Supply Chain Matters has penned multiple commentaries related to the unique and ever more complex challenges within today’s commercial aircraft focused supply chains, in particular, Airbus and Boeing. One would optimistically believe that having upwards of ten years of booked orders would be an enviable position, and perhaps it may in certain other industries.
But such a situation provides added dynamics for managing and fulfilling customer demand as well as insuring long-term supply and capacity in strategic supply areas. Commercial aircraft is very much an engineer-to-order, make-to-order supply chain framework involving thousands of different moving pieces.
In the subsequent two commentaries, we focus on some current news developments from the lens of product demand and strategic supply perspectives.
On the demand front, Jon Ostrower, aviation columnist for The Wall Street Journal penned a column this week (paid subscription or free metered view) indicating that some of the world’s largest and perhaps most influential aircraft lessors are indicating that Airbus and Boeing should be focusing more on delivery commitments on existing new aircraft rather than indicating intentions to develop even more newer technology-laden aircraft models.
This dialogue was prompted by speculation that Boeing was in discussions with United Airlines on a possible replacement for the older workhorse Boeing 757 model aircraft. There have also been published reports that Airbus and Boeing have been in separate discussions with Middle East carriers such as Emirates on even larger, more efficient wide-body aircraft. In the WSJ report, the CEO of one of the largest jet lessors by fleet value indicated that aircraft producers should be focusing on completing and delivering the thousands of aircraft currently on-order. In essence, the statement can be translated to stop confusing the market with more product choices and options, and deliver on the commitments made.
As we have noted in our commentaries, 8-10 years of backlog provides a rather long window to potential changes and uncertainties in the world economy or to the overall volume of air travel. Over a decade, there can be many economic growth or severe contraction scenarios. Throw in today’s extraordinary low-cost of crude oil, along with major shifts in foreign currency values, and you get the picture of how events can change in such an extended window.
There is a continued tone of concern regarding whether the world’s airline carriers have collectively underestimated the overall impact of thousands of new aircraft added to global fleets and to existing aviation infrastructure, air traffic control needs as well as the supply of qualified and experienced pilots. Recent airline disasters and accidents across coastal Asia including recent tragedies related to Malaysian Airlines have added to this concern.
For aircraft producers themselves, executive leaders continue to respond to various strategic options, initiatives and business challenges. They include the potential launch of a another new aircraft development program which can cost upwards of $10-$15 billion dollars and according to industry participants take 8-10 years of planning and deployment. Some newer models such as Boeing’s 787 Dreamliner program have yet to meet break-even profitability, requiring added years of stepped-up delivery. When Boeing announced development of its new 777X replacement program, it played hardball with governments and suppliers in its strategic sourcing decisions, garnering leverage for longer-term product margins.
A further option is to placate investors with lucrative added dividends or stock buyback programs which provides added value for stockholders. A third option is added investments in supply chain capabilities including long-term strategic supply or added production capacity. For this industry, such long-term strategic supply strategies often are linked to production sourcing within global regions that will influence long-term demand, such as Asia, China, Japan, and the Middle East where commercial air travel and resident air carriers are expected to grow the most. That results in today’s globally extended and complex aerospace supply chain ecosystem.
It would seem that judging from the current lens of the majority influential customers, the voice of the industry’s most influential customer’s is for commercial aircraft producers is to step-up on supply and delivery commitments.