Premium #226 - Uncovering Farnborough 2016 Highlights

We’ve seen some reports that the 2016 Farnborough Airshow was disappointing, with the fewest new aircraft orders in recent years. One commentator even called the show ‘boring.“ We attended, and have a very different opinion. These are exciting times for the industry, which essentially needs to deliver the equivalent of the last 30 years of aircraft production over the next 10 years. The aircraft and engine OEMs have record backlogs, as airlines competed for delivery slots for new technology aircraft when fuel prices were high. Today we’re in a normal down cycle for orders as the industry absorbs a record number of new aircraft deliveries. Growth in passengers, and operations worldwide continues at significant rates, and the future outlooks from both Airbus and Boeing show continued industry growth in step with economic growth worldwide. Things are far from dull in the real world. The excitement at the show wasn’t generated by the big two, but by the thousands of small firms in the supply chain who are experiencing a rapid change in technologies in the way parts are designed, maintained, and operated to meet new expectations for their customers, the OEMs, and their customer’s customers, the airlines. Things are changing in a major way, and exciting things are on the horizon. Let’s take a look at a few of the major trends: New technology aircraft are now at or approaching EIS Airbus and Bombardier have new models that just entered service, and Boeing, COMAC, Embraer and Irkut will soon follow. The technology of aircraft is changing dramatically, and with it come new challenges for the supply chain, MRO facilities, and airline operators. The supply chain will be challenged by price wars among the aircraft companies, who will place pressure on suppliers to lower costs. Boeing’s Partnership for Success program phase one obtained price reductions from the supply chain. They are now embarking on Partnership for Success 2, which will focus on terms and conditions, including who holds inventories and the timing of payments. Airbus is redoubling its efforts and examining its own processes after Zodiac caused major delays in the A350 program that were costly. While the program is finally catching up, Airbus did throw Zodiac off the A330neo program. For Bombardier and Embraer, the focus is on being on time and on specification, quality being a key variable. The engine companies, Rolls-Royce, GE and Pratt & Whitney, are each focused on major ramp-ups, and cannot tolerate delays anywhere in the supply chain. Each company has dual-sourced most of their components, with the focus on meeting the dramatic ramp-up requirements as new products begin deliveries. New Manufacturing Technologies Many of the first production parts from additive manufacturing will begin with the new technology engines, the GTF and the LEAP that will power the next generation of narrow-body aircraft. Additive manufacturing holds significant promise, particularly in aircraft engines, as unusual shapes can be “built-up” rather than cut from a block of metal. Because these shapes can be optimized and include passages for cooling air, engine applications are ideal. Today, we’re scratching the surface of what’s possible, because additive manufacturing requires a different way of thinking than traditional metal cutting. Engineers need to be re-trained to think about what’s possible, rather than what’s traditionally cost-effective, as additive manufacturing allows for unusual shapes and precise dimensions built up micron by micron. When they do, however, results can be impressive. GE just completed a skunk-works study redesigning one of their engines for additive manufacturing, and achieved an 12% weight reduction with a 7% improvement in efficiency while taking out 800 parts. That’s quite impressive, and tells you where we are heading with this industry. Norsk Titanium is already producing parts utilizing additive manufacturing, and has a unique investment in equipment that builds parts from titanium wire. This process includes feeding the wire, heating it and then cooling it, results in rapid development of parts. The company is now offering an option to order a part in the morning, and have it delivered by DHL the next day, and is investing in a massive facility in upstate New York. The dream of additive manufacturing is now becoming reality, both with OEMs and the supply chain. We’re just at the start of a manufacturing revolution. As costs and productivity of additive manufacturing processes improve and engineers recognize the unique capabilities they can design without the constraints of cutting metal, the supply chain will dramatically change. This isn’t a question of if, but how soon it will happen. As we walked the halls at Farnborough, we could see a change from just two years ago. While the revolution won’t be overnight, it will be faster than many believed possible. Analytics and Big Data Everyone in the industry is talking about big data, as nearly each component on new aircraft are being designed to throw off data for purposes of preventive maintenance. Of course, the problem is that petabytes of data will be generated annually, primarily driven by engines as the first application, that will enable new analytics. The OEMs are chomping at the bit to provide this to airline customers, and utilize this to their competitive advantage. Most OEMs are offering aircraft health management systems to one degree or another with their new aircraft, and the engine makers are similarly leveraging big data for engine maintenance. One of the most advanced aircraft health management applications comes from Embraer, who happen to have their own IT school near their factory and also develop their own fly-by-wire systems. Their existing health management programs will be massively extended with the forthcoming E2 applications. The CSeries will also have an advanced system, integrated with Pratt & Whitney’s application developed for the GTF engine, and provide a single interface for both airframe and engine. Rolls-Royce announced a deal with Microsoft and Singapore Airlines focused on big data and analytics. GE has its Predix system which is a company wide application across multiple business units, from health care to aircraft engines. It is modular, and enables additional applications to be easily coded within its systems architecture, whether by GE or third parties. As a result, suppliers can join with that system and ensure that their components are tracked, and obtain the necessary data back to engineer better performance. The promise of all of these systems is to improve reliability. By measuring performance under different conditions, whether in hot weather in a sandy desert or near salt water, analysis of data can indicate the relative lifespan from operating in different conditions and lead to customized maintenance plans based on how an airline operates its aircraft. But big data needs big software and big data clouds, and the attendant security that goes with them. We’re seeing the former, but not the latter, which could become problematic if not solved. But while challenges remain, a new era in software and analytics will be upon us sooner than we think. The implications are far reaching. Will the OEMs share the insights from the data on thousands of engines and aircraft they they collect, or will they restrict that only to their maintenance customers and not share data with third party MROs? To whom does the data belong? If it is the airline, what should they be providing the OEMs and MROs, and what rights to access aggregate data should they be negotiating prior to agreeing to send their data back to the OEM? Were we running an airline, we wouldn’t share anything unless we had access to the aggregate data so that our maintenance folks could compare how they are doing with the fleet on a routine basis, and discover what we could do better, rather than being told by the OEM. But we’re in the wild west of big data -- the ground rules haven’t yet been written, and somebody is likely to end up at re-boot hill. The Hidden Gems While the airlines and OEMs have the sexy image, much of the work is done by the supply chain. One example of that is training. CAE, best known as a manufacturer of simulators, is now the world’s largest aviation training company, and signed more than C$180M in contracts at the airshow. But with most of their training ventures showing the brand of the airline, CAE has grown somewhat anonymously in this market. Yet their combination of advanced simulator technology, including performance evaluation on an individual by individual basis, is leading to adaptive training and individualized curricula to ensure that every pilot is well trained to perform, including re-learning when performance is substandard. Another example is maintenance of the Bombardier CSeries. This aircraft has access doors for every line replaceable component on the aircraft, making it easy for mechanics to switch out components more quickly. Line maintenance technicians are thrilled somebody considered their point of view in design. But the interior and other elements of the aircraft, which are more sexy, get all the press. The Bottom Line There’s a lot going on at an airshow that is meaningful, but you have to know where to look. Farnborough 2016 was very exciting for those who decided to dig a little deeper, and we'll be providing more insights over the next few weeks.

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