Declining revenue due to COVID-19

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COVID-19 has had a significant impact on Australia’s air conditioning and heating market, with revenue expected to fall by 7.5 per cent in fiscal year 2021/22.

Market research firm IBISWorld expects revenue to fall to $8.4 billion this fiscal year due to weaker demand for industrial services in new construction projects.

According to the report, most of the industry revenue comes from installation and maintenance work in the non-residential real estate market, although the residential construction market is emerging as an important source of demand.

“Over the past five years, industry performance has been largely supported by demand for the installation of sophisticated climate control systems in large non-residential buildings and housing estates,” the report says.

“The economic fallout from the COVID-19 pandemic is expected to contribute to a significant decline in industry performance, resulting in an annualized 2.8 percent decline in industry revenue over the five years to 2021-22.

“This includes an expected 7.5 percent year-to-date decline in response to the decline in building construction and the resulting decline in demand for heating, ventilating, and air-conditioning (HVAC) installation.”

However, due to the growth of the residential construction market from 2023/24, the industry will gradually recover over the next five years.

“Over the five years to 2026-27, industry revenue is expected to grow at an annualized 2.9 percent to $9.7 billion,” the report said.

Many companies have made it their goal to protect their cash flow and profits by maintaining ongoing repair and maintenance contracts for the past five years. However, the increasing sophistication of building information modeling (BIM) by building owners has increased competitiveness in the facilities management market.

This trend has constrained prices and profitability for both large and small providers.

Building managers are in a strong position when bidding for maintenance contracts, and many prefer short-term maintenance agreements that place a greater burden of risk on industry operators.

“Industry earnings trends are expected to improve over the next five years in response to improved demand for installation services in the residential and infrastructure markets, which is expected to offset subdued demand in the non-residential market,” the report said.

The industry derives more than half of its revenue from the installation, maintenance, and repair of HVAC systems in commercial and industrial buildings.

The Australian air conditioning and heating services industry shows a low market share concentration, with the four largest players expected to account for less than 20 percent of industry revenue in 2021-22. The largest players typically serve commercial and industrial markets and therefore receive ongoing contracts for the ongoing maintenance and servicing of air conditioning and heating systems.

Profit is expected to account for 4.9 percent of industry revenue in 2021-22 and is volatile in response to changing demand conditions in downstream commercial and industrial real estate markets.

Over the past five years, the industry’s profit margin has narrowed, mainly due to weaker demand following the outbreak of the COVID-19 pandemic.

Labor costs often differ between small businesses and larger operators, as sole proprietors and partners typically earn income directly from operating profits.

This income may vary depending on the volume of work in a given year.

Conversely, larger companies pay wages to employees in order to have labor available at all times, while payments to subcontractors represent variable operating costs.

Direct labor costs are expected to account for 28 percent of industry revenues in 2021-22 and have increased as a share of revenues over the past five years.

This increase is mainly due to the fact that employment and wages have fallen less than earnings in the current year as a result of the COVID-19 pandemic.

With the current drop in demand, companies are likely to fire temporary agency workers before permanent employees.

A sweet spot in the market was cooling. Companies install commercial refrigerators and freezers for a range of businesses including restaurants, caterers, butchers, slaughterhouses and scientific laboratories.

This segment’s share of industry sales has increased over the past five years, in part corresponding to an increase in the construction of retail stores, particularly supermarkets and food preparation facilities. This growth also reflects the increased need for cold storage of goods in transit.

Tight contract market

COVID-19 will hit smaller contractors hardest as the market is likely to contract this fiscal year.

According to IBISWorld, industry participation is expected to decline an annualized 1.5 percent over the five years to 2021-22 to a total of 6,225 companies, after hitting a peak of 6,866 companies in 2019-20.

This decline mainly reflects the exit of many small contractors due to weaker year-to-date demand for non-essential repair and maintenance services.

Households remain a large market for air conditioning and heating operators, particularly small businesses focused on local areas.

The fragmented structure of the industry is reflected in the prevalence of small businesses.

The vast majority of industrial companies employ fewer than 20 people, including a significant proportion of unemployed companies (40.6 percent), consisting mainly of sole proprietorships and shareholders.

Approximately 40.2 percent of industrial companies generate less than $200,000 in annual revenue, while the top 13.5 percent of companies generate more than $2 million.

Fresh glitches

Business leaders move to ‘living with COVID’ after two years of massive disruption.

In a survey of CEOs’ expectations and plans for 2022, respondents said they expect new disruptions from COVID-19 this year.

The survey of 346 business leaders was conducted by the Australian Industry Group (Ai Group).

The employers’ federation’s senior policy adviser, Peter Burn, said there had been a significant drop in activity in the construction market in early 2022.

“Despite a surge in new commercial construction orders, new orders across the industry were dragged into a contraction by a sharp decline in residential construction orders and a smaller decline in home orders,” Burn said.

“As has been the case for some time, builders and designers have been reporting labor shortages, although during this period the unavailability of existing staff who were COVID positive or required to isolate compounded the problem.”

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