COVID-19 has had a significant impact on Australia’s air conditioning and heating market with revenue set to fall 7.5 per cent during the 2021/22 financial year.
Research firm IBISWorld predicts revenue will fall to $8.4 billion this financial year due to weaker demand for industry services on new building projects.
The report said most industry revenue is derived from installation and maintenance work in the non-residential property market, although the apartment construction market is emerging as an important source of demand.
“For much of the past five years, the industry's performance has been supported by demand for the installation of sophisticated climate-control systems in large-scale non-residential building and apartment developments,” the report said.
“The economic fallout from the COVID-19 pandemic is expected to contribute to a significant decline in the industry's performance leading to a decrease in industry revenue at an annualised 2.8 per cent, over the five years through 2021-22.
“This includes an anticipated decline by 7.5 per cent during 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 (HVAC) systems.”
However, the industry is forecast to gradually recover over the next five years on the back of growth in the residential building market from 2023/24 onwards.
“Over the five years through 2026-27, industry revenue is forecast to increase at an annualised 2.9 per cent to reach $9.7 billion,” the report said.
Many businesses have aimed to protect their cash flow and profit by securing ongoing repair and maintenance contracts over the past five years. However, greater sophistication in building information modelling (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 powerful position when tendering for maintenance contracts and many favour short-term maintenance arrangements that pass on a greater risk burden to industry operators.
“The industry's profit performance is forecast to strengthen over the next five years, in response to the improved demand for installation services in the residential building and infrastructure markets, which is anticipated to offset subdued demand from the non-residential building market,” the report said.
The industry derives over half of its revenue from installing, maintaining and repairing HVAC systems in commercial and industrial buildings.
Australia’s air conditioning and heating services industry has low market share concentration, with the four largest players expected to account for less than 20 per cent of industry revenue in 2021-22. The largest players tend to service commercial and industrial markets, and therefore receive ongoing contracts for continued maintenance and servicing of air conditioning and heating equipment.
Profit is expected to account for 4.9 per cent of industry revenue in 2021-22, and has fluctuated widely in response to changing demand conditions in downstream commercial and industrial property markets.
Over the past five years, the industry's profit margin has narrowed, principally stemming from the weaker demand following the outbreak of the COVID-19 pandemic.
Wage costs often differ between small businesses and larger operators, as sole proprietors and partners tend to draw an income directly from operating profit.
This income can vary depending on the volume of work done in any given year.
Conversely, larger firms pay wages to staff to have a workforce available at all times, while subcontractor payments represent variable operating costs.
Direct employment costs are expected to account for 28 per cent of industry revenue in 2021-22, and have risen as a share of revenue over the past five years.
This increase has been mainly due to employment and wages declining at a slower rate than revenue during the current year as a result of the COVID-19 pandemic.
Due to the current downturn in demand, firms are likely to shed non-permanent subcontracted labour ahead of permanent employees.
One sweet spot in the market has been refrigeration. Firms install commercial fridges and freezers for a range of businesses, including restaurants, caterers, butchers, abattoirs and science laboratories.
This segment has risen as a share of industry revenue over the past five years, which partly corresponds with the increase in retail store construction, notably of supermarkets and food preparation facilities. This growth also reflects the greater requirements for cold storage of goods for transportation.
Tight contracting market
COVID-19 will hit smaller contractors the hardest with the market likely to shrink this financial year.
IBISWorld said industry participation is expected to decline at an annualised 1.5 per cent over the five years through 2021-22 to total 6,225 businesses, sliding from the peak at 6,866 enterprises in 2019-20.
This decrease mainly reflects the exit of many small-scale contracting enterprises due to weaker demand for non-essential repair and maintenance services during the current year.
Households remain a large market for air conditioning and heating operators, particularly for small-scale firms focusing on localised areas.
The industry's fragmented structure is demonstrated by the prevalence of small-scale businesses.
The vast majority of industry enterprises employ fewer than 20 people, including a significant share of non-employing businesses (40.6 per cent), which mainly comprise sole proprietors and partners.
Approximately 40.2 per cent of industry enterprises generate annual revenue of less than $200,000, while the top 13.5 per cent of businesses generate more than two million dollars.
Business leaders are moving to a ‘living with COVID’ footing after two years of massive disruption.
In a survey of CEO expectations and plans for 2022, participants said they expect to face fresh disruptions from COVID-19 this year.
The survey of 346 business leaders was undertaken by the Australian Industry Group (Ai Group).
The employer body’s chief policy advisor, Peter Burn, said there has been a significant contraction in activity in the construction market at the start of 2022.
“Despite a lift in new orders for commercial construction, across the broader industry new orders were dragged into contraction by a sharp reduction in orders for apartment building and a smaller drop in orders for houses,” Burn said.
“As they have done for some time, builders and constructors reported labour shortages although in this period the unavailability of existing staff who were COVID-positive or required to isolate exacerbated the problem.”