The impact of COVID-19 on the airline industry and the reduction in demand of air travel is expected to have a material long-term impact on our industry. Airlines across the world have grounded the majority of their fleets, with some no longer operating any aircraft at all. Not only does IATA's recent forecast indicate that airlines will need more than $200 billion in bailout money to sustain operations beyond July, but numerous commentators suggest there will be a much leaner airline sector in the medium term after operations resume.
It is not only the airlines that are struggling from lack of demand. Airline suppliers and the whole air transport supply chain are reliant on continuing to deliver new equipment and supplying spare parts and maintenance services. All major commercial aircraft programmes depend on a global supply chain for raw materials and components, as well as an available workforce to physically build aircraft and engine parts and operate and maintain production facilities, final assembly lines and test facilities.
Whilst some Chinese production facilities are at various stages of restarting and ramping back up capacity, production across the rest of the globe is still being hindered and disrupted. Examples of the practical impacts COVID-19 is having in the aerospace supply chain are:
- Imports/Exports stopped - countries are enacting different measures concerning import of goods and services from COVID-19 high risk countries. The European Commission has allowed each Member State to adopt proportionate measures aimed at safeguarding the health of its citizens and to prevent the spread of COVID-19.
- Production and test facilities closing/reducing output – countries are adopting differing approaches as to whether or not production must halt, and this is changing almost daily. Airbus has been forced to pause production in Spain and France in order to comply with COVID-19 restrictions. And in the US, Boeing has also ceased production at its Washington state twin-aisle aircraft factory for reasons connected with the virus.
- Reduced workforce – employees not coming to work due to self-isolation, sickness or fear of risks.
- Travel bans – border closures mean that overseas-based specialists who are required to travel to work (for example, for specialist installation or operation and maintenance) are unable to get to the location of work due to these travel restrictions.
Additionally, many airlines now take their equipment on the basis of long term support contracts. Airlines make payments – and suppliers rely on payments - based on hours flown, which in the current climate are drastically reduced. The levels of aircraft or engine performance and reliability guarantees on which airlines rely from their suppliers are also dependent on the commitments the airline made in respect of operational utilisation of the aircraft/engine over several years (e.g. 10 or 12 years). These contracts can entitle the suppliers to alter the charges or reduce the guarantee support if an airline customer reduces its utilisation or fails to take delivery of the planned fleet.
This all means that customers and suppliers are keen to understand their rights and liabilities under their contracts should COVID-19 cause delay, and, equipped with this knowledge, will be better placed to work collaboratively to find solutions. Of particular interest may be whether liquidated damages remain payable by the supplier, and whether the supplier has any other options such as suspension, termination or entitlement to increased costs under the change in law clause.
This note focuses on how force majeure and frustration under English contract law applies to the COVID-19 pandemic, and highlights other contractual hints and tips that both customers and suppliers should be aware of.
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Last reviewed: 21 April 2020