Podcast: Will Commercial Aerospace Blow Its Big Opportunity?

Aviation Week editors are joined by contributing columnist Kevin Michaels to discuss whether the industry is making the most of the commercial upcycle.

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Joe Anselmo (00:06): Welcome to Aviation Week's Check 6 podcast. I'm Joe Anselmo, editorial director. Last week, Robert Wall, Steve Trimble, and Tony Osborne riffed on defense on Check 6. So we thought we would turn the script this week and talk about all things commercial. Joining me are senior editors, Michael Bruno and Jens Flottau and special guest Kevin Michaels, who is managing director at AeroDynamic Advisory. Welcome back to Check 6. Kevin, I wanted to start out with you because you wrote a column in the latest issue of Aviation Week & Space Technology. Here we go. The commercial upcycle is finally here. What do you mean? It's finally here? I thought it's been here a while.

Michael Bruno (00:47): Right? So technically we've been about five years into this upcycle, but we're at a point right now where across the board you're hearing from people that they finally feel like it's actually here. The past five years have been haunted, frankly in Western aerospace when it comes to making large airliners haunted by false starts, bad projections, major OEMs kind of leading us to believe in January of each year that we were going to build hundreds and hundreds of aircraft and hundreds more than wound up getting built. Because as each quarter would come along in these recent years, they'd have to revise their projections downward. And this kind of had a cascading effect everywhere in industry. For the longest time, nobody would believe the OEMs with their master schedules, and there were four or five master schedules floating around. There was the one, the official one the OEMs gave, and then there was kind of the quiet one they whispered to their top tier one or maybe tier twos.

(01:51): And then each of those companies had their own schedules and they were telling their own suppliers. And then there was the schedule about if you just talk to somebody on the street, you went to, one of the supplier conferences said, when do you think they're actually going to get to rate, I don't know, 75 with an A320 or 50 something with a 737? And people would say, I don't know, sometime in the second half of this decade. And so we were in this bad area for several years and now we're not anymore. And I think the kind of clarion call that the new upcycle is finally happening is of course the FAA's recent permission to Boeing to begin thinking about going above rate 38 to going to rate 42 in producing 737s every month. And so that plus the durability, the stability of the supply chain, which seems to get recognized. Long story short, the upcycle's here, we can debate about how long it's going to last. I've got some ideas about that and I definitely want to hear Kevin and Jens on it, but we're here now. There's no denying it. The upcycle has begun.

Joe Anselmo (03:02): Could you tell our audience briefly why it's such a big deal that Boeing is going from 38 a month to 42? I mean, what milestone are they crossing there?

Michael Bruno (03:11): Well, the most important milestone and the engineers in the audience are going to hate hearing me say this, but the milestone is financial. So for this company, which is still facing a mountain of debt that it accumulated during the MAX crisis and the pandemic crisis, they have to get that mountain of debt down. And in order to do that, they've got to produce cash. And to produce cash, they got to get their number one cash cow product out the door, make more of them and deliver them. And that's the 737 MAX. So in order to produce that cashflow they've got to get into well into the forties of producing new aircraft and delivering them every month. So with the FAA recently giving permission to get to 42, that begins to get them along the path where maybe they're finally producing positive cashflow this year. Real quick, we're recording this before Boeing gives its final quarterly results for the third quarter, but there are already expectations about how Boeing's going to do this year. They're expected to lose roughly $3 to $4 billion right now according to most Wall Street analysts, but next year they could actually maybe become positive cashflow, which is that big milestone of when you're finally able to take some leftover money, start working down that debt.

Joe Anselmo (04:38): And maybe start developing new airplanes at some point.

Michael Bruno (04:42): Oh, sure. But that's a whole other...

Joe Anselmo (04:45): Kevin Michaels, you're based in Ann Arbor, Michigan, but you don't spend a lot of time in Ann Arbor. You are all over this industry, visiting companies, talking with companies. Is what you're hearing in your work, what you're hearing from Michael here, does it match?

Kevin Michaels (05:00): Oh, it does. It does match. And maybe if I could broaden the perspective slightly. So Michael described what's going on in air transport production and this wonderful ramp up, but when you look at production in military and business aviation as well, we take the bigger picture. Last year we produced by our estimates at AeroDynamic about $140 billion of aircraft for calendar year 2024. We estimate that by 2027 it will be $210 billion, the value of aircraft over three years. So that's nearly a 50% increase in the value of aircraft produced for air transport, business aviation, and military over that time. Air transport is leading that charge, but the other parts in the market are also extremely hot, and I know we'll get into MRO and aftermarket in this discussion as well, but that's also happening also. So it's sort of like everything's firing at the same time. Some people refer to it as kind of a super cycle of sorts just because it's so unusual that all the end user markets are growing at the same time.

