In September, Supply Chain Matters alerted our commercial aircraft supply network readers to candid remarks made by Airbus CEO Guillaume Faury at an industry conference. He observed that while the global airline industry is showing signs of recovery, business travel remains muted, and the industry is unlikely to be back to pre-pandemic service volumes for years hence.
Faury’s remarks included the following statement:
“We fear that the supply chain management for the next 12 to 18 months will be the most difficult part of what we have to achieve to really recover. Their situation is tough.”
Supply Chain Matters applauded this candid assessment in that it provided a reality check both for investors and the various stakeholders in Airbus’s continued market success.
Last week, Faury conducted an interview with Bloomberg News. In that interview he expressed confidence that the Airbus supply network can overcome the pandemic induced demand contractions that have occurred.
He further reaffirmed current planning related to once again boosting the monthly production rates of the widely popular A320 single aisle aircraft. The plan is to boost output from the current level of 40 per month, ramping to a rate of 64 A320 aircraft per month in 2023. There was mention of potential interest is boosting monthly production to 75 aircraft per month around the mid-decade, which is an unprecedented monthly output number for the industry as a whole.
Faury cautioned in the Bloomberg interview that the company’s supply network partners “have ambitious, longer-term targets in mind as they manage through the current turmoil.”
Our translation is that such a remark is nuanced to mean that the suppliers need to candidly undertake more focused short and longer-term planning as well as doing the right things. We would add that there is a need to candidly rethink existing material, component and production sourcing strategies in the light of what has occurred across global supply chains in this post pandemic period.
For its part, Airbus continues to dispatch teams to suppliers to help in assessments of capabilities or concerns related to the pandemic’s setbacks, and on a supplier’s ability to scale to the 2023 milestone. CEO Faury indicated that by 2022, there will be a good understanding of needs for 2025/2026. By our lens, this will be a daunting effort.
Added Supply Chain Matters Perspectives
We have noted in prior commentaries related to commercial aircraft and aerospace supply networks that as the ongoing product demand crisis has evolved, the smaller, specialty suppliers, as well as their highly skilled workers have especially struggled with the financial impacts of the sudden production and aircraft delivery suspensions. The bulk of revenue associated with aircraft sales occurs after an aircraft is delivered and accepted by an airline customer.
Prior to the pandemic, industry supply network thinking around bigger is better in the notions of providing supplier scale and influence for negotiating with the likes of Airbus and Boeing was evident. Scale further equated to added resources for product and process innovation, and in securing more timely payments for either product delivered, or monetary support in times of monthly production volume disruptions. This was especially important during the 18-month operational grounding of the entire Boeing 737 Max fleet.
There is a building undertone that further consolation among smaller or even mid-market specialty suppliers are a real possibility in the coming months. This is for a number of reasons.
The obvious is one of financial survival, and of the ability to re-acquire the highly skilled workers required in this industry. Our sense is that there is a further message related preparing to have the right level of trained and skilled workers in place to meet each of the expected annual production milestones.
The mid-century milestone overlaps with industry plans to develop new aircraft that are not primarily fossil fueled dependent. That has an important implication for the traditional weakest link in aerospace supply networks, that being aircraft engine producers.
With the dramatic demand shock caused by the pandemic’s impact on monthly production needs, larger scale suppliers have managed to buffer some of the financial and worker loss impacts better than some others. However, the previous success of this industry in its ability to attract robust product demand and future profits was an attractive lure for financial equity markets. That fostered an emphasis on near-term profitability and shareholder returns in forms of lucrative dividends and stock buybacks. In our view, and others, that emphasis came at the expense of investment in added production and supply network innovations and especially supply network agility and added resiliencies. Boeing is a prime example in the manufacturer’s challenges with aircraft engineering and design standards, ongoing manufacturing quality shortfalls and now contraction of supply network capabilities.
For the last several years, consolidation in the form of M&A activity was already occurring in this industry, primarily to garner added influence and leverage in contracting with the likes of Airbus and Boeing for supply needs, as well as lucrative aftermarket service part demand revenue flows. The industry is once again abuzz with belief that more consolidation is likely.
There is the further reality of the current multitude of challenges now impacting global supply chains, along with the eventual implications of such disruptions. That certainly includes the availability and pricing of commodities and components, an explosion in global transportation costs, eroding service reliability levels and as previous noted, availability of skilled workforces.
Indeed, this an industry that will benefit from a rethinking and likely new definitions and directions related to global aircraft demand and supply network strategies. This is especially an industry that must weight added investment in supply chain agility and added resiliency.
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