COVID-19 has had a significant impact on the Australian air conditioning and heating market, with revenues expected to fall by 7.5% in fiscal year 2021/22.
Research firm IBISWorld expects revenue to fall to $8.4 billion this fiscal year due to lower demand for industrial services on new construction projects.
The report says most of the industry’s revenue comes from installation and maintenance work in the non-residential real estate market, although the apartment construction market is emerging as a major source of demand.
“For much of the past five years, industry performance has been supported by demand for the installation of sophisticated air conditioning systems in large-scale non-residential buildings and apartment developments,” the report states.
“The economic fallout from the COVID-19 pandemic is expected to contribute to a significant decline in industry performance, causing industry revenues to decline at an annualized rate of 2.8%, over the five years to 2021-2022.
“This includes an expected decline of 7.5% in the current year in response to the contraction in building construction and the subsequent decline in demand for the installation of heating, ventilation and air conditioning systems. (HVAC).”
However, the industry is expected to gradually recover over the next five years on the back of growing residential construction market from 2023/24.
“In the five years to 2026-27, industry revenue is expected to grow 2.9% annualized to $9.7 billion,” the report said.
Many companies have sought to protect their cash flow and profits by securing ongoing repair and maintenance contracts over the past five years. However, greater sophistication of building information modeling (BIM) by building owners has increased competitiveness in the facility management market.
This trend has limited prices and profitability for both large and small suppliers.
Building managers are in a position of strength when bidding for maintenance contracts and many prefer short-term maintenance agreements which place a greater burden of risk on industry operators.
“Industry earnings performance is expected to strengthen over the next five years, in response to improving demand for installation services in the residential construction and infrastructure markets, which should offset weak demand. of the non-residential construction market,” the report said. noted.
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 has a low concentration of market share, with the four largest players expected to account for less than 20% of industry revenue in 2021-22. The larger players tend to serve the commercial and industrial markets and therefore receive ongoing contracts for the ongoing servicing and maintenance of air conditioning and heating equipment.
Earnings are expected to represent 4.9% of industry revenue in 2021-22 and have fluctuated widely 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 been shrinking, mainly due to lower demand following the outbreak of the COVID-19 pandemic.
Payroll costs often differ between small businesses and large operators, as sole proprietors and partners tend to derive income directly from operating profit.
This income may vary depending on the amount of work done in a given year.
Conversely, large companies pay salaries to staff to have a workforce available at all times, while payments from subcontractors represent variable operating costs.
Direct employment costs are expected to represent 28% of industry revenues in 2021-22 and have increased as a proportion of revenues over the past five years.
This increase is mainly due to employment and wages declining at a slower pace than income in the current year due to the COVID-19 pandemic.
Due to the current slump in demand, companies are likely to shed non-permanent labor on contract before permanent employees.
A sweet spot in the market has been refrigeration. Companies install commercial refrigerators and freezers for a range of businesses including restaurants, caterers, butchers, slaughterhouses and science labs.
This segment has grown as a share of industry revenue over the past five years, which is partly in line with the increase in the construction of retail stores, including supermarkets and food preparation facilities. This growth also reflects the increased need for refrigerated storage of goods for transportation.
Market in tight contraction
COVID-19 will hit small entrepreneurs the hardest, with the market likely to contract this fiscal year.
IBISWorld said industry participation is expected to decline 1.5% annualized over the five years to 2021-22 to 6,225 companies, slipping from the peak of 6,866 companies in 2019-20.
This decline mainly reflects the exit of many small outsourcing businesses due to weaker demand for non-essential repair and maintenance services in the current year.
Households remain an important market for air conditioning and heating operators, especially for small businesses that focus on localized areas.
The fragmented structure of the industry is demonstrated by the predominance of small businesses.
The vast majority of companies in the industry employ fewer than 20 people, including a large share of unemployed companies (40.6 percent), made up mainly of sole proprietorships and associates.
About 40.2% of companies in the industry generate annual revenues of less than $200,000, while the wealthiest 13.5% of companies generate more than two million dollars.
Business leaders are shifting to a “living with COVID” stance after two years of massive disruption.
In a survey of CEO expectations and plans for 2022, participants said they expected to face further disruption from COVID-19 this year.
The survey of 346 business leaders was conducted by the Australian Industry Group (Ai Group).
The employers’ organisation’s chief policy adviser, Peter Burn, said there had been a significant contraction in activity in the construction market at the start of 2022.
“Despite an increase in new orders for commercial construction, across the sector, new orders were pulled into contraction by a sharp reduction in orders for apartment buildings and a smaller decline in orders for homes” , Burn said.
“As they have for some time, builders and builders have reported labor shortages, although during this time the unavailability of existing staff who were COVID-positive or required to self-isolate has exacerbated the problem.”