Joe Anselmo (06:11): Well, let's talk a little bit about MRO. GE Aerospace had earnings this week and they were stellar led by MRO. I was at Aviation Week's MRO Asia-Pacific Conference in Singapore, 24% higher attendance this year than last year. Our MRO Europe conference in London, 20% higher. I mean, this industry is booming.

Kevin Michaels (06:31): It's like that old adage go to where the money is or whatever it is with bank robberies and it's sort of with MRO by our estimates with Alton Aviation, there was about $75 billion spent by airlines on maintenance, repair and overhaul in 2019 pre-COVID in the most recent years on the order of $125 billion. So you're looking at a 50% increase a little bit over a five-year period. Now granted some of that is price inflation, something we haven't talked about pretty much at all in MRO, which is now central to what we're looking at. So probably a rule of thumb is probably a good half of that increase is due to price inflation, maybe more, and the rest is volume. And the big story there of course is engine MRO, engine MRO used to be 40% of all maintenance spending. Today it's over 50%, and I'll let you draw your own conclusions as to where that might be coming from, but without a doubt, engine MRO is sort of eating up maintenance budgets right now and thus all the interest in every venue of your MRO conference series.

Joe Anselmo (07:42): Jens Flottau welcome from Frankfurt, you in that same issue, Michael wrote his column. You wrote an in-depth report on Aviation Week's latest 10-year forecast for commercial aviation and MRO, and one of the tenets of that forecast was that maybe supply chain is going to slow down the growth just a little bit from what it could be.

Jens Flottau (08:02): My perspective, and I'm going to throw in some caution here, so we're all talking about this great upcycle and supercycle and yeah, I get it. Everything's growing right now, but let's not forget that we're still off 2018 delivery levels. So 2018, the industry did 1,792 aircraft, that's Boeing and Airbus combined this year. They're still way below that. Next year they're getting to it, but they're still below it in terms of at least according to our own forecast. And 2027 will be the first year when they're actually above 2018. So you can see how much time the industry has lost, and of course things have been improving of late and according to everything we know it's going to become a lot better in the coming years, but let's not forget where we come from and that we're still not where we were roughly six years ago.

(09:01): Also, yes, there is this big output expansion plan for the coming years, but it still depends on some crucial milestones that have yet to be met. And they don't have to do much with suppliers, the suppliers as well, of course, because of the engine constraints, mainly cabin constraints. But they also have to do with certification. The 737-7 has not yet been certified. The -10 has not been certified. All of that has to happen before production output of those two models can actually happen. The same is true for the 777-9. Airlines are desperate to get that aircraft. It's a big number of aircraft that Boeing wants to produce, yet it's not certified and will possibly not be certified next year either. And then the question will be how fast can Boeing ramp up production in the widebody market? Same is true for the 787 at seven a month right now or something like that, supposed to go to essentially double in the next few years in Charleston alone. Don't forget, Everett is no longer a final assembly line for the 787. It's all in Charleston. Can Charleston handle that? There are a lot of open questions. Can it happen? When can it happen? How fast can it happen? So let's wait and see.

Kevin Michaels (10:32): If I could add to that. Jens makes a great point. It's so easy to focus on supply chain bottlenecks when in fact regulatory bottlenecks have become a big issue. And it's not just for new aircraft, it's for things like interior configurations. One of the reasons that there's so many A321neos sitting on the ground, is that there's a shortage really of regulatory folks in the EASA to certify interiors. I heard this and I can't prove it to you, but I've heard that they had three people responsible for certifying interiors and now it's down to two. So there's a bottleneck which affects interior configurations. These long-haul single aisles have more bespoke interiors that require certification to be, they have to be approved.

Jens Flottau (11:24): And my hometown airline, Lufthansa had at one point 15 787s parked in Charleston because the business class seats couldn't be certified quickly enough.

Kevin Michaels (11:35): Exactly.

Michael Bruno (11:37): I would just say that what Jens and Kevin are touching on is you're hearing this common concern about restraint. It's the restraint provided by the supply chain as it downsized during the dual crisis that happened over the last five years. There's constraints in the workforce. It's not just having talented people, it's also having enough warm bodies in some situations. And so when Jens says there's a lot to be seen and whether this is going to turn into a great super-duper upcycle where it's just going to be an upcycle, and I kind of take this comparison from Kevin's coworker and a friend of all of ours, Richard Aboulafia, who made this comment recently in another venue, he said, is this just a slow moving upcycle that will wind up being kind of normal, but it got such a slow start and so when the second half of this upcycle, it may seem super, but in reality it'll just kind of be normal in the end.

