The state of supply chains: Aerospace

Once on the top of the world, aerospace supply chains have been some of those hit hardest in 2020, but their long-term approach has helped to create resilience and it will be a case of weathering the storm reports Roger Hailey

Credit: time:matters

Aerospace supply chains stalled in March when Covid-19 saw airlines ground most of the world’s passenger aircraft. At the start of the crisis, some airline bosses spoke of a two-year wait until aviation activity returned to near 2019 levels, but those timelines have now lengthened to 2024.

According to ADS, the body representing the UK’s aerospace sector, there were just nine commercial aircraft orders in August 2020, the lowest for the month on record. The figure is a 59% decline on August 2019 and a 91.3% decline on two years ago. Since the start of the crisis in March, just 123 orders have been placed.

ADS chief executive Paul Everitt says: “The aerospace industry in the UK and around the world is feeling the effect of travel restrictions and 2020 is set for the lowest number of global aircraft deliveries in more than a decade.”

A sudden reversal

“This is a European-wide industry and a European-wide challenge,” says Everitt. “Before March this year, the aerospace industry and wider aviation industry had grown consistently over the last 20 years, with annual increases in passenger numbers of between 5%-6%.”

“That was reflected in demand for modern, quieter, more fuel-efficient aircraft so our challenge in January and February of this year was articulated as how quickly can we increase the rate of production for those aircraft?

“The supply chain was working hard, investing in capability and capacity to allow an increase in the number of aircraft being produced. If you take Airbus as an example, we were probably producing somewhere between 50 or 60 new aircraft a month, and looking in the future to perhaps around 70 new aircraft per month.”

Airframe and aero-engine manufacturers were on a growth trajectory until March’s mayhem which saw global population lockdowns and suspension of travel plans, with around 98% of all flights cancelled and the majority of the world’s passenger jets parked, overnight.

“Obviously, we have seen some improvement in that situation, but we are probably only at about 20% of capacity,” observes Everitt.

Rethinking business models

time:matters, the Frankfurt-headquartered expert in high-performance and special speed logistics, installed a task force at a very early stage in the pandemic to monitor developments in real time, such as flying restrictions that could be imposed by national governments at very short notice.

Alexander Kohnen, time:matters chief executive, says: “COVID-19 has paralyzed the global economy and a large part of our usual core business has been lost due to the first shutdown of production facilities. In demanding days like these we needed, and still need to be, even more flexible and creative in order to develop transport solutions for our customers.

“With the lockdown a sharp decline in world trade and the collapse of global supply chains were recorded. This trend was counteracted by the growing demand for the transport of medical and protective goods. The commodities shifted significantly during the crisis. The transport of medical goods had gained in importance.”

Adds Kohnen: “This development had also an immense impact on the spare parts and aircraft on ground (AOG) supply in the aviation industry. A massive slump in spare parts and AOG transports has been recorded due to the lockdown and travel restrictions.

“We have been observing the massive decline in the aviation industry beginning March 2020 with negative peak in Q2 with a decline of spare part shipment transports falling by 80% and so far in Q3 by more than 60%.

“The airlines are still in the ‘ramp-up phase’ and this will take longer depending on the course of the pandemic and the associated travel restrictions. A larger number of aircraft are still grounded.”

Bolloré Logistics, with a specialist aerospace supply chain arm, observes that while the aviation sector has a record of being highly resilient to global events, today’s crisis “has completely shaken up the aeronautics market as we know it, obliging all the players in the sector, as well as manufacturers, to rethink their business models”. 

Adds Jérôme Le Grand, Aerospace Product Director: “With nearly 80% of the world fleet grounded, we have had to change tactics and focus on the resources available, such as freighter aircraft and passenger planes converted into cargo planes, while grouping shipments to redirect them to operating trade routes.”

In the initial phase of the crisis, Bolloré Logistics’ global network, and in particular its emergency units, were mobilised 24-7 to respond to demand, which has increased in certain segments, in order to resupply customers in replacement parts.

Adds Bolloré Logistics: “This was notably the case for the helicopter sector, owing to the extensive use made of helicopters at the start of the crisis for transporting infected individuals and health equipment.”

In the second phase of the crisis, Bolloré Logistics had to reorganise and find the relevant solutions for ensuring business continuity: “At the same time, the warehouses continued to receive new goods with no possibility of evacuating them owing to the near across-the-board halt of consumption, leading to the constitution of buffer storage.

“From that moment on, the key was to understand the outlook for recovery and resize our warehouses to match business activity. With our customers, we reviewed the possible scenarios for finding solutions and supporting them during the period while demonstrating responsiveness, flexibility and agility.”

A very different market for parts and engines

Denmark-headquartered DSV is one of the world’s largest logistics operators, with a sizeable aerospace supply chain presence, moving both complete aero-engines and their spare parts for on-going maintenance globally.

Mads Ravn is the US-based head of global air freight procurement at DSV Air & Sea, with 25 years career experience at the fast-growing freight forwarder.

Says Ravn: “DSV moved some 2,500 engines in 2019, and this year it will be just 20% of that number. There is still some engine production, but it is slowing down and is almost at an end, [although] there are still orders that cannot be stopped.

“The current movements are primarily leased engines being moved for various reasons, for example carriers returning leased engines in order to reduce inventory, and they are being stored in a very similar to actual aeroplanes, in the desert.”

Leased engines are a very big business says Ravn, adding: “That is where we believe the market is going. For example, some 40% of one customer’s engines are sold on leases which means that an airline does not have to pay $10m or $15m to buy an engine.”

