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Aerospace Report

Some Minor Turbulence

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Boeing’s problems and supply chain issues put small pause on commercial aerospace’s anticipated long runout. 

There is no question there is plenty of demand for commercial aircraft – particularly single-aisle planes. However, a number of factors, including production, supply chain and labor issues, have made it hard for the airframe makers to supply their customers with the planes they want on a timely basis. 

Overall, it has been an exciting time for the commercial aerospace industry, Di Reimold, vice president, civil aviation for the Aerospace Industries Association says, maintaining that in many ways the aerospace industry has come out of the COVID pandemic stronger. 

“There has been a much more rapid recovery in air travel than had been envisioned, including for both leisure and business travel,” she says. “People want to enjoy the freedom and opportunities of travel,” adding there is also a growing need to get products and services around the globe. 

In fact, air travel is now above pre-pandemic levels, says Johan Petry, Novelis’ vice president of aerospace sales. While domestic flights, which are often satisfied by single-aisle planes, were the first to recover, intercontinental travel is also on the upswing. However, Peter Zimm, principal of Charles Edwards Management Consulting, adds that long-haul travel (therefore demand for wide-body planes) isn’t quite back to where it was in 2019. “But it is getting a lot closer.”

The biggest pickup in air travel was in 2022 and 2023, which Aero Dynamic Advisory Managing Director Richard Aboulafia terms as the “revenge” years. Still, he notes there continues to be moderate growth rates, even with video conferencing and general cutbacks impacting business travel to some degree. 

Greg Himstead, vice president of sales and marketing operations at Titanium Industries, says that while global demand for new commercial aircraft to expand routes around the world and to replace aging, less fuel-efficient aircraft in Western fleets remains very strong, “After a relatively strong first half, the commercial aerospace supply chain has been experiencing a slowdown.” He says that has primarily been due to reduced single-aisle plane build rates, although there have also been some challenges in ramping up production of wide-body planes. 

“But there are worse problems to have,” Aboulafia declared, noting that the post-pandemic production ramp up was supposed to be a lot easier than it was, and therefore the airframe OEMs can’t build jets fast enough. 

Due to a number of different factors, commercial aircraft backlogs are currently at record levels. In fact, according to Philip Gibbs, a senior equity analyst for metals and aerospace at KeyBanc Capital Markets, in some cases they are out as long as 10 years. If demand and other market dynamics don’t change considerably, that could continue to make it more of a replacement story given the age of existing fleets and greater efficiency of new aircraft. 

This, he explained, is because the newer model engines and single-aisle aircraft result in at least 15 to 20 percent fuel savings. Because of this, Petry says, airlines are looking to replace their planes sooner than they had done in the past.

Bob Mraz, director of strategic business development for O’Neal Industries Inc., says given these factors, single-aisle aircraft like the Boeing 737 and the Airbus A320 and their derivatives account for about 70 percent of the backlogs. It is believed that airlines will need about 40,000 new commercial jets over the next 30 years. Because of the long lead times, any aircraft that is ordered today might not arrive until 2031 or 2032. 

Reimold points out that the production of aircraft involves a combination of critical roles, including leadership, processes, materials, workforce and a whole series of steps to make sure they are built according to specifications designed to ensure safety. But at the same time, she notes, there are a number of “amazing” partnerships that have been set up with governments and industries to help resolve problems and to figure out what future production processes will be needed. 

Despite the need to increase build rates, the major OEMs are encountering challenges doing so. Aboulafia notes that both Boeing and Airbus have had production problems, although Boeing’s problems have been the most pronounced and most widely publicized. He explains that for Airbus most of its problems have been related to the impact of various supply chains, while most of the Boeing issues were at the final assembly level. 

While it is the January 737 MAX mid-flight incident that has most recently resulted in Boeing pulling back on a lot of its deliveries to reassess its internal production processes, Bruce McClelland, senior analyst for Teal Group, notes the airframe OEM previously had certain quality and safety issues. However, in 2023 Boeing’s build rates were gaining momentum. “The January Alaska Airlines incident basically put a stop to that momentum and resulted in Boeing pushing down deliveries.”

While the biggest impact has been on its 737 MAX, most every Boeing plane was affected, McClelland says. He notes the company didn’t deliver as many 767, 777 and 787 aircraft during the first half of this year as during the first half of 2023. In fact, it only delivered 175 commercial planes during the first half of this year vs. 266 during the first six months of 2023. 

Ethan Treese, CCO of Rapid Ratings, says this is because Boeing’s production issues have created ripple effects throughout the supply chain, demonstrating the importance for aerospace companies to adopt robust supply chain risk management strategies. 

He says what happened at Boeing shows the potential consequences airlines can face when supply chain vulnerabilities are not addressed, including safety, quality and brand reputation. 

But several industry observers voiced optimism that partly under the guidance of Robert “Kelly” Ortberg, its new CEO, Boeing has been making moves to improve its performance. However, during its second quarter earnings conference call, David Calhoun, the company’s previous president and CEO said that as of the end of July Boeing had already made meaningful progress, under the oversight of the Federal Aviation Administration, toward its safety, quality and delivery goals.

Unfortunately, Boeing was dealt another blow in mid-September when its machinist union went on strike, halting production of the 737. 

