Paul Adams is a Director and Aerospace & Defence sector specialist at Vendigital. He recently shared his insights with Aerospace Manufacturing.
Demand uncertainty isn’t something that aircraft makers and the OEMs in their supply chains have been used to over the years, at least not until the global pandemic hit. Now, the unpredictable nature of demand for wide-body aircraft in particular, is posing challenges for all concerned.
Prior to the pandemic, production demand for both wide-body and narrow-body aircraft was increasing steadily year-on-year. When the pandemic hit, global passenger demand in 2020 dropped by nearly 70% year-on-year. This was followed by a rapid recovery in passenger demand for short-haul flights in 2021 in certain regions, as Covid restrictions were relaxed. OEMs and suppliers have chosen to ramp up production capacity for short-range, narrow-body aircraft quickly to avoid losing market share. Next generation long-range, medium-sized aircraft such as the A321neo have also been selling well, due to their suitability for short-haul, domestic flights as well as Atlantic crossings. A mega-order of 255 A321 jets was placed by a constellation of low-cost airlines at the end of last year.
The market for wide-body aircraft, such as the A350 and Boeing 777, is far less predictable and the continuing low demand for long-haul flights is holding back recovery for some OEMs that may have focused production in this area. The main reason for the unpredictable nature of demand for wide-body aircraft is the ongoing reluctance of many people to commit to a long-haul holiday or business trip, due to the financial risks attached. China’s recent move to re-introduce Covid-zero measures is adding to the sense of global uncertainty surrounding long-haul travel.
OEMs and suppliers with a combined industrial footprint, serving both the narrow-body and wide-body markets, have been more protected from the ongoing demand uncertainty. With production rates for narrow-body aircraft now nearing pre-pandemic levels, revenues in this area of the business should begin to compensate for any losses that might be incurred elsewhere.
Despite the prevailing uncertainty surrounding passenger demand for long-haul flights, OEMs are looking for ‘green shoots’ or indications to suggest that recovery could be on the way. The ability to predict when demand levels will bounce back could be critical to some OEMs and suppliers, as they must be ready to ramp up production quickly when the time comes.
Tentative signs of an increase in passenger demand for long-haul flights are beginning to appear, although it may be too early to describe these as ‘green shoots’, and they are more apparent on some routes, run by certain airlines. For example, Emirates has an operating model that pushes as much traffic through Dubai, as possible. Its proposition is based on offering passengers increased journey times at a slightly cheaper price. By contrast, British Airways operates on a point-to-point basis, and the airline is already starting to see an uptick in passenger demand for key long-haul routes, such as London to Singapore and London to New York.
While a recovery in production demand for wide-body aircraft is bound to come at some stage, the volumes will be lower than for narrow-body planes, so any new opportunities that emerge for manufacturers in these supply chains are likely to be hotly contested. For businesses that are already struggling to meet production demand for narrow-body and next gen medium-sized aircraft, the pressure on the supply chain is going to be considerable.
Ready and willing
Some businesses will be more ready than others to capitalise on the rapid recovery in demand of wide-body aircraft when it comes. Vendigital’s own research suggests that some businesses allowed good process management and in particular rigorous sales and operations planning to slip when volumes fell at the start of the pandemic and there is now a need to catch up. At the same time, skilled workers have been lost along the way, adding to resourcing issues. Some businesses have also been investing in digital transformation and other strategic projects in order to build in efficiencies, but in some cases these initiatives have brought challenges of their own.
To prepare for the ramp up, manufacturers should re-examine the sales and operations planning process in detail to ensure everything is running smoothly. In particular, it is vital that decision makers have access to the data that they need to guide their decisions as the market recovers and the use of automated tools and software can help to streamline and optimise processes.
Cash management is also critical during times of market expansion, and leaving this too late could cost the business dearly. When sourcing components and raw materials for example, leaving things too late could mean the business is forced to pay more to secure short lead times. By planning ahead, they can invest in strengthening inventory levels and hire the additional people needed to meet increased rates of demand.
A cost-centric approach
Larger organisations in the supply chain are better placed to compete and some have already established dual sourcing arrangements to avoid supply shortages during the ramp up phase. For SME suppliers however, this solution might be too costly or they may lack the volumes to make it viable. In these cases, a cost-centric approach now could reap rewards further down the line, when the ramp up begins. Controlling costs when production rates are low, will deliver value as rates start to climb.
A cost-centric approach to preparing for the ramp up should involve making sure that the business understands the true cost of a product. Cost engineering can be used to determine whether a product is being made cost-effectively or whether there is scope to trim costs while protecting quality by switching materials or altering production processes. Many SME manufacturers in the supply chain expect to make low margins, so understanding the true cost of a product is vital and needs to be understood before commencing negotiations with customers.
With some green shoots evident in terms of rising demand for long-haul flights, there are significant opportunities ahead for suppliers. Those that are ready for the ramp up will thrive, but those that have not invested in understanding their cost base, improving process efficiency and boosting resources at the right time could find themselves behind the curve.
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With defence spending increasing and civil aviation passenger numbers predicted to rise, could this be the year that they put their ‘factory of the future’ strategies to the test?