Aerospace & defenseJune 28, 2021

As Air Travel Roars Back – How Will Aircraft Suppliers Meet the New Demand?

Domestic air travel demand is roaring back, suggesting that airlines sooner or…
Avatar Tony Velocci

Domestic air travel demand is roaring back, suggesting that airlines sooner or later will need to expand the size of their aircraft fleets. It should come as no surprise, therefore, that Airbus and Boeing, the world’s two largest commercial aircraft manufacturers, are making plans to raise production rates over the next several years that could eventually exceed pre-pandemic levels faster than anyone could have predicted just six months ago, according to some industry observers.

If that happens, equipment suppliers will find themselves facing numerous challenges and under enormous pressure from their original equipment manufacturer (OEM) customers. “The supply chain is the lifeline of every organization,” said Chris Karney, managing director of Global Supply Chain Offering at Accenture operations. “The events of 2020 put this into sharp focus, pushing supply chain leaders into uncharted territory.”

Let’s take a look at a few key challenges.

Having right-sized their businesses to manage the worst business slump in modern aviation history, perhaps suppliers’ most pressing challenge will be figuring out, reliably, the rate at which production is likely to ramp up.

Such information—including how effectively OEMs communicate their market outlooks—will be critical to suppliers’ success. Currently, they still don’t have good insight into the complex aviation ecosystem. Such visibility also offers a lesson on the role that managing demand can play in easing bottlenecks.

Airbus recently asked parts suppliers for its Airbus A320 narrow-body jet family to prepare for a firm monthly production rate of 64 by the second quarter of 2023, which is close to the 67 figure it was targeting before the pandemic. Boeing has issued similar updates on its family of single-aisle 737 models.

While encouraging, suppliers need to validate those forecasts through third parties, such as major lessors and market-forecast firms. Reason: OEMs’ public statements about future production rates tend to be soft at this stage of a market recovery; they’re not necessarily bankable production rate forecasts. “Suppliers should be skeptical,” said Bank of America analyst Ron Epstein. “If they just take the OEMs at face value, then they’re taking risks that maybe they don’t want to.”

Another big challenge for many companies is managing new mountains of debt accumulated in response to COVID-19, as well as access to additional capital needed to prepare for rate increases, digital overhauls of business operation, and other demands.

Counterintuitively, new orders are not a panacea for suppliers, particularly among smaller companies, even though  many of them were fighting for their survival in 2020 as a result of OEMs’ dramatic loss of new airplane orders throughout 2020. Companies will be financially squeezed to pay for long-lead items needed for higher rates of manufacturing that will get under way. “The [companies] with the deeper pockets are going to win the battle at the end of the day,” Eric Bernardini, managing director of the aerospace practice of at AlixPartners.

A third major challenge is that OEMs almost certainly will expect suppliers to cut the price of their products. “Prices will be very intense,” he said.

In a recent Commercial Aerospace Insight Report from Accenture, nearly half of supply chain executives indicated they expect to be hit with higher costs covering raw materials, labor, and components and subsystems.

A shortage of skilled labor also looms as a serious issue even as some companies continue to reduce the size of their workforce and segments of the supply chain consolidate.

Preparing for the inevitable work surge in itself will be a major challenge, too, but there are steps suppliers can take to help insure they are ready when the time comes, according to Bernardini. They include:

  • Continue to lean on inventory and work-in-process as cash-conservation tools.
  • Be prepared to make tactical decisions, based on scenarios that could develop anywhere from three to 12 months in the future.
  • Prioritize liquidity and horde cash.
  • Revisit make-versus-buy decisions.
  • Monitor key suppliers of essential components and be ready to respond to distressed suppliers with backup plans, such as insourcing or dual-sourcing work.
  • Expedite digital-transformation and manufacturing-overhaul initiatives while production rates are relatively low. For those companies still on the sideline, launch such initiatives.
  • Focus on sustainable lines of business.

As if suppliers need reminding, Sylvain Boisvert, general manager at jet engine manufacturer Safran Canada, had this observation about what companies are facing: “Regardless of current circumstances, performance, quality and on-time delivery [to OEMs} have never been more important.”

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