In the meantime, Airbus hasn’t been able to gain as much market share as it had hoped despite Boeing’s problems because of supply chain issues, points out Michael Leshock, a senior associate for metals and aerospace at KeyBanc Capital Markets.  The company hasn’t been able to ramp up its production as quickly as it would like to because it needs more materials, components and trained workers to do so. 

McClelland observes that during the first half of this year Airbus delivered 323 commercial planes, up from 316 planes in the first half of 2023. It’s obviously much better than what’s gone on at Boeing, but not much better than flat. 

“Supply chain issues are clearly an element of demand – not just for aerospace but for virtually every industry,” Reimold observes, noting that increased need for aircraft equates to increased need for the materials and parts for those planes. 

Aboulafia says one major supply chain issue has been the availability of jet engines, noting the OEMs would like engine build rates to be about 15 to 20 percent higher than they have been. 

There are some actions being taken is solve the supply chain concerns, Reimold says, noting the Aerospace Industries Association is the industry lead for a U.S. Department of Transportation task force that is currently assessing supply chain resiliency, including the impact of basic transportation dynamics, workforce issues, materials issues, and governmental policies and regulations upon the supply chain. 

Mraz maintains the fact that commercial aircraft build rates are lower than what had been forecast has actually allowed some parts and materials suppliers to catch up on deliveries and, in general, for the supply chain to start to rebalance itself. He, however, admits that has varied by the specific parts and specific raw materials. 

At the same time, Jerry Bashir, president of Falcon Aerospace, says the the large delivery backlogs for new aircraft have been very supportive of the maintenance, repair and overhaul market. KeyBanc’s Gibbs agrees, noting the longer it takes the airlines to get the new aircraft that they want, the more they need to spend on their existing fleet. 

That, Himstead observes, has been very supportive of the aftermarket demand for spares. But even though MRO and aftermarket dynamics tend to be more volatile and difficult to forecast than airframe production, metal suppliers – both service centers and mills – are well equipped to support any unexpected demand spikes for the commercial aerospace market in general. 

Nevertheless, Zimm says that while there is a lot of variation, aerospace-grade raw materials have much longer lead times than they had been prior to COVID. “There definitely were concerns about titanium and nickel earlier in the recovery, but more recently there have been some issues with certain specialty steel grades as well as for engine-related castings and forgings. 

On the other hand, Novelis’ Petry says supply and demand for aerospace grade aluminum plate are fairly balanced even with the amount of aluminum being used.  

Petry notes that aluminum continues to be used very intensively in single-aisle planes and that even though wide-body planes are heavy users of composites, namely titanium, they still use a significant amount of aluminum structural parts. “So as build rates ramp up, aluminum consumption will also increase.”  He adds that Novelis and other aluminum producers are making investments to increase their productivity and to ensure that aerospace aluminum supply and demand remains in a good balance. 

He adds the possibility to recycle aluminum is contributing to the environmental impact of aerospace parts, helping the aerospace industry to meet its target of reducing greenhouse gas emissions.

On the other hand, titanium remains in very tight supply. O’Neal’s Mraz points out that titanium is very important for modern aircraft – not only because it is the lightest, strongest aerospace metal, but because, unlike aluminum, it mates well with composites, which are being increasingly used in newly developed planes, especially wide-body aircraft.
 
At the same time, there are supply chain challenges for semi-finished titanium products, largely in reaction to the Ukrainian invasion. Himstead explains that as commercial aerospace OEMs continue to restrict titanium from Russia, the other major aerospace titanium mills are contending with the increased demand.

 “All U.S. melt shops have introduced titanium raw material surcharges, which are intended to pass through the increased import costs – primarily sponge and aerospace grade scrap,” Himstead says, noting that in the near term those input costs still appear to have upside potential. 

“Titanium has been seen as a poster child of what could go wrong in the aerospace market,” Zimm says. Though it’s possible everything could come to a standstill, that fear hasn’t been realized. 

In fact, while titanium lead times are still very long – out about a year in some cases – KeyBanc’s Gibbs says they have begun to shorten somewhat with the mills looking to manage their order books and being careful not to overpromise. 

While it varies by product form, generally aerospace-grade stainless and other specialty steels are relatively tight, by not as tight as titanium, Aboulafia observes, given that they don’t have the same geopolitical issues. 

Nevertheless, Mraz notes that given there are just a limited number of companies able to make certain products, like vacuum-remelted specialty steels, their lead times are extended – out about 30 to 36 weeks. While that is down slightly from their recent peak, as recently as three years ago they were only out about six to 10 weeks. 

 “While there have been some ups and downs with build rate changes and supply chain issues, overall 2024 has been a healthy year,” Petry says, adding that given the growth in air travel and delivery backlogs, the commercial aerospace market will continue to be strong, especially once supply chain issues ease and the airframe OEM are able to further increase their build rates. 

McClelland says that barring any new problems, next year should be a better year for everyone in the commercial aerospace supply chain. “Boeing and Airbus should both be back to full strength and more of the supply chain issues should be worked through,” so there should be more available supply and fewer disruptions. 

In the meantime, metal suppliers have been doing a good job preparing themselves to serve the commercial aerospace market the best they can, KeyBanc’s Leshock says.  “They are hiring more workers, increasing their efficiencies and putting in new assets to let them produce more materials.” This capacity is coming online at a time when the OEMs’ build rates are subdued, which will help them to build a better foundation for once things ramp up again.

Caption:
Commercial aerospace has recovered to pre-pandemic levels. (Photo courtesy Falcon Aerospace)