It was 2011. Aerospace and defense (A&D) experts had gathered to assess the health of both the defense and commercial aircraft industries. The defense industry was weak and softening. But the commercial aircraft market was strong.
It was the tale of two industries.
It is now 2014. Three years later finds the chasm is wider than ever, according to one of those experts at a recent meeting of the Aerospace and Defense Forum: The defense industry continues to languish with the onset of sequestration; however commercial aviation is booming. Manufacturers supplying the defense industry are scrambling for business, some looking for other channels in which to sell their product. But for those servicing commercial aviation, the outlook is rosy. Well, kind of.
The two 800 pound gorillas in the industry, Boeing (IW 500/14) and Airbus, have orders on the books that are at all-time highs. Between the two, over 10,000 planes are on order. If they both were to not take another order, based on estimated deliveries in 2014 of 1380 planes, the two companies have business that will last them until 2022!
How could that be? Although some would suggest that our economy has shown improvement, many would assert that it is still not on stable ground. So why the boom in commercial aviation? The cost of money is one factor. What better time to replace aging fleets than now when the cost to finance is so attractive? And if we get past our myopic view of the world, we discover a dramatic shift in what some refer to as the “Population Center of Gravity.”
Within an eight-hour flight of New York City, there are approximately 600 million people, or 9% of the world’s population. Sounds like a decently large number until one considers that same eight- hour radius from Dubai in the United Arab Emirates. That territory boasts more than 4,500 million, or 65% of the world’s population. The Emirates, supported by oil money, have made no bones about their desire to establish a worldwide network to connect any city on the globe to Dubai.
Explosive growth is underway because of skyrocketing demand and the attractive low cost of capital. New planes are now more efficient than ever. At a time when the cost of oil is at historically high levels, the use of lighter-weight composite materials in the production of aircraft has dramatically risen. Almost 90% of a plane’s interior is now made from composites. Even engine parts are being produced from composites. The net result? Planes are lighter, the cost to operate is lower and each new aircraft can reach farther distances on the same tank of gas.
Regional Manufacturers Eye Niches
From the perch of the prime manufacturers, life is grand. At least for Boeing and Airbus. Due to the increased demand around the world, regional manufacturers are trying to carve out their piece of the pie. Bombardier out of Canada has notions of competing with the big boys in the 100- to 130-seat arena but are finding that route challenging. Given that Bombardier is bleeding cash to the tune of $1B every six months, no one can predict how long they will be around.
New Market Entrants and Other Challenges
New regional entrants Comac (China), Mitsubishi (Japan) and UAC (Russian) are throwing their hats in the ring. There are challenges for all three. However, with the large population centers in their respective regions, their regional footholds alone may provide these companies with the production flow necessary to survive.
From a 40,000-foot perspective, the commercial aviation supply chain sees a rosy picture. But not everything can be viewed through such rose-colored glasses. Challenges loom at a closer view.
Supply Chain – It is predicted that it might take 10 years for the supply chain to be ready to handle the new fleets of composite produced aircraft. For instance, how will the industry deal with such factors as repair of composites, or the painting and stripping of composite materials? Technical hurdles exist that are not yet fully understood.
Price Pressure – Oil is expensive. Overall production costs are on the rise. So Boeing and Airbus are asking each of their suppliers to “partner” with them to reduce costs by 15%. For many suppliers, that is just not possible. However the pressure is on. Boeing, long a practitioner of single source supply, is now actively looking for second sources. Suppliers will need to be all the more nimble to retain their contracts.
Paperwork – It is said that there is not an airplane in existence that can carry the paperwork required to certify it. The necessary certification requirements will place a significant burden on suppliers, forcing OEMs to maintain or further streamline their internal processes.
What does all this mean to commercial aviation suppliers? Opportunity, and laser focus.
- Those suppliers who have a plan, who are nimble, who have their “head on a swivel” can not only survive but prosper.
- Operational excellence must be a way of life, not a desired goal. Nothing less than 100% on-time deliveries or 100% quality performance will be acceptable. There will always be another company lurking around the corner trying to snatch the business. Employment of lean principles and continuous process-improvement practices will be a must to meet these levels of performance.
- Innovate proactively. The status quo will not be acceptable. Suppliers must truly understand their customer needs and innovate to meet them.
- Secure long-term agreements. While not without some shortcomings (additional price pressure is one), these contracts provide long-term stability.
- With costs rising and prices forced downward, employ countermeasures.
- Protect your intellectual property.
- Promote win-win ideas.
- Employ lean manufacturing.
- Secure cost savings by creating a culture of continuous process improvements.
- Look for alternative production sources.
Opportunities exist for those suppliers who are nimble and forward thinking. It is not too late to jump on this bandwagon.
Lee Schwartz, former CEO and president of manufacturing and distribution companies, is principal of the Schwartz Profitability Group (SPG) that, for almost 13 years, has uncorked the operational bottlenecks of manufacturing and distribution companies, boosting their bottom line results. Lee’s clients range from smaller family-run companies to Fortune 500 firms across a multitude of industries. His consulting and operational turnaround work helps clients find solutions related to process improvement, supply chain management, inventory control, workflow design, and operational performance. Lee can be reached at [email protected] or at 310-450-2628. More info can be found at www.schwartzpro.com or his LinkedIn profile.