Aerospace supply chains face potentially catastrophic changes
Airbus has risen to rival Boeing to form a duopoly despite the plane maker operating across multiple countries and, even before the pandemic, facing problems of scale, fragmentation and lack of profitability.
A recent Financial Times article details how, apart from a few large corporations, the majority of suppliers are small and many are almost totally reliant on commercial aerospace work.
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In the U.K., for example, the Financial Times reports 725 out of 820 aerospace suppliers have fewer than 50 employees, while those with under 250 employees account for just over one-third of the industry’s 118,000 jobs, according to U.K. trade body ADS.
In France and Germany, close to 60% of aerospace suppliers generated annual revenues of less than €50 million in 2018. Smaller firms with a narrow focus do not have the resources or breadth to weather severe or prolonged disruption, yet that is exactly what they are facing as a result of the near-collapse of airline activity and wholesale cancellations by their customers.
The article states many airlines — and, hence, suppliers — from Airbus downward are suspending contracts, canceling orders, demanding price cuts and refusing to take deliveries. After struggling to keep up with demand last year, the supply chain has found in a few short weeks that revenues have dried up and order books have evaporated.
Airbus is faced with both a short- and long-term existential crisis in terms of its supply chain.
It needs its supply chain to survive the current situation, but in the longer term it needs consolidation to encourage larger, more robust firms — which have the capital depth to invest in new technologies and more automation — to emerge.
Airbus has taken the remarkable step of bringing back from retirement three industry veterans to spearhead the preservation and rationalization of the firm’s supply chain. Each individual has been chosen to lead a national task force, the Financial Times reports: Tom Williams, former chief operating officer of Airbus commercial, for the U.K.; Didier Evrard, ex-head of aircraft programs, for France; and Bernhard Gerwert, previously chief executive of the defense arm, for Germany.
They will not only work with suppliers but with the government to coordinate action, trying among other things to avoid countries gaming the crisis by supporting domestic firms in taking rival countries’ work.
France, in particular, has been busy taking stakes in companies to keep them alive and channel support through specialist funds — to the detriment of British firms in recent years.
According to the Financial Times, big original equipment makers such as Airbus, GKN and Rolls-Royce have already begun to reallocate orders. In some cases, they have even taken work back in-house to minimize the impact of the crisis on their own workforces, in what is seen as a Darwinian battle for survival.
Unlike similar industries with diverse but sophisticated supply chains (such as automotive), the aerospace market is not expected to recover fully for three or four years. Short-term government loans and wage support have helped firms weather the storm these last few months; but longer-term, patient capital that will tolerate marginal or zero profitability over such a time frame is going to be required.
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Airbus is hoping national governments can be encouraged to take a role, as no doubt is Boeing, which is facing similar problems as it struggles with its own slowdown in orders, on top of last year’s 737 Max fiasco.
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