Air Traffic Recovery Is Straining Aftermarket Supply Chains
If the commercial aftermarket recovery stalls in the near future, it will not be due to a lack of demand-stoking flight activity, but rather supply chain-related constraints linked to labor and production-rate increases on key programs at Airbus and Boeing.
After a collapse that mirrored the global airline passenger-activity decline that approached 100% in mid-2020 with the onset of the COVID-19 pandemic, the aftermarket has been rolling. Depending on the market, airlines are either ramping up activity to meet current demand or preparing their fleets for an anticipated summer-season breakthrough as pandemic-related headwinds subside.
The near-term upside: MRO specialists are benefiting from full shops and brisk sales. Full-year MRO sales and parts purchasing are projected to be up 15-20% in 2022 with steady quarter-to-quarter sequential growth, a recent RBC Capital Markets survey found.
During Aviation Week’s recent MRO Americas conference, “we consistently heard about a strong [first quarter], with expectations that this strength continues into [the second quarter],” RBC Capital Markets Managing Director Ken Herbert writes in a post-event investor note. “For example, many distributors are seeing similar levels of sequential growth into the second quarter—mid-single-digits—with what the industry saw in the first quarter.”
Coming out of a global economic downturn that saw many companies trim staff while navigating two years of turbulence, some are not prepared for such a demand surge. Shortages of both high-skill, specially trained workers and key front-line employees such as ground-service crews are prevalent among airlines. The supply chain is suffering as well, and operators are beginning to feel the effects.
“There was no buffer in the industry,” Drew Skaff, Republic Airways vice president for supply chain, told MRO Americas attendees. “Our demand is lower than it was two or three years ago, and we are still dramatically challenged with consistent sources of supply.”
The U.S.-based regional operator’s 220-aircraft Embraer 170-
series fleet is operating at about 90% of comparable 2019 block hours, Skaff said. Despite this lag, suppliers are not keeping up.
One way Republic has responded is by expanding its use of dynamic modeling.
“We are now sending demand signals to our suppliers at a more frequent level,” Skaff said. “The theory is that the supply chain will become a little bit more nimble and reactive. It does require more work on behalf of our supply chain, because we are producing more orders. We’re receiving more orders. But we have noticed that that has produced dividends in terms of increasing our internal service level to our operation. So it’s working.”
Staffing problems have hit the carrier’s internal supply chain operation. A department of 85 employees several years ago is now only 45—due at least in part to a lack of available talent.
“We are now measuring that as a constraint,” he said. “Even if suppliers could provide all the inventory we wanted right away, we would still have an internal challenge” ordering and processing all the parts, he noted.
Skaff sees the issue as akin to the long-term pilot and technician shortages already plaguing the industry. “We have to do a better job of luring talent to the supply chain profession and attracting them to our industry,” he said.
Republic has also padded its inventory levels and asked its supply chain to do the same—“and not just for [aircraft-on-ground] scenarios,” Skaff said. “The days of just-in-time inventory are absolutely gone,” he added.
While more inventory can solve some problems, suppliers with other options should examine them.
“If we go into just raising the inventory levels, we incur a huge cost,” said Benjamin Moreau, Air France Industries KLM Engineering & Maintenance senior vice president for strategy and business development. “Alternative sources take on more importance,” he added, citing repair development and used serviceable material (USM) as prime examples.
Suppliers are adjusting to meet customer expectations. GE Aviation has pulled in about 500 repairs that had been done by third-party shops, said Ryan Gunyan, aftermarket solution business operations leader. Among the benefits: using internal capability mitigates the risk of the supply chain not having qualified staff.
“Many of the constraints of the OEMs are actually way down on the supply chain,” added Barry Swift, senior vice president at parts specialist AJW Group.
Republic is hardly the only operator seeing supply chain issues, and they are not limited to small carriers.
“We’re all saying the same thing—it’s so hard right now,” Peter Requa, Southwest Airlines senior director of supply chain management for technical operations, said at the conference. “You had your [issues], but everything used to just kind of work. Now, every single day we are sending out critical-parts lists. We’re chasing stuff. We’re really running on the ragged edge.”
The supply issue is most acute in the U.S., which is setting the global recovery pace. U.S. domestic revenue passenger kilometers (RPK) were down 7% for February from comparable 2019 levels, while available seat kilometers (ASK)—which drive aftermarket activity—edged up to within 3%, the latest International Air Transport Association figures show. Both were far ahead of the global market, which had RPKs down 45% and ASKs off 37% from what they were three Februarys ago.
While the front-line worker shortage is apparent, an industry-wide departure of experienced employees is equally significant.
“We lost a lot of management staff, and we lost a lot of relationships in that process, a lot of knowledge base,” Requa said. “I’ve seen issues linger longer than they normally would because some of those relationships are no longer there.”
Many employees took early retirement and are unlikely to return. The gaps they left behind require more than simply filling positions.
“It takes quite a bit of time to get [supply chain specialists] up to speed,” Requa said. “I hear two years typically, sometimes three years.”
The near-term ramifications vary by industry sector. Several U.S. airlines have pulled flights from their schedules due to a lack of staff. The issue goes beyond the well-publicized shortages of pilots, cabin crew and customer-service staff. One U.S. airline representative tells Aviation Week that it cannot keep its cabin maintenance teams fully staffed. The reason? Prospective technicians keep dropping out at the entry level of the career pipeline, cabin crew cleaning.
