Our Dec/Jan issue reveals the results of our pilot compensation survey, along with our 2018 photo contest winners and more!
When Manfred Hader addressed the Canadian Aerospace Summit in 2017, he cautioned that a majority of executives were predicting an end to the “supercycle” of aircraft manufacturing that has shaped the past decade and were bracing for a downturn.
A year later, that outlook may be more buoyant. Many still believe commercial aircraft manufacturing could see a significant dip once the order backlogs of major original equipment manufacturers (OEMs) like Airbus and Boeing decline around 2021, but opinion is divided about how severe that will be.
“The market outlook as compared to last year is more positive,” Hader, a senior partner with Roland Berger Strategy Consultants, told the annual Aerospace Industries Association of Canada conference in Ottawa on Nov 13. “However, there are certain areas of disruption which are key points of attention for all of us.”
The data, drawn from an annual survey of more than 200 senior industry executives representing 100 companies across the globe, point to greater disruption in the value chain. Over 90 per cent of respondents believe the workshare model of who does what in the value chain is about to change, and most predict it will be Tier 1 suppliers who are affected the most.
Though executives raised a wide range of strategic and operational issues in the survey, Hader said many fell into five broad themes that are driving much of that pressure on the supply chain. Chief among them is in-sourcing by OEMs.
Almost two-thirds of executives expect the move by OEMs to return and integrate more work on their factory floors to continue. While it’s hardly a new trend, Hader suggested it is accelerating and is unlikely to change for the foreseeable future. In part, it’s being driven by an imbalance in the industry. If average profit across the sector is about 10 per cent, OEMs typically see about six per cent while suppliers make between 11 and 15 per cent.
“As long as we have this imbalance, watch out for OEMs to try to re-balance things,” he said.
One avenue OEMs are already pursuing to improve profit margins is a greater share of the aftermarket maintenance, overhaul and repair business. “Aftermarket is a classic area” to find new growth and ensure stable growth, he said, noting that both Airbus and Boeing have ambitious targets over the next decade–€25 million in Airbus’ case; US$50 billion in Boeing’s–“which is significant compared to what they do today. The only way to do this is to take business, or parts of business, from the supply chain [that] are currently doing this aftermarket business.”
Survey respondents also predicted more consolidation across the sector. Hader argued aerostructures, still a very fragmented area, could be ripe for partnerships as OEMs demand greater efficiency and individual companies strive to invest in new materials and manufacturing technologies, things “they can only manage by having more scale.”
OEMs may not like the trend, ergo their reasoning for bringing more component manufacturing in-house, but some suppliers will be too big to ignore. The proposed $30 billion merger by United Technology Corp (UTC) of Rockwell Collins, which received approval from the U.S. Department of Justice on Oct. 1 pending the divesture of two overlapping businesses, would mean “no aircraft flies without substantial workshare from Collins Aerospace,” said Hader, referring to the proposed name of the business unit. “These guys are not really replaceable any more.”
A third theme in the survey data is the emergence of local supply chains in countries that typically are prime candidates for export. Almost two-thirds of executives flagged the trend, suggesting a dramatic change to the “classic export model,” said Hader.
Both India and Saudi Arabia, for example, face enormous demand to generate millions of jobs “and they will do everything to get those jobs.” Consequently, they are pushing western manufacturers to partner with local companies and transfer intellectual property.
“It is quite a complicated squaring of the circle, but it is the only way to do business in these countries,” said Hader.
The other two themes revolve around digitalization and what Hader called the third revolution in aerospace, electric propulsion (the first two being flight itself and the arrival of the jet engine).
Almost half of respondents say they have already been affected by the digitalization of their processes and about 20 per cent expect to feel the change within the next two years. Hader said the next phase will see the emergence of new business models and products as companies, especially small- and medium-sized enterprises, collaborate with technology start-ups to develop applications that could change traditional approaches.
The greatest disruption, though, may come from electric and hybrid propulsion. Survey respondents expect the first midrange hybrid-electric powered passenger aircraft to enter service by the 2030s, and an all-electric engine to be on aircraft 10 to 15 years later.
“We can sense this thing is becoming real,” he said.
Roland Berger maintains a database of electric propulsion projects. Hader said there are currently 120 distinct efforts underway and only 20 per cent “of the ventures are associated with classic aerospace companies.”
Driven by opportunities with urban air mobility, more and more technology players are eyeing a market that the consultancy estimates could reach over 100,000 passenger drones flying in cities around the world by 2050. That would suggest a manufacturing scale that is more in line with the automotive sector than aircraft, Hader noted.
“It’s not clear today who will be running that system,” he said. “Will it be aircraft companies, will it be automotive companies, will it be people like Booking.com? It’s not clear at all. Which is a huge risk for many people, but at the same time a huge opportunity.
“It means it is time now to get prepared.”