The Aerospace Perfect Storm

Flying high. That was the feeling in the aerospace industry just over 1 year ago. Huge backlogs, record build rates, and long lead times were the story and it seemed like it would never end. As I said to colleagues often times back then, the fundamentals were solid enough to withstand market fluctuations and corrections, and for things in aerospace to get really bad, the whole world would have to blow up. Then, as if on cue, Covid 19 arrived in force and the world did indeed blow up. For us in the aerospace industry, it was the perfect storm. 

As a titanium producer, we at VSMPO were concerned where we were going to get more metal in the first months of 2020. As the world’s largest titanium producer, our capacity was maxed out from sponge production down to melting, rolling and forging. Lead times were in excess of 50 weeks and that made planning extremely difficult. The worry was securing metal for our customers and orders were piled onto our mill to guarantee melting and production slots. Inventory was a concern, but the primary driver was to lock up metal, even if it wouldn’t come for over a year. It was better to have excess than not enough. 

The first shoe to drop, even before Covid 19, was the Boeing 737 MAX. Crashes involving 737 MAXs occurred in October of 2018 and March of 2019 and after the second crash, the MAX was grounded. Soon after, Boeing cut production of the MAX from 52/month to 42/month. Then in January of 2020, Boeing suspended production of the 737 MAX as it looked like its grounding would extend well into 2020.

It was if a mile long train hit the side of a mountain at full speed and all the trailing cars kept piling up on top of each other.

However, the 787 was humming along at 14/month. In addition, the remaining commercial programs were still continuing at steady, albeit lower rates. The 777, another significant consumer of titanium was chugging along at 3.5 aircraft/month.   The 767 and 747 were going at 3 and 0.5 aircraft/month respectively. As a titanium producer in January of 2020, we were looking at a total of 21 large aircraft/month being produced by Boeing with the hopes that the 737 would come back on line again relatively soon. 

The outlook for the other half of the commercial airframe duopoly, Airbus, was much better from the perspective of a titanium producer. The A320 was being produced at a rate of 60 aircraft per month.  The A350, which is also a big consumer of titanium, was being built a rate of 10 aircraft/month. The A330 and A380 were at rate 3.4/month and 0.5/month respectively although the A380 was being wound down. So in January of 2020, Airbus was producing nearly 74 aircraft/month. Combine that with Boeing, and that means the major air framers were producing 95 planes/month with another 40-50 to come on line when the 737MAX would be approved to fly again. 

Titanium is also a major metallic component of jet engines. All those planes being built required at least 2 engines per aircraft, and in the cases of the 747 and A380, they required 4 engines per aircraft. With lot of engines to being built to keep up with the build rates, even more titanium was needed on top of the airframe requirements.

Then the whole came apart. In March of 2020 Covid 19 brought the entire globe to a halt. Travel was shut down, plants were closed, and life ceased to exist as we had known it. It was if a mile long train hit the side of a mountain at full speed and all the trailing cars kept piling up on top of each other. So there were already major problems at Boeing and then a full-fledged global pandemic hit. In other words, it was the perfect storm. 

The big problem was that the industry went from producing 137 large planes/month to 0 planes/month from January to March. When aircraft production largely resumed in late April, it was likely in the 78 aircraft/month range and possibly less. In the train analogy mentioned above, the lead car hits the cliff and the trail cars just pile up on top of the lead car. This was the effect on the entire aerospace supply chain. Material was already in the pipeline and it could not be stopped. This material continued to accumulate through much of 2020 and you now have entities along the entire supply chain with lots of inventory that nobody needs anytime soon.

The problems are threefold. First, the pandemic is a global event and it is persisting. This did not affect just one or several countries. This affected every country on the planet and essentially shut the whole world down. There was not one aircraft/travel market in the world that was not dramatically affected by the pandemic.

The international air traffic has been decimated. Some estimates have it being off by as much as 70%.

Furthermore, the pandemic has endured for longer than expected. In 2020, it was thought that by the end of summer, the virus would begin to wane and the recovery would begin. However, fall and winter resurgences of coronavirus occurred and the grips of the epidemic are still strong nearly 1 year after exploding onto the world stage.

Second, travel markets continue to be in shambles. While domestic air travel has been less impacted it is still off by at least 20% overall as compared to 2019 levels. This varies by region but is a much lower level than in 2019. The international air traffic has been decimated. Some estimates have it being off by as much as 70%. This is exacerbated by strict travel restrictions which include travel bans and mandatory quarantines which appear to be in place indefinitely. The take-away here is that the less travel there is, the less airplanes needed, and the less titanium needed. 

Thirdly, there is massive inventory built up in the system. Boeing produced approximately 400 737MAXs when the MAX was grounded that were undelivered. So at the very top, there is a huge inventory overhang. This has cascaded all the way through the supply chain where sub-tier suppliers have large inventories of raw materials and finished goods. Raw materials suppliers are loaded up with material ordered and produced when the build rates were sky high. Some estimates have the inventory situation easing in about 18 months which means lean times well into 2022 for the aerospace infrastructure.

The good news is that after multiple body blows, it appears that the bottom is close or has been reached. While the order books and deliveries continue to be juggled, the two most important events that needed to happen have happened. The first step to recovery has been the return to flight of the 737 MAX. Now the large backlog of undelivered planes can start to be whittled down and the return to a more normal cadence of business is in sight, albeit in the distance. 

Perhaps the biggest step is the introduction of the Covid 19 vaccines. Should they work, and it appears, they are showing to be effective, the pandemic will mercifully be brought to an end. With the pandemic end hopefully in sight, the slow recovery of air travel can begin. It would be na?ve to think that the pre pandemic levels will be experienced quickly but the process has started. 

Whatever happens, the aerospace industry will be different on the other side of the pandemic. Some aircraft programs are in question and it remains to be seen how many airlines will survive. Relationships have been tested as the reality of the situation has been at odds with terms and conditions of long term agreements. This could affect how business is done when the market recovers. Telecommuting and virtual meetings will likely have some long lasting impact on travel as well. As storms go, this has been a doozy and is the worst the industry has ever seen. However, all storms pass and the question becomes how long does it take to clean up and recover after it has moved on. And for us in the aerospace industry, we will recover, even if it was the perfect storm.