Aviation - A Brighter Tomorrow: Being kind to people
As the aircraft and the engine manufacturers assess the unique challenges of the post-COVID landscape, we could potentially see the impetus for lasting and positive change
The major aircraft and engine manufacturers, often known as Original Equipment Manufacturers (OEMs), have had an embattled decade, with well reported strategic, operational and performance related issues that have led to frayed relationships with their customers. As the airline and the OEMs assess the unique challenges of the post-COVID landscape, might the struggle provide the impetus for lasting change?
In an interview with the Financial Times on 5 September 2019, Sir Tim Clark (Emirates) exposed the tensions that exist when he said he was “fed up” with receiving aircraft that did not meet contract specifications and were beset by problems. "We would be foolish in my view to start coming up with new contracts until we are absolutely sure that these aircraft are going to do what they said they would,” he said. “When they don’t give me the aeroplanes and engines that work, it’s over. Now you produce what you say you will produce”. He added: “I cannot afford to have aircraft coming in and out of the fleet because engines have to be changed etc..”
Steven Blue perhaps summed up the issues that many in the sector see them in Industry Week in May last year when he said:
"When a company is on a roll, it begins to think it can do no wrong. Therefore, it begins to act like it can do no wrong. And then arrogance blinds it to things that can go wrong."
He was discussing Boeing. In his view, "the seeds of arrogance were sowed in the success of the 737 platform. It has dominated the aircraft market for decades. Boeing saw no reason why it couldn’t dominate the market for decades to come with its new 737 Max platform. It couldn’t imagine what could possibly go wrong, because everything was going right."
Difficulties had started much earlier, with the delayed in service entry of the Boeing 787 and subsequent problems. It's been widely reported that Boeing's own employees repeatedly complained that the 787 manufacturing process was so rushed that "foreign object debris" was routinely left inside finished aircraft, including tools, metal shavings, and even an entire ladder.
There have also been some high profile corruption allegations. In January 2020, Airbus agreed to pay nearly USD4 billion to simultaneously settle anti-corruption charges.
OEMs now face new problems as a result of the devastating impact the coronavirus crisis has had and likely will continue to have on global trade. It hit global trade and investment at an unprecedented speed and scale and unleashed a global supply chain crisis. Governments, businesses and individual consumers suddenly struggled to procure basic products like toilet paper and tissues, medicines and medical equipment. Some nations and territories ran short of certain foods. The over dependence on "foreign" countries to produce food, raw materials and industrial products has prompted some countries' policy makers, companies and people to call for (with a good measure of jingoism) a decentralization of agricultural and manufacturing capacity, with companies looking to bring production home, whatever the cost.
When you consider that the dominant OEMs have 100s of component and material suppliers and these have many subcontractors you can start to see how even small changes in our ability to trade and transfer goods globally will impact them. Take the Boeing 787 as an example. The forward fuselage is made in Japan, the centre fuselage in Italy. The rudder is made in China, the wing tips in South Korea, the landing gear in the UK, the passenger doors in France; and the cargo doors in Sweden. So supply chains are critical for getting aircraft parts and assemblies delivered quickly, safely and securely to production facilities around the world. Hence the creation of dedicated freighters to transport parts to assemblers: the 747-400 Dreamlifter and, in Airbus' case, the A300-600ST, or Beluga.
The collapse in air travel demand, lockdowns and border restrictions have resulted in the grounding of aircraft at an unprecedented scale. At some point in 2020, close to 18,000 aircraft will be parked or put in storage, many never to return (including the Boeing 747 and Airbus A380) due to the collapse in passenger demand and bankruptcies. While airlines still need to maintain parked aircraft, aftermarket revenues for the OEMs will be severely curtailed as overhauls are deferred to conserve cash and aircraft cannibalized.
Aircraft production is also being reassessed: airlines are not ordering new aircraft; airlines are challenging delivery on ones spoken for earlier. Demands for termination of aircraft purchase agreements or future aircraft swaps have risen sharply. The scale of the difference between production and deliveries is unprecedented. The pain from too much inventory is impacting the spare parts and maintenance, repair, and overhaul aftermarket as companies fight for bailouts and subsidies, airlines, suppliers, and MRO providers have begun to consolidate. Many of the airlines that survive are expected to focus on narrow body aircraft, helped in part by OEMs who are ceasing to produce wide body aircraft. The last Boeing 747 will roll out of the Everett, Washington, plant in about two years, ending the more than five-decade production run of the "Queen of the skies".
For now, OEMs cannot completely stop production or decentralise at a click of a switch as the policy makers may wish. There are sound reasons for globalisation: risk sharing, access to cheaper capital, parts and materials, technology and labour. Fundamentally, it may be cost prohibitive to bring production home to the countries where OEMs and assemblers are headquartered.
So, fundamental changes in how the OEMs operate is 'pie in the sky' talk. Or is it?
We are likely to see a change in the way in which aircraft are certified. The Boeing 737 MAX-8 debacle has caused a crisis of confidence in the certification of aircraft and regulators. In June, a group of U.S. senators introduced legislation to strengthen FAA oversight of aircraft certification.
We may see greater competition. Airbus and Boeing dominate an under competitive airline manufacturing industry. The duopoly makes 99% of global large aircraft orders, and those large aircraft orders make up more than 90% of the total market. The duopoly doesn’t have many competitors, but overseas competition is brewing: China’s state-run company, COMAC, Brazil's Embraer, Japan's Mitsubishi Heavy Industries and Russia's United Aircraft Corporation (Ilyushin, Sukhoi, Tupolev etc) may have better prospects.
The next few years will be difficult and perhaps defining for the OEMs. Some will agree that this is perhaps the time for some much needed hard medicine to restore health in the sector and renew much needed trust between suppliers and customers.