COVID-19’s Impact on the Canadian Aerospace Industry: Is a Bailout Required?

By: Noah Clarke

COVID-19 travel restrictions have wiped out demand for air travel since early 2020, and the impact has spread to the entire aerospace industry. Aerospace is a strategic industry because of the economic and innovative benefits it provides. While other governments have provided bailouts specific to their aerospace industries, Canada has not. Without government support the survival of Canada’s aerospace industry is at risk as international competitors use government funds to adapt and become more competitive.

Travel restrictions implemented by governments globally, although understandable to reduce the spread of COVID-19, are damaging the aerospace industry. In a recent report published by Deloitte, international passenger capacity dropped by 91% in April 2020 compared to what was originally planned.

Air Canada reported a loss of $4.6 billion CAD in 2020 from the impact of the COVID-19 pandemic. It’s full-year revenue fell from $13.3 billion CAD to $5.9 billion CAD and passenger volume fell 73% when compared with 2019.

These losses are not unique to Air Canada. An international aerospace industry consultant report from March 2020 found that most airlines could run out of capital if they have no income for four months. A report published by Deloitte also found that the immediate issue is that the aerospace industry is capital intensive, which raises short-term concerns about cash flow and liquidity. According to Forbes, several airlines already went bankrupt in 2020, including Virgin Australia and Avianca Holding.

The Organisation for Economic Co-operation and Development (OECD) reported that air transport is closely linked to the activities of other sectors, especially airports and aircraft manufacturing. Air transport relies on sectors in the supply chain that support air transportation such as airports, aircraft manufacturing, rental and leasing services, and refined petroleum manufacturing.

As airlines cut costs to manage the drastic reduction in revenue caused by COVID-19, they’ve reduced their purchases through the supply chain, which is causing a drastic reduction in revenue for companies in related sectors. For instance, in March 2020, Air Canada said it was looking to save $500 million CAD through layoffs and deferring capital spending. Since airlines are leading customers in the aerospace industry, a drop in their purchases means a lot to the supply chain. The AIAC reported that Canadian businesses in the aerospace industry have lost over 40% of their revenue due to reduced international travel caused by COVID-19.

Aerospace is often considered a strategic industry because, as OECD identified, in general the aerospace industry is a key enabler of several economic activities because it facilitates trade in goods and in services.

In Canada, aerospace is often considered a strategic industry because it is a large contributor to the economy in Gross Domestic Product (GDP) and employment, is export focused, is at the forefront of industrial innovation and employs a lot of highly skilled workers.

Share of GDP by Canadian Aerospace Industry Segment, 2018

Source: Innovation Science and Economic Development Canada

The Aerospace Industries Association of Canada (AIAC) reported that as of 2019 the Canadian aerospace industry contributed a total of $25.5 billion CAD to GDP and supported 215,000 jobs. The Canadian aerospace industry also exports over 70% of its products to over 190 countries. Aerospace lead’s Canada’s manufacturing sector in innovation-related investments as spending totals over $1.4 billion CAD annually. In 2018 this was over five times the manufacturing average in Canada. Science, technology, engineering and medicine employment in the Canadian aerospace industry is three times the national manufacturing average.

According to a report published by Innovation, Science, and Economic Development Canada in 2018, the aerospace industry in Canada also outpaced the manufacturing average in the use of key advanced and emerging technologies, especially among small and medium enterprises.

The Canadian aerospace industry has been warning the Government of Canada that its long-term survival is at risk without government support. In response, the government has said that the aerospace industry has received over $1.5 billion CAD through the Canada emergency wage subsidy and has announced an additional $1 billion CAD in support of airports and smaller airlines.

AIAC has still expressed concerns that this is not enough as Canadian aerospace companies could struggle to compete with countries like the United States, France and Germany in the future. France funded a €15 billion support program for the aerospace industry through a mix of investments, loan guarantees and subsidies. The United States has provided airlines $25 billion USD in payroll assistance, grants and loans. Lastly, Germany has provided Lufthansa with a €9 million lifeline. Although these bailouts are meant to protect jobs, they provide the aerospace industries in these countries the opportunity to adapt to current circumstances and find ways to become more competitive in the long run.

Another concern is that highly-skilled workers in the Canadian aerospace industry, who are in demand around the world, might end up leaving the country for jobs abroad.

All in all, the aerospace industry has been severely impacted by COVID-19. Without government support the survival of Canada’s aerospace industry is at risk as international competitors use government funds to adapt and become more competitive.

Noah Clarke is currently in his first year of the Master of Public Policy program at the Munk School of Global Affairs and Public Policy. He graduated from the University of Western Ontario with a degree of Bachelor of Arts with Honours Specialization in Political Science. Some of his interests include politics, sustainable development, economic development, environmental policy, energy policy, technology innovation and housing affordability. 

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