Now that so many planes are grounded, airlines have taken to decision to demount the engines and return them to the lessor.

When an airline has a significant number of parked aircraft it can make economic sense, in maintenance terms, to taken off an engine from a parked jet and mount it plane that is in active service rather than source spares.

Lufthansa Technik, the aircraft Maintenance, Repair and Overhaul (MRO) arm of Lufthansa, said that it is currently seeing a reduction of more than 50% in required man-hours, although this varies in some business areas significantly by product and region. 

Wolfgang Reinert of Lufthansa Technik says: “The Engine MRO market has been hit hardest as engine events are very cost-intensive and engines can be swapped between different tail signs quite easily.

“We believe engine MRO will face an intense cost pressure while the usage and availability of used serviceable material will increase. We forecast engine MRO to reach the level of 2019 in mid- or end-2024. Besides increasing green-time management, the engine market is facing various uncertainties regarding B737Max re-entry into service and wide-body engine recovery.

“While it is still impossible to predict how the recovery will play out, it is clear this is a crisis of a dimension that the aviation and aerospace industry has never experienced,” believes Reinert. “Previous crises were more regional in their nature and had shorter dips than we have experienced in recent months.

“Our own scenario planning confirms the market view that a recovery to 2019 MRO volumes will be reached again in three to five years. Within these scenarios, we see products that will remain in demand and others, which are heavily impacted by airlines effectively managing the green time on their aircraft and components.

Reinert continues: “This crisis has accelerated the fleet retirement plans of many airlines and will result in a significant volume of USM/surplus material hitting the market. This will lead to a devaluation of the assets on the books of many MROs and airlines and a premature obsolescence of tooling and inventory.

“Consequently, we are facing a prolonged period of over-capacity in the MRO Market – locally and globally.  We expect to see the newer more fuel efficient narrow and wide-body aircraft take to the skies again first, with the older and aircraft with major checks pending left parked until last. 

“This will put players with access to the new technology fleets in a better position to ramp-up their operations first. Over capacity always leads to irrational market behaviour (look at the competition between airlines in the last decade) and that will certainly end up hurting some players in the MRO industry.”

Keeping the foundation of complex aerospace supply chains

The grounding of aircraft has put a brake on demand for new parts or replacement spares for aircraft and engines, meaning a huge revenue slump and shortage of cash for many smaller suppliers, while at the same time large numbers of skilled aero engineers have been furloughed who may never return to their former jobs.

Paul Everitt of ADS says: “We have to make sure we don't lose lots of high-value jobs during this difficult period.

“We need to find some longer-term and more patient finance for aerospace suppliers because many of them will be running short of cash and are already quite indebted because of the coronavirus interruption business loans or bounce back schemes.

“They are in a position where the revenues are still low or non-existent because they haven't seen a pickup in demand yet, so unless they can find some alternative finance, they either carry on as kind of zombie companies or they survive, using new technology to improve their own productivity to prepare for a net zero future of aviation that is coming quickly.”

Everitt wants swift government action to kickstart the global aviation industry and points out that aircraft manufacturing employs more than 110,000 people in the UK alone. He wants the UK government to act urgently to develop and reform its quarantine policy, using testing to reduce the period air travellers need to isolate after arrival in the UK.

“The last element of the package we are looking for is to increase the funding for R&D so that we can be at the forefront in delivering net zero aviation by 2050.”

A recovery … but when and where?

Ravn says that DSV is positioning itself for when flying schedules restart and there is a need to perform maintenance on aircraft and aero-engines that have been sitting idle for several months.

“They have to go through full checks, and we expect will be a tremendous amount of movements of spare parts, and also a significant number of engines going to the MRO shops so they will actually be able to fly again.”

DSV is preparing itself for a backlog in engines need undergoing maintenance because there is a limited supply MRO shops around the world, many of which are located in remote locations where you need a freighter to move the engine in and out.

“The question is, will there be enough engineers to get all these engines up and running again at the speed of which the airlines want their aircraft back in the air?” asks Ravn.

Lufthansa Technik sees “two philosophies” emerging from airlines currently in the heavy maintenance market: “Some are anxious to secure slots in order to maximize their fleet available for a recovery in the next two years, others are deferring their heavy checks and managing flight hours carefully across the fleet. 

“Our forecasts indicate the heavy maintenance market will lag a recovery and depending upon which level the market stabilizes a potential backlog of events when airline finances recover. There is still high uncertainty on the recovery of the wide-body market, so suppliers with a strong narrow-body market share will recover first.”

Bolloré believes that, for the recovery phase and the resumption of business, the trend will be different for each segment of the industry.

 “For example, the production of planes has already resumed, with forecasts established for first-half 2021,” says Yorann Marc, Projects Department Manager at Bolloré. “The helicopter sector will also soon be resuming the production of new models to be launched in the near future. For our part, our aim is to rank as the service provider of the future by supporting the development of drones along with aircraft intended for urban transport.

“As some small-cap businesses will lack the volumes and critical mass to ensure a competitive supply chain, we will be in a position to support them by providing them with a broad range of pooled services, including supply coordination, buying consolidation, pooled logistics and final-assembly-line deliveries.”

He thinks that the aerospace sector as a whole “has held up well owing to its long-term approach. We are expecting gradual growth in the coming years, driven by numerous fast-growing markets, including constellations of mini-satellites for new applications; cable-free high-speed internet; the security industry; deliveries by unmanned drones; and zeppelins and electric and hydrogen motors, which also have a strong outlook.”

Aerospace supply chains are taxiing for take-off, but it may be a long wait.

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