This article first appeared in The Edge Malaysia Weekly on June 29, 2020 - July 5, 2020
THE Covid-19 pandemic has brought the aerospace industry to its knees as national borders have been closed to contain the spread of the coronavirus, which has resulted in the grounding of thousands of aircraft globally.
Airlines not already bankrupt are tottering on the brink.
The US and France set aside US$25 billion (RM107 billion) and €15 billion (RM72 billion) respectively to bail out their aerospace industries, given their strategic importance in terms of foreign currency earnings and the number of jobs they support.
Should the commercial aviation sector go belly up, hundreds of thousands of jobs will be lost and billions of dollars in economic contribution and tax income will evaporate.
No country has been spared this unfortunate scenario, including the knock-on effect on the aerospace supply chain.
“Civil MROs (maintenance, repair and overhaul) in Malaysia have seen a reduction of up to 30% in the volume of business. The manufacturing industry is beginning to see a reduction of up to 30% in delivery demand based on their long-term contracts, as airlines are delaying deliveries,” Naguib Mohd Nor, president of Malaysia Aerospace Industry Association (MAIA), says in an email interview with The Edge.
From commercial aviation to aircraft parts manufacturing MRO, aerospace is a strategic industry for Malaysia. In 2019, revenue from manufacturing and MRO raked in an estimated RM18 billion and provided jobs for 26,000 skilled workers.
Malaysia is the second-largest aerospace market in Southeast Asia and the largest aero structures manufacturer in the region, with a long established design and build capability.
Local players UMW Aerospace Sdn Bhd, Upeca Aerotech Sdn Bhd, Strand Aerospace Malaysia Sdn Bhd, SME Aerospace Sdn Bhd and CTRM Aero Composites Sdn Bhd are Tier-1 companies that supply parts to global original equipment manufacturers.
Malaysia — or more specifically Selangor — is an MRO hub in Southeast Asia, with players such as Airbus-owned Sepang Aircraft Engineering Sdn Bhd, which acts as the centre for in-service engineering issues for the region, covering customers from as far as the Middle East and India.
The country, however, still trails Singapore in export value of aerospace parts as it exported only about US$2 billion worth of manufactured parts last year, or less than a third of Singapore’s US$6.6 billion.
In terms of revenue to the government, the commercial aviation sector paid more than RM564 million in taxes, including income tax receipts from employees, Socso contributions and corporation tax on profits.
In addition, Naguib says an estimated RM603 million in tax income is raised via the sector’s supply chain, and another RM367 million through activities supported by the spending of employees of the aviation sector and its supply chain.
“Therefore, it is important that steps be taken to protect and preserve Malaysia’s aviation industry,” says Naguib.
The government does not appear to be looking at a stimulus or bailout package specifically for the aerospace industry.
It already has its hands full keeping Malaysia Airlines Bhd afloat. However, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz has denied a Bloomberg report that sovereign wealth fund Khazanah Nasional Bhd might be injecting US$1.2 billion into the flag carrier, which was floundering even before the Covid-19 outbreak.
An opportunity to attract global players
MAIA views the crisis as both a challenge and an opportunity as it anticipates recovery to post-Covid-19 levels within a time frame that will allow Malaysia to reposition itself to be more competitive in the aerospace industry.
In the past, global air passenger traffic would bounce back quickly after a short-term crisis. As there are no other alternatives to travelling long distances — because of much shorter flying times — air passenger traffic is expected to pick up once the pandemic is brought under control.
As the middle class continues to grow as projected, more people will take to the skies, which in turn will lead to stronger demand for aircraft.
According to the “Airbus Global Market Forecast 2019” report, the middle class will make up 60% of the world’s population by 2028, and 66% by 2038, from 52% in 2018.
“MAIA’s members have seen through this crisis greater interest by major manufacturers to reset their supply chain, breaking incumbent positions in the West and in some cases, China. This has been evident through some major companies seeing an increase in new requests for quotation.
“MAIA hopes that, through a concerted effort with the government, the Malaysian supply chain can invest in capability and technology development to be ready for the upside. This may be the opportunity to leapfrog new workflow volumes, increasing both revenues and high-skilled employment in Malaysia,” says Naguib.
While MAIA believes that the aerospace industry must be preserved and supported through the Covid-19 pandemic, Naguib says it does not necessarily have to be through cash injections that would only benefit creditors. He highlights Singapore’s salary subsidies, which cover up to 75% of salaries in the industry until the end of the year, as a possible measure.
Other measures include extending special tax holidays for investments, and providing research and development (R&D) and capital investment grants — initiatives that would help Malaysia keep pace with others as well as capture the upside growth of the sector, a strategic enabler of future industries and technologies.
Naguib says significant technology advancements have lately been driven by stricter environmental targets. France’s €15 billion stimulus packages, for instance, require the aerospace industry to invest more in low-emission aircraft powered by electricity, hydrogen and other clean energy sources.
He adds that Malaysia’s aerospace industry has taken a long time to get to its current position and any substantial shrinkage or cessation of business will negatively impact the entire aviation ecosystem — be it the supply chain or other stakeholders such as tourism.
“Hence, there is a need to recognise and support the entire aviation and aerospace supply chain — MRO operators, caterers and the like — to ensure that when there is a need for airlines to start flying again, their supply chain remain similarly intact.”
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