Is an Unpredictable Supply Chain the New Normal?

Aircraft OEMs are struggling to ramp up production rates. The reason, again and again, is blamed on supply chain problems that peaked during the global pandemic. But that pandemic was six years ago. What has changed structurally and behaviorally to make supply chains less reliable and OEM delivery schedules perpetually short? Aviation supply chains are complex, multinational, and need active management to ensure continuous supply. The skills required have intensified as uncertainty has increased. image: Boeing Forecasts, Backlog and Pushing Deliveries to the Right OEM forecasts for deliveries at both Airbus and Boeing have seen shortfalls over the last five years. While Boeing’s quality problems could be blamed for much of its difficulties, Airbus has seen supply chain issues. Similarly, even business jet manufacturers like Bombardier have seen supply chain shortfalls that have caused late deliveries. Business jet manufacturers don’t have the same level of production volumes as commercial aircraft manufacturers. However, they also face supply chain issues. Of course, a missing component leads to late deliveries and cash flow impacts. Meanwhile, book to build ratios in the industry remain strong. Backlogs for popular narrow-bodies now extend beyond 10 years, even at projected production rates. However, Airbus projection of rate 75 for its popular A320neo family has been pushed to the right several times. Even with four assembly lines globally, Airbus can’t seem to have its supply chain deliver aircraft on time. Aircraft Engines have MRO and Reliability Challenges Engines have also been a problem, and engine OEMs have also faced difficulties. Pratt & Whitney’s GTF engines experienced quality of materials issues resulting in full tear-down and rebuild of flawed components. The resulting shortfall in engines grounded a substantial portion of the Airbus narrow-body fleet over several years. PW and Airbus are just now approaching normal supply and demand arrangements. CFM International has had fewer problems, but the LEAP engine introduction has not been as clean as customers would desire. Time on wing for the LEAP has not matched the high standard set by its predecessor, the CFM-56. Given high fuel prices and cost pressures, airlines want to replace older aircraft with new aircraft. But production rates are moving in the wrong direction, with Boeing delaying its 737 MAX ramp-up due to supplier and quality issues. That delay, and a reduction in workforce at Boeing commercial airplanes, will result in lower than planned deliveries. Fear of Missing Out Airlines want new airplanes. Fleet planners are looking at a 10 year plus backlog for narrow-bodies, as well as the likelihood of new technology replacements by the late 2030s. Given OEM delays, the question of obsolescence has emerged as a consideration in deciding to order new aircraft. If an order can’t be delivered until 2036, it is likely that new models would be available to replace today’s narrow-bodies. Most airlines would prefer to switch to a new airplane rather than take the tail-end of existing model production. Advanced engine technology drives new airplane development. GE’s RISE, Rolls-Royce Ultra-Fan, and PW’s second generation GTF designs should be finalized by 2030. That would enable entry into service by the late 2030s, adding to fleet planning decision risk. Fleet planners typically prefer to be at the front-end, rather than the tail-end, of aircraft programs. But if they bet on an existing A320neo or 737 MAX family, would they retain the flexibility to upgrade to newer models? That is a part of the uncertainty airlines face. Fear of missing out is an element of that decision. If committed to today’s model, will those aircraft have a shorter economic life, or will an order today preclude the possibility of a future launch order for a new product. Changes to aircraft orders can typically happen if the customer sticks with the same OEM. However, they may face contractual consequences if they choose another OEM. Timeliness is also a problem for the OEMs Certification programs at Boeing have run six to seven years behind schedule. The 737 MAX 7 and MAX 10 took six years beyond their original schedule to certify, and the 777-9 is currently running seven years behind schedule, with problems with a mid-engine seal on the GE9X engine potentially pushing the schedule further to the right into 2027. Given that backdrop, is a countervailing risk the potential that new aircraft push out to the early 2040s? If that happens, do customers betting on new technology lift end up without their planned fleet? Structural Issues Impact the Supply Chain The major OEMs provide detailed forecasts for demand that have been remarkably accurate over the years. Even after high-impact events like 9-11 and the global pandemic, which temporarily disrupt the market, demand has recovered to the long-term trendline. Aviation is a growth industry with increasing global demand. The global fleet will double over the next two decades. But despite strong forecasts, OEMs will not guarantee production volumes with the supply chain, passing risk to suppliers. The global pandemic, compounded by the 737 MAX production shutdown, had the most significant impact of an external event in the post WWII era. The drop in global demand and aircraft production resulted in financial difficulties for several suppliers. Despite increased concentration through OEM acquisition of supply-chain companies, for example, Spirit Aerosystems, the supply chain problems remain far from being solved. Dual Sourcing Is Not Easy to Manage Where there have been difficulties, OEMs have sought multiple sources for components, typically allocating a portion of production to two entities. In today’s environment, that often means only one supplier in the US and one internationally, to spread geopolitical risk. The allocation percentage among suppliers can change, and isn’t always 50/50. Often, first and second suppliers can be a 70/30 relationship, which is less exciting for the second supplier. Ramping-up supplier production in many cases requires additional capital expenditure to increase facilities and capacity. The post-pandemic environment, with weaker earnings and cash flows, has made investment infeasible in the supply chain. Weaker suppliers are being acquired by larger and more stable entities, but still have no guarantees of volume from OEMs. Therein lies the rub - with supplier taking investment risks without guarantee of a return. In the post-pandemic environment, many have chosen not to invest but to operate with additional shifts, leveraging existing infrastructure. But that is also subject to risk, as a “flat-out” production plan can’t afford to have anything go wrong. The Bottom Line It has taken six years since the global pandemic for the supply chain to return begin to return to normal. Unfortunately, uncertainties and logistics difficulties remain. Changing geopolitical relationships, capital investment requirements and a lack of OEM support have combined and bring uncertainty to the ability to ramp-up production. Will this get better with time? The answer is yes, as supplier financial performance continues to improve. But without structural changes, uncertainty and disruption are likely to continue in the short-to-intermediate term. All it takes is one out of a million parts to ground an aircraft. That uncertainty has become harder to manage in the post-pandemic environment.

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