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Do you foresee bankruptcies with any major Tier 1 and Tier 2 producers for Boeing and Airbus?

Michael Bruno, Aviation Week’s Senior Business Editor, responds:

A flurry of news in late September and early October illustrated some of the realities of the worst aerospace downturn since the dawn of the Jet Age. In the span of days:​​​​

•  Impresa Aerospace, a supplier to OEMs and Tier 1 military and commercial aircraft manufacturers, entered U.S. bankruptcy protection and said it could be taken over by its predominant private equity owner, Twin Haven Capital Partners;

•  Aerostructures giant Spirit AeroSystems formally walked away from its two-year-long effort to acquire Belgian aerospace supplier Asco Industries;

•  Aero engine supplier Whitcraft Group announced it would auction newly acquired plants across the U.S. as part of a retrenchment effort; 

•  Word emerged that the embattled Triumph Group was fielding takeover interest from suitors, reportedly including serial aerospace and defense acquirer TransDigm Group; and

• Boeing leaked plans to scrap its Enterprise Operations division.

A new wave of consolidation and contraction in the A&D sector has arrived in earnest due to COVID-19. To answer the first question: Yes, bankruptcies are foreseeable in the lower tiers of the supply chain (as Impresa’s case already demonstrates). The question of how many more could occur is answered by another question: Does it matter whether it is bankruptcy? Insolvency is likely to be just one process by which up to 20% of lower-tier suppliers exit the industry in coming years, according to estimates from aerospace analysts and advisors.

Can the supply chain handle the exits of these lower-tier suppliers, especially if there are further monthly production rate reductions? In a nutshell, it has to, but success is not guaranteed. Aerospace analysts note that the larger automotive industry has gone through the same degree of consolidation before, particularly after the 2008 Great Recession, and enjoyed a revival before the pandemic. However, automotive has faced existential crises since the 1980s that required government, labor and management to reach compromises, but such a grand bargain for A&D may be a ways off as industry largely still appears to be working through the first, liquidity-oriented stage of crisis response to COVID-19.

Aerospace manufacturing long ago stopped being an industry where a greater number of smaller suppliers are created from whole cloth. Instead, the story this century has been about slow but steady consolidation due to OEM and Tier 1 supply chain squeezes, the dearth of new programs, technological and workforce challenges associated with ramping up production, and exogenous shocks such as 9/11, the 2008 financial crisis and now the novel coronavirus. What is more, in the recent super-cycle of commercial aviation, mergers and acquisitions were driven less by capacity needs and more by access to programs or control of proprietary processes or parts. This is expected to continue and accelerate post-pandemic.

OEMs and Tier 1s are working to buttress suppliers, but—as might be expected—they are working with their largest and most important providers first. In turn, each is expected to oversee their own supply chains. Before the COVID-19 outbreak, consultants said OEMs and Tier 1s never enjoyed deep insight into their supplier bases. And since crises tend to draw attention inward, insight is not expected to improve soon either. On top of that, OEMs and major suppliers are not in the business of financially supporting smaller players. Indeed, outsourcing cost and risk has become an integral part of modern aero management DNA. Instead, Boeing offers to facilitate talks with its own financial supporters to help with any key supplier who needs near-term liquidity support, top executives say.

“The supply chain is in an every-man-for-himself-situation because the OEMs are exhausted,” says Bryan Perkins, founder & CEO of Novaria Group.

The good news is, as Boeing’s new Commercial Market Outlook attests, confidence is high over the long-term prospects of commercial air traffic and demand for aircraft manufacturing. The challenge will be bridging the gap between now and the end of the forecast’s 20-year outlook. Survival of the A&D industry is widely expected, and private investors are already poring over potential opportunities to get in on at a relatively low entry point. But the survival of any brand or factory is not a given, and much remains to be determined.

CLARIFICATION: Impresa is the only company referenced here that has filed for bankruptcy protection. Others are listed as examples of industry’s response to the downturn.