Supply Chain Issues:
Operational and Financial Impacts on Maintenance
Activities, Industry Trends
Jonas Murby, Principal
19th Maintenance Cost Conference (MCC)
Hanoi, Vietnam
October 4th, 2023
SUPPLY CHAIN ISSUES
Aviation has gotten used to excess supply – now we are may be in a supplyconstrained environment for a long time
Global RPKs (billion): 1990 - 2022
Gulf
Crisis
Asian
Crisis
9/11,
SARS
Trade War ->
COVID-19
Financial
Crisis
Previously
› Geopolitical consolidation
› More countries plugged into global
trade, adding raw materials and
labor
› Sophisticated global supply chains
› Aviation was a well-oiled machine
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
Now
› Geopolitical fragmentation
› Demographic shifts
› Reorientation of supply chains
› Hickups everywhere
2,000
1,000
0
Source: Macrotrends
2
SUPPLY CHAIN ISSUES
Technology shifts and demographics are making it challenging to hire
good staff
› Talent brain drain as buy-out and early retirement packages during
pandemic targeted most experienced workers
› Other industries continue to compete for aerospace talent with pay and
flexibility, especially appealing for younger cohorts
› While shortfall is broad-based, there are acute shortages of specific
trades (e.g. welders)
› Ageing demographics in several regions
“Only 20 percent of technicians finish their
technical training with us”
“Risk in the next ten years when we have a wave
of retirement, there may not be a new generation
renewing the personnel work force.”
Source: St. Louis FRED
3
*As of May 2021
Medium-sized airline
MRO
SUPPLY CHAIN ISSUES
…and aerospace labor appears to be moving further downstream
Aerospace Employees Migration
OEMs
Aircraft
Aeroengines
Tier 1
Avionics, Systems &
Major Structures
Modules &
Accessories
Tier 2
Components &
Subassemblies
Components &
Subassemblies
Tier 3
Make-to-print and basic parts
Tier 4
Raw materials, forgings, castings,
extrusions, hardware
› Anecdotal evidence of aerospace employees
migrating downstream in supply chain to larger
suppliers and OEMs
› Similar phenomenon as regional airline pilotsor
mechanics migrating to mainline airlines
› Likely most prominent in tight geographic
aerospace clusters
› Talent vacuum is further contributing to difficulties in
meeting delivery schedules
“Since hiring me, the company hired some of my close 10+ colleagues from my former employer. Now, these
suppliers are lacking labor in every corner of their business and the OEM team recognized that the delivery towards
the final assembly line is delayed in many cases.”
Source: Interviews
4
SUPPLY CHAIN ISSUES
Aerospace suppliers have been coping with the impacts of supply chain
initiatives over the past decade
Events Impacting Commercial Aerospace Supplier Working Capital
Present
2010s Production
Ramp-Up
› OEM price reductions
› Significant CAPEX
› Working capital
requirements increase
› Payment terms
increase from 30 days
to 60-90 days
Source: AeroDynamic Advisory
737 MAX
production
shutdown
COVID-19 Crisis
› Survival mode
› Burn down remaining
working capital
› Major layoffs
› Government support +
lenient lenders
› Revenue decreases
› Layoffs begin
› CAPEX for ramp up
wasted
5
Production reawakening
› Payment terms 90 –
120 days
› More working capital
required
› Higher inflation
› Many lenders unwilling
to renew lines of credit
SUPPLY CHAIN ISSUES
Engines face a trifecta of challenges on the demand side that are
amplifying supply chain bottlenecks
Lower Reliability of New
Engines
Time On-Wing (Hours)
New Engine Teething
Problems
› Teething problems in new
generation narrowbody engines are
sparking retrofits to provide longterm fix
› Corrective actions yet to be
established for some issues
Strong Aftermarket Demand
for Mature Engines
40K
30K
20K
10K
0K
Mature
Narrowbody
Engines
New
Narrowbody
Engines
› New generation engines are
entering shops for performance
restorations earlier than expected
› Lack of repair options means
nearly all material demand is
fulfilled via new parts
› Airlines keeping older aircraft
longer due to uncertainty in new
aircraft delivery schedules
› Assets are consequently
undergoing more maintenance and
generating more material demand
At the same time, forgings, castings, and extrusions all bedevil supply chain integrity
Source: Secondary Research
6
SUPPLY CHAIN ISSUES
OEMs are attempting to ramp-up production but are facing several supply chain
constraints; engines are the key today but other flashpoints may be emerging
Aerospace Supply Chain Challenges – by Category
OEMs
Emerging
bottleneck?
