It goes without stating that many industry supply chains have undergone various forms of either product demand or supply disruption as a result of the ongoing COVID-19 coronavirus pandemic. In a matter of a few months, industries have been upended.
One of the most prominent and likely more dramatic disruptions remains that of the commercial aircraft industry and its associated demand and supply networks. An industry that at the start of this year continued to have upwards of ten years backlog in customer orders, is now facing the reality of significant reductions in demand for new aircraft among global airline carriers, many of whom are dealing with substantial operating revenue and financial challenges. In the U.S. alone, United Airlines and American Airlines are indicating the need to furlough upwards of 50,000 employees combined because of significant declines in global and domestic air travel.
The pandemic radically changing airline travel demand and commercial aircraft manufacturers who often plan on 15-20-year long-range time lines must now deal with month to month planning changes. For this industry, it is unquestionably the most significant disruption dating back to the sixties. Some industry observers have noted that pre-COVID 19 demand and production levels are not likely to return until five to eight years from now.
Normally, at this point in mid-July, Supply Chain Matters would be highlighting the Q2 quarterly operational and subsequent financial performance of the two global stalwarts of the industry, Airbus and Boeing.
This is no longer a meaningful exercise since all notions of operational normal have been shattered. We have elected instead to highlight recent interviews conducted by industry and business media among each of these manufacturer’s CEO’s. Going forward, we will highlight major industry suppliers and their challenges and response.
Boeing CEO David Calhoun recently sat down with the respective Editors of Aviation Week publications as well as select business media. With just six months as CEO, Calhoun has a lot on his plate, given that the aircraft manufacturer is likely facing the most acute corporate crisis in the company’s history.
Business and Operational Outlook
In his interview with the Aviation Week Editors, Calhoun pointed to significant progress being made on re-certification efforts of the Boeing 737 MAX aircraft, which according to a published report today by The Wall Street Journal, is not expected to be able to resume widespread airline service until early next year.
Just as the virus has upended global-wide manufacturing and services, it has also impacted re-certification task timelines. As of this month, the global grounding of this aircraft has now extended past 16 months and has taken a toll on Boeing and its supply network ecosystem. Needless to state, any inbound order volumes for the MAX are negligible and the challenge for Boeing remains ongoing day-to-day individual airline customer negotiation regarding delivery scheduling of aircraft more than likely already produced and parked in various airfields.
Boeing had previously lobbied the Trump Administration seeking what was reported as more than $60 billion in government assistance for the company, and to a lesser extent for the company’s direct and indirect suppliers. The size of such a stimulus provided to a single company reportedly came with stipulations of likely U.S. government equity investment ownership in the company. Such scope and stipulations turned out to be political non-starters. The U.S. Congress subsequently passed the PPP Stimulus program that allows individual companies to seek government loans with the stipulation that existing employees be retained thru September of this year.
Boeing turned down the government stimulus and instead elected instead to raise an additional $25 billion in April from commercial financial markets.
In his interviews, Calhoun has stressed that the company will need to closely manage cash outlays during the coming year, while attempting to boost revenue flows from its military and defense businesses, while resuming customer deliveries of completed commercial aircraft. Thus, establishing modified monthly production plans and proactively managing the logistics for delivery of the upwards of 400 completed 737 MAX aircraft will be crucial for the company. There is the further risk of losing market share to rival Airbus while all this is occurring.
Boeing is already in the process of an upwards of 10 percent reduction in the existing workforce and speculation remains as to whether added headcount reductions will be required down the road.
On the product development side, Boeing is facing considerable additional challenges. While Calhoun has indicated to reporters that he does not feel desperate in this dimension, he has expressed confidence in the existing portfolio of aircraft models. That is likely because the market for added new models of either single aisle or wide body aircraft has shown no signs of life for many months to-come.
Asked as to his expectations as to when the industry will be able to move beyond the COVID-19 disruption, Calhoun indicated it might be in the three to five-year time period for Boeing. He based that assumption on when vaccines are widely distributed globally and when air travelers recover from the fear of the virus. Calhoun indicated to Editors that Boeing is making in efforts to return to its engineering-driven corporate culture, where engineers are independent to program leaders.
Regarding questions relative to the supply chain, Calhoun observed that the production ramp-up and prior hyper growth of the industry uncovered a lot of stress points. He noted that production lines and pretty much everything else was stressed to move faster and that took its toll. The CEO also admitted that the Partnering for Success program aimed at key suppliers: “may have gotten mis-interpreted over the course of the years.” He followed by pledging transparency and support for the Boeing supply chain.
From our Supply Chain Matters lens, the above statement likely mis-represents a more evident reality that Boeing’s prime strategy has been to handsomely reward shareholders with stock buybacks and dividends while leveraging suppliers for added cost savings. That is not just our view, but increasingly others as well.
