With this week’s conclusion of the Dubai Air Show, commercial aircraft manufacturers Airbus and Boeing touted large numbers of new customer orders for their innovative, more fuel-efficient aircraft. Both industry rivals departed with over 700 provisional orders valued at $75 billion, mostly for single-aisle aircraft. The reality, however, is beyond the sales euphoria, there are many supply chain management challenges that the industry will come to grips with over the coming months and years.
By far, the most significant deal this week was a single order for 430 of the Airbus A320 /A321 neo aircraft family which was valued at $49.5 billion at list prices. This deal was headlined as one of the largest single aircraft orders in industry history. In the category of industry-milestone, the Memorandum of Understanding represented the first time a single private equity firm, Indigo Partners, leveraged its negotiating power in procuring new aircraft for a portfolio of four separate owned global low-cost carriers. (Frontier Airlines, JetSmart, Volaris, Wizz)
More than likely, such negotiating power translated to some significant discounting from list prices along with provisions for added services programs that the portfolio of airlines can benefit from. That milestone alone is compelling evidence of increased negotiating power for airline customers, not only in pricing but potentially in future delivery slots down the road.
Not to be outdone, Boeing announced a late-night deal from low-cost carrier FlyDubai consisting of 175 of various models of the 737 MAX aircraft family, along with options for 50 additional aircraft, which was valued in list prices at $27 billion. In total, Boeing announced a total of 296 orders valued at $50 billion that included an additional order from Emirates for 175 of the new 737 family aircraft.
Once again, from a supply chain management lens, there are a few thoughts to ponder.
There is the reality of increasing multi-year backlogs of the wildly popular more fuel-efficient single-aisle aircraft, especially among existing and new low-cost, no-frills carriers. The Indigo agreement with Airbus reportedly calls for deliveries beginning in 2021 and spanning out to 2026. Eight to ten years of backlogged orders can be a universe in today’s more volatile global economy and who can accurately predict potential economic scenarios or shocks in such timeframes.
Industry observers seem to be openly questioning how-long the current boom cycle can continue. As we and business media continue to point out, both Airbus and Boeing must continue to ramp-up monthly production levels to not only meet stated delivery commitments, but to generate the cash flows required to sustain operations, new product innovation and investor demands to share in the cash dividend rewards of a booming industry.
From a supply chain ecosystem perspective, both manufacturers continue to pressure major suppliers for price concessions, with multi-year assurances of volume as the bargaining chip. But, as this blog and industry-focused media continue to observe, the supplier base is consolidating with increased M&A activity, the latest being United Technologies large-scale acquisition of Rockwell Collins that umbrellas many Tier One component products.
With the promise of Internet of Things enabled equipment services, both manufacturers, especially Boeing, have made commitments to broaden top-line revenue growth in added aircraft services and maintenance programs. This is an area where industry suppliers make considerable margins in providing add-on services and replacement parts. As Supply Chain Matters has declared in prior commentary, consolidation of supplier power places OEM’s on a direct collision course for the control of incremental revenues, data, and information related to multi-year aircraft service programs. The seeds of competing strategies have been sown, and that will likely lead to tougher negotiating stances from major component suppliers. The more Airbus and Boeing accelerate shipments of aircraft, the more they can add-on opportunities for power-by-the hour or sustaining maintenance services.
Finally, there is the “elephant-in-the-room.” What will be the next weakest links or vulnerabilities in fuel efficient, single aisle aircraft supply chains in a period of dramatically higher shipment levels?
Today, the weakest link is associated to the aircraft engines that power these aircraft with far lower operating costs. Both Pratt & Whitney’s GTF and CFM International’s LEAP aircraft engines have exhibited production ramp-up issues due to unplanned component maintenance or pre-mature failure. While operating benchmarks for fuel-efficiency has been noted by airlines as better than anticipated, unplanned off-wing maintenance is a growing trend. There is industry optimism that these start-up component challenges will be resolved in 2018 and both engine manufacturers will be able to concentrate on delivering on each’s multi-year order book rates. But as many supply chain teams know all too well, weak links are a reality without comprehensive resilience and contingency planning. Today, General Electric, a key strategic partner to CFM, is reeling from a shareholder crisis seeking added profitability, higher efficiencies and added revenue growth. There is speculation as to whether this will result in a shedding of existing GE businesses, and certainly, aircraft engines are a very financially attractive growth industry.
Indeed, a decade of order backlogs represents continuing euphoria, but industry supply chain teams must deal with the building realities of day-to-day and month-to-month challenges for ramping-up overall supply and production output of highly engineered components.
Teams are urged to look beyond the euphoria and concentrate on the people-process-technology needs for higher levels of agility, supply risk mitigation and overall resilience to disruptions that are sure to occur.
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