One consequence is fewer technicians to address items on the minimum equipment list (MEL) or issues that need fixing but do not ground aircraft. Eventually, MEL items become too numerous to ignore, and the aircraft must be pulled from service—either voluntarily or because it breaks down.
On the supplier side, there are signs that these cutbacks are affecting lead times for parts and even basic product support.
An executive with one repair station that is also an authorized service center for a major supplier says lead times for some parts the shop needs from its larger partner have ballooned to a year.
“We had issues here and there pre-pandemic, but it’s far worse now,” the executive, whose shop did not cut any positions during the downturn, tells Aviation Week. “In some cases, we can’t even get answers to basic questions. That’s just not sustainable.”
RBC’s Herbert said that while conventional wisdom may be that the smallest suppliers are at the forefront of the supply chain labor crunch, the pain seems more widespread—and could be particularly prevalent at companies that saw major swings in staffing levels.
“The risk of a labor shortage to results is growing,” he writes in the post-show note. “The hiring challenge cuts across all defense and aerospace markets, and the companies that were the most aggressive in lowering headcount in 2020-21 could be the most at risk.”
Running alongside the labor crunch is a materials shortage risk. In some cases, the issues are linked—a lack of skilled labor at some repair shops means component-repair turnaround times (TAT) are lagging, for instance. Some suppliers compensate with more liberal exchange policies, but this often just delays the parts bottleneck while increasing overall costs.
“Repair TAT still matters,” Requa said. “I sense that this is not being treated with urgency. I appreciate the free-of-charge exchanges, [but] this adds cost for all of us. We cannot have [serviceable] components celebrating birthdays. We’ve got to get more efficient.”
Of greater concern in the MRO world is the looming rise in new-aircraft production rates. Airbus is now targeting an eye-opening total of 89 A320neos and A220s per month in 2025, up from 46 a year ago.
Boeing recently reached 31 per month on its 737 line, and Reuters reported the company plans to be at 47 per month by 2024. Boeing has not publicly committed to a future target.
“Our biggest job right now is to stabilize around that rate,” Boeing CEO Dave Calhoun said on a recent earnings call (AW&ST May 2-15, p. 24). “Anything else is going to be a future decision that we’re not prepared to take because we just want to get confidence in what’s right in front of us.”
While Airbus and Boeing eye more output, some major suppliers are already working overtime to keep up. Raytheon Technologies CEO Greg Hayes said on an April 26 earnings call that he sees overall issues abating as the year progresses, but he acknowledged that several challenges continue to bedevil the company, including castings and forgings for Pratt & Whitney engines headed to Airbus.
At an investor conference in February, Hayes warned that Raytheon would miss delivering 70 engines to Airbus due to a casting supplier’s shortcomings.
“That problem is not behind us, but we are working with that supplier to recover,” Hayes reiterated April 26. “We’ll get most of the way there by the end of the year, but it is not without its challenges, like everybody else. Our suppliers are seeing a shortage of labor.”
Hayes emphasized that despite the challenges, his company is prepared to support the production ramp-ups.
“We’re in lockstep with both Airbus and Boeing on their production rates,” he said. “We’re certainly doing everything we can to support our customers there. But supply chain continues to be an issue, I would say, across the business, especially on the electronics side, where we’ve seen lead times go from three months out to 12 months-plus.”
As parts suppliers work to satisfy their largest customers—top-tier manufacturers—the aftermarket could feel any resulting strain.
“Build rates are going up, [and] production comes first,” Requa said. “I’m not sure how we get to these build rates and support the in-service fleet.”
Herbert’s latest conversations with suppliers left him more optimistic. “Lead times for materials and spare parts are expanding,” he writes. “There is a sense that lead-time risk is greatest now, and it should improve across 2022.”
One upside to higher production rates and more new aircraft deliveries is that some aircraft pulled from service but still on the balance sheets could finally be retired. That could drive more USM into the market, providing some material-demand relief.
Strain on the supply chain could grow as airlines match their labor needs to growth aspirations over the next few years, driving up demand for maintenance. In the engine overhaul world, most OEM engine shops are running at or close to capacity, RBC’s Herbert writes, while independent shops still have capacity.
“We believe utilization at non-OEM shops is running at 50-75% of pre-COVID levels,” he writes. “We expect much of this excess industry capacity will get soaked up in 2023 as shop visits continue to recover.”
CFM International CFM56 shop visits are projected to return to their 2019 level of about 2,000 next year, while those for the V2500 will be back to about 800, or 20% below the comparable 2019 figure.
“While the recovery in the V2500 is looking to slightly lag the recovery in the CFM56 shop visit forecast, we do see upside to the [approximately] 800 outlook for 2023-24 based on utilization of the A320ceo aircraft and the pace of the narrowbody recovery,” Herbert writes.
If international travel continues its slow recovery, increased widebody activity should help provide more lift for the broader aftermarket.
RBC’s April survey of MRO providers names material lead time, availability and labor as the top three risks to the aftermarket recovery’s momentum. But the risks are not yet a major threat to near-term rewards.
“Most MROs do not yet expect labor and stretching supply chains to be a reason they do not make their 2022 forecasts,” Herbert writes. “But it is clearly a watch item.”