to normal as new Delta variant outbreaks have just started to spread around in China. Domestically focused Chinese aerospace manufacturing might not recover as fast as expected eventually since the rebound in domestic passenger travel is poised to stumble. In the US aerospace industry, the main player has not finished yet with the headwinds hampering the rise in the production rate of its flagship 737 Max and the 787 Dreamliner planes. Moreover, the global supply-chain disruptions that have been affecting other industries could also pose a problem for the transport equipment sector as a whole if its recovery starts to ramp up.

A return to pre-crisis output levels not expected before 2023. Renewed mobility restrictions in China have started dampening domestic demand and the same could occur in India or the US if case numbers rise again, like in Russia or in Baltic states. Therefore international as well as domestic tourism is not expected to recover fast, causing a weak recovery in long-haul travel and long-haul aircraft output as a result. More worryingly, there could be structural shifts in air passenger demand as air travel is becoming less global relative to pre-pandemic trends. In other words, we expect international travel to lag behind domestic travel and single-aisle aircraft manufacturing to be chosen at the expense of larger but also more profitable planes. The demand momentum in railway as much as road rolling stock has to be monitored because the competition between global players remains intense in spite of  the latest wave of concentration, like the merging Bombardier with Alstom for rail rolling stocks. New investments in urban rail infrastructure to be decided shortly give a brighter outlook for the sector but growing questions arise about how high the funding of these infrastructure projects are actually. More long-term considerations are the share of households for whom air and sea travel are truly affordable and the actual capacity of states, whether emerging or mature, to see their transport equipment take part in curtailing global carbon emissions.