(12:42): Or there's a potential that if the industry can get its act together when it comes to supply chain, everything from cabin interiors to castings and forgings, which Kevin knows he's forgotten more than the rest of us kind of know about this and maybe can update us on that too. But there's still questions about fasteners out there because of the plant fire that happened at the start of this year and has that been resolved? Then meanwhile, air traffic controllers, do we have enough of them to keep the passengers flying? Lindsay Bjerregaard in MRO here at Aviation Week has been talking about they just can't train enough new wrench turners because there aren't enough people certified to train new people or take a test. So it's just constraints everywhere in the system, and eventually we're probably going to come back here in a couple of years and be talking about, oh my gosh, are we just letting the greatest upcycle slip through our hands because we're not getting enough capacity and workers and regulators and certifiers all in there? Or maybe we'll come back in two years and say, Hey, we did it. People are rising to the demand because they could see this is going to be a great upcycle.

Joe Anselmo (13:55): Kevin, we opened today on such a high note, and then Jens is talking about letting the super upcycle slip through our hands. Is that a real danger?

Kevin Michaels (14:04): It is a danger. It is a danger. I mean, I would say in general, the supply chain has improved in its health over the last 12 to 18 months. I think most executives would acknowledge that it is in better shape today, but you do have all these wildcards with tariffs and rare earths and God knows what else, and maybe a couple comments on that because there was a pretty historic, maybe historic is overstating it, but there was a notable agreement just last night with the new Prime Minister of Japan following on I think an agreement with Australia, which Michael can probably riff on, but this is for the U.S. and Japan to cooperate on refining capacity and reducing regulatory burden kind of coordinating and the like. And that's a big deal right now. What I would say is that with rare earths, it gets a lot of headlines. It doesn't seem to be really impacting the engine supply chain. When you look at the alloys used in engines, for the most part, rare earths aren't as much of a big deal there according to people that I've spoken to. Maybe rhenium, a little trace amounts, maybe a little bit, but not a whole lot. But where it really shows up is in electronics and with magnets and the like. And we've seen it. It's affecting the automotive industry for sure, and I think we're all waiting to see what might happen in the aerospace industry.

Jens Flottau (15:34): Just for some European perspective here on have we let slip the opportunity or are we going to, I think we already have to an extent because if you look at the Airbus side, Airbus decided during COVID that it wouldn't let A320neo production slip under the level of 40 a month, 40 aircraft a month just to keep the supply chain going. In Europe in the first nine months of 2024, the average number of deliveries was 43, so that's three more per month. That's totally underwhelming if you ask me. And of course the reason is all the troubles that we know about. So if you're Airbus and you're looking back over the last three, four years, they have already lost a great opportunity to gain much more on the back of Boeing troubles. That hasn't happened.

Joe Anselmo (16:40): Kevin, you mentioned headlines. Another thing in the headlines today is tariffs. I mean, just last week we saw a Canadian province took out an advertisement in the World Series and President Donald Trump turned around and imposed 10% tariffs, and they asked the treasury secretary on TV, what does this cover? And he is like, I don't know, it's whiplash. Is this tariffs issue a danger to aerospace or is it just a lot of noise?

Kevin Michaels (17:09): I think there's a couple ways to look at that. One is sort of the financial impact, and I think it hasn't had profound impact yet. Although if you ask someone at Pilatus in Switzerland, they might tell you otherwise because they're not exporting aircraft to the U.S. anymore. But the big markets and trading relationships, whether it's Japan or the EU, U.S. and so forth, somehow aerospace has gotten to the right people in the Trump administration to convince them to largely exclude parts and aircraft from that. By the way, unlike the automotive industry in my backyard, I'm in Ann Arbor, Michigan, Ford's going to pay over $2 billion in tariffs this year. GM's going to pay $4.5 billion in tariffs. So somehow we managed to get out of that. But I'll tell you what's scary to me, and I had an epiphany last week, which is that if you think about all the non-value-added activity to keep up with the tariff whiplash, which changes by the day, that adds a lot of cost.

(18:08): It's a lot of people you have to add whether you're an MRO, a small supplier, distributor, what have you, and then you layer all the sanctions, the Section 232, the environmental regulations CMMC, which is the IT requirement for military contractors, a lot of regulations coming out of Europe as well. You layer all this on top of small suppliers, it's a huge burden. And what it might do is it might cause consolidation in the small parts of the market, whether it's MRO or production, because the regulatory burden and the non-value-added activities are just, they're getting to be enormous and it affects scale requirements.