For Boeing’s suppliers and partners, it has become rather clear that the name of the game is maintaining cash liquidity and financial stability, while attempting to preserve what they can in key worker technical and operational skills. For smaller, specialized suppliers, such risks are significant. U.S. suppliers will have to depend on either current of future government stimulus support or avenues of added funding if they exist. Added headcount reductions remain a real possibility.
Airbus CEO Guillaume Faury recently told reporters that Airbus does not expect recovery to occur in terms of aircraft delivery rates, until sometime in the 2023 to 2025 time period.
This was not the case back in April. In a letter sent to all employees at the time, Faury did not mince words: “The survival of Airbus is in question if we don’t act now.” He further stated that the aircraft manufacturer was “bleeding cash at unprecedented speed.”
Providing a more optimistic perspective, Faury has now indicated to industry watchers that the single-aisle market will recover initially, before the wide-aisle market. Noted was that the commercial aircraft manufacturer took bold actions in April to reduce monthly production levels by upwards of 40 percent. He admitted that there was a lot of guessing and assumptions that had to be made at the time, but it turned out that planners were not too off-base. From our lens, that is a tribute to Airbus’s internal supply chain and operational planning teams. The monthly production number rate now being planned is noted as being 40 single-aisle aircraft per month through 2021, with perhaps some up or down tweaks.
Business and Operational Outlook
Faury indicated to Aviation Week Editors that while the product demand picture remains unclear through the 2024 window, it is likely that when demand resumes, it will be robust, and the production system ramp-up will once again have to scale-up quickly when that occurs. He told reporters that the company is working with multiple airline customers, sometimes on a daily basis regarding aircraft delivery deferral discussions, and that such discussions can be painful but have to be acceptable for both parties. He described how each airline and each market is different, and customers have to traverse their own short or longer-term crisis development plans.
The takeaway message was that high industry uncertainty remains for the foreseeable future.
Airbus itself has announced plans to shed 15,000 positions this year. Asked by Editors if there is a danger for losing needed experience-based skills, Faury indicated that the company cannot escape the disruption occurring among global airlines and the industry as a whole. The manufacturer, however, is proactively working with European government and EU agencies to help buffer the social and worker disruption implications. He stated that the company would rely on the full set of measures available while retaining needed skills, competencies and know-how.
On the topic of new aircraft development, both the French and German governments have individual financial incentive programs that are tied to next-generation aircraft technology development targets linked to long-term climate sustainability and other goals. The French government proposal is reportedly tied to the development of the first fully de-carbonized aircraft by 2035, likely to be hydrogen powered. Faury indicated to reporters that this goal is reasonable in that it will motivate the company to re-think air travel segments and new technologies.
Regarding the Airbus production and supply chain network, Faury had a more proactive perspective. He observed that the current production footprint among five global production facilities is more complex and far-reaching than a certain competitor, and that comes with benefits for Airbus. Observed is that the company has learned over the years to manage complexity and that the production system is now a strength. He noted that having production presence in the United States and China will provide continued benefits, and their presence will likely continue.
Regarding impacts to Airbus’s extended supply network, as far back as March, Airbus had indicated that governments should be considering any needed financial support for airlines and supply chain partners, if indications warrant. That was interpreted as meaning that the commercial aircraft manufacturer was in no position to add added direct financial assistance.
Supply Chain Matters Added Thoughts
We wanted to highlight these two industry CEO perspectives for our global readers, especially those residing in aspects of commercial aircraft.
Aerospace industry manufacturing has always been a keen concern among resident nations, not only for the strategic industry capabilities but as major engines of technological, economic, employment and supply network growth. However, governments have only so much money to buttress key industries. The ongoing economic consequences of the pandemic imply significant multi-industry needs from all levels of businesses, large and small. This is especially the condition in the U.S. in an environment of political party toxicity.
From our biased view, one of these manufacturers has visibly embraced the notion of the supply chain being a strategic enabler of business strategy and that global presence is critically important. Equally important is that despite the significant consequences of this industry’s disruption, industry and government collaboration can still be focused on added innovation.
Five months since the peak of the pandemic across Europe, Airbus is quickly adapting and responding to customer needs and sensitivities, while taking actions to maintain the company’s competitive presence.
This manufacturer has been far more proactive in investing in supply chain wide capability, regional global presence and additive manufacturing based automation. Likewise for advanced supply chain planning and applications technology. Product development strategies have been built upon providing continuous innovation, breakthrough technologies and paying close attention to global airline and lessor company needs including better designed and more comfortable aircraft. As much as the company can, Airbus has demonstrated support and close collaboration with customers, suppliers and partners.
Airbus has had its own struggles along the way but has managed to recover and learn from each experience. While the ongoing pandemic will likely provide added disruption, Airbus seems more well positioned from a product management and supply chain agility perspective.
The coming months and years will provide new learning and new developments for the commercial aircraft industry. Now, respective suppliers and partners to each of these aircraft manufacturers must address their own challenges individually. We will highlight this area in future commentaries.
As we have previously stated in prior commentaries, this industry, both the good years, and the most challenging years, will be the basis for many future academic case study learning as-well.
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