OEMs
Avionics
Engines
Aerostructures
• Labor & complex
processes are key
bottlenecks
• More insulated from
labor volatility
Interiors
• More customized &
driver of traveled
• Long lead times for
work
electrical components
• Labor is key challenge • OEMs establishing
• Some recent capacity • Higher rates &
presence at vendors
more widebodies
• Somewhat higher
relief due to demand
and dual-sourcing
may create further
exposure to
weakness in other
strain
sanctioned titanium
sectors (e.g., phones)
Source: AeroDynamic Advisory
7
Airframe Systems
• Challenges with
engineered items,
castings, & complex
machining
SUPPLY CHAIN ISSUES
The issues cascade through the MRO supply chain, creating a gordian
knot that will take a while to solve
Observations Across Air Transport MRO Supply Chain (Not Exhaustive)
OEM / New
Parts
• Long ramp-ups
for in-production
aircraft
• Long lead-times
for parts and
technical issue
resolution
• Personnel redeployed to
sourcing
Asset
Management
& Distribution
• Few teardowns
• USM takes long
to get to market
• Cargo assets
being leased out
• $1.2 Billion lost
in Russia
MRO
• Full shops and
hangars
• Long TAT waiting
for parts
• Old aircraft –
technical issues
take time to clear
with OEMs
• Long-term
contracts
prioritized over
adhoc
Airline
Techops
• Groundings due
to engines /
aircraft
availability
• Pay years ahead
to get slots
• Stretched
purchasing
departments
Airlines
• Demand
recovery with
more leisure
traffic
• Seasonality
• Wet leases
• Missing pilots &
crew
• Training
bottlenecks
All steps in the chain suffering from lack of qualified experienced personnel
Source: Market interviews, secondary research
8
SUPPLY CHAIN ISSUES
With on-going supply chain uncertainties, airlines and MROs are
moving away from “just-in-time” to “just-in-case” inventory
Southwest Airlines – Inventory per Aircraft
$1.2
45% higher than
2019 levels
Inventory per Aircraft ($M)
$1.0
$0.8
$0.6
$0.4
$0.2
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$0.0
Source: Southwest Airlines, CAPA, AeroDynamic Advisory
Current Industry Circumstances
Implications for the Future
› Low USM availability due to
low retirements
› Long lead times from OEMs
due to broad-based supply
chain constraints
› Recovering MRO activity
creating demand pressure for
materials
› Inventory re-stocking
following burn-down to
preserve cash during
pandemic
› Engine teething problems
adding to supply chain
pressures & material
availability challenges
› Aftermarket material
purchases are strong now,
coupled with a strong pricing
environment, a boon for
OEMs and distributors
› These conditions are likely to
persist for the near-term
› However, an acceleration in
retirements and USM
availability, or a faster
resolution to supply chain
constraints could lead to a
supply glut as customers
eventually right-size their
inventory levels
9
SUPPLY CHAIN ISSUES
Like the passengers they serve, airlines are also facing significant inflation that is
hampering the recovery in profitability
2019 vs. 2022 Airline Cost Structure
2019 vs. 2022 Airline Unit Cost (cents)
100%
$16
90%
80%
21%
$14
33%
42%
$4.9
$12
70%
-6%
60%
50%
14%
10%
Other
$8
$6
$1.3
Labor & Benefits
$3.4
18%
30%
$4
$2.9
20%
10%
23%
30%
$4.4
$2
$2.8
0%
56%
$0
2019
2022
Source: OAG, Visual Approach; North America data – indexed to 2019, IATA, Alton Aviation Consultancy
2019
10
Other
Maintenance
59%
Labor & Benefits
Fuel
24%
$5.2
$2.0
Maintenance
23%
40%
$10
2022
Fuel
Thank You!
Jonas Murby
Principal
jmurby@aerodynamicadvisory.com
+1 (734) 773-3899
121 W Washington Street, Suite 400
Ann Arbor, MI 48104
www.aerodynamicadvisory.com