Michael Bruno (18:54): And I would follow up one more thing on that. What we're seeing with this potential decoupling that's happening around the world, whether it's the U.S. and China to a degree, but even the U.S. and Europe for instance, and it remains to be seen how the U.S.-India partnership continues, and whether that gets stronger or more decoupled over time. And this adds to the concerns that it's still very hard to figure out exactly how to establish your company in an international sense going forward. Now, there isn't as much clarity as I think people would like. Perhaps we got through the first six months of the Trump administration and people have survived the tariffs, but from what I'm hearing is it's very hard for people to kind of go pull the trigger on major decisions about where to locate plants, whether to nearshore or reshore, because you could very well wake up one morning and find that President Trump has canceled all trade with Canada because he didn't like an advertisement that got placed on TV.

(20:03): And if you thought, wait a minute, I thought we were safe, I thought Canada was about as close of an ally as we can get. And there's even the USMCA pact. Well, that USMCA pact comes up for renegotiation next year, starting next year, by the way. So it seems like there are several years coming of sort of unanswered questions, and that is also going to be taxing to the industry to the degree that Kevin was talking about, that you're just having to find more people and more resources to deal with things that you didn't used to really, and the smaller your company is, much, much harder burden it is to afford that.

Joe Anselmo (20:42): And Jens, what's the sentiment in Europe? I mean, aviation has been a free trade industry for the last 40 years. Are there concerns that that's starting to fray?

Jens Flottau (20:52): Luckily, it's zero tariffs for now again, but as Michael and Kevin say, it's still very, very much in flux. The concern right now is more on the airline side, I would say over here as to what the tariffs and overall the end of globalization will mean for airlines, for travel demand. So far it seems it's still robust, it's OK, but airlines are already seeing yields not improving. Further transatlantic isn't as great as it used to be, maybe in '24. So there are some signs that this is taking an effect, even though that's indirect, but still it'll impact the industry one way or another. So yes, even if aviation got away this time, it really didn't indirectly.

Joe Anselmo (21:57): Well, guys, we've covered a pretty broad waterfront in commercial today, so thank you for that. Kevin, any final words for us?

Kevin Michaels (22:04): Well, I think for us to not blow this opportunity, given some of the challenges and headwinds we discussed, and I've written about this as well in Aviation Week, why hasn't Airbus been able to take advantage of this? Because it hasn't supported its supply chain in the right way. I mean, above all, and I think it's the importance of a supplier new deal of recognizing the pain in the subtiers and doing something about it that's critical. And I would highlight maybe to end on a bit of positive news, GE, when we're talking about engines, I mean GE is moving to more of a kind of take-or-pay. In other words, they're putting their money where their mouth is with their smaller suppliers, and really maybe the Larry Culp culture and the lean operating system is now reaching into supply chain. And so what we're now seeing is GE putting its money up and saying, here is the issue that Michael alluded to about all the different forecasts, right? Everyone had their own forecast. No one believed each other. They're actually putting their money where their mouth is right now. And I think that's a really positive sign that, and I'm hopeful that that will help pull that part of the supply chain out of the weeds a bit.

Jens Flottau (23:37): Kevin, do you think that Airbus has learned its lesson that they didn't manage their supply chain well enough in the past and that they've now drawn their conclusions, the right conclusions?

Kevin Michaels (23:49): I hope so. They get mad every time I say this. They're very sensitive about this whenever you criticize, but I still think they have big blind spots when you get down to the tier-three level where it's not their immediate supplier and maybe not even some of the bigger tier-two suppliers that supply, but it's when you go below that where it gets really challenging and it's just really hard. And I like to say, if you want to understand what's happening in machine shops and tier three, don't talk to the aircraft OEMs. Talk to the raw material suppliers and the distributors who sell directly to them and see when they're not getting paid, why am I not getting paid and what's happening? They're the ones that really know what's going on in the subtiers, I think more so than aircraft OEMs, no matter how hard they try. It's just natural, the more layers you get removed, it's just more difficult when you have so many suppliers.

Joe Anselmo (24:45): Well, Kevin, thank you for coming back to Check 6. We'll have you back again. Really appreciate your insights. Thank you, Michael and Jens. Thanks for your insights from the front lines of aviation journalism. That is a wrap for this week's Check 6. A special thanks to our podcast producer in London, Guy Ferneyhough, and to our audience, thank you for your time and join us again next week for another Check 6.