Why I Bet Against OEM Production Rates
Years ago, I learned that all the money to support a supply chain comes through the customer.? Ultimately for aerospace, that is the ticket buying public.? As the graph above shows, average ticket prices for US domestic flights have increased by 20% since 1993.? During that same period, the Producer Price Index for Aerospace in general has more than doubled.? The data sources are the US Bureau of Transportation Statistics and the St. Louis Federal Reserve respectively.?????
One way that airline fares have stayed relatively low is the relatively flat price of airplanes.? The duopoly has competed on market share and pushed cost efficiency to keep airplane prices in check.? However, there is a long term problem looming.? With any kind of reasonable production rate, i.e. one lower than what Airbus and Boeing keep touting, the backlog for narrow bodies is the better part of a decade.? Those prices have already been negotiated.? There are escalation clauses, but they are not high enough to offset costs, and do not flow through the supply chain regularly.
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IAM 751 will vote on Boeing’s proposed contract next week.? No matter what the outcome of that vote is, Boeing’s labor costs are about to rise. ?After Boeing settles with the IAM, there will be follow on effects.? First and foremost, Boeing can look forward to more pressure from the IAM union that they will take on when they acquire Spirit.? That agreement expires June 19, 2027, well within the current narrow body backlog.? Beyond that, there will be wage pressure spreading through an industry that already experienced significant wage growth coming out of the pandemic.
When working on our Raw Material Market Reports, I am constantly reminded that raw material suppliers generally have production opportunities outside of aerospace.? Indeed, most of their production opportunities are outside of aerospace in areas ranging from automobiles to the beer cans we enjoyed on Labor Day.? Given time, opportunities outside of commercial aerospace exist for all firms.? I have seen firms turning to medical equipment, space, and other adjacent industries in the past few years.? I expect to see more.? When I am asked, “when will commercial aerospace ramp up to meet the OEM forecast?” I now answer, “when there is a reason to do so.”? Suppliers must invest money to increase production rates.? Money that they do not see for months at best given current payment terms from the OEMs.? Until there is money coming in to support significantly increased production, I will continue to bet against the production rates touted by the OEMs.
Strong argument, Cliff. I, too, am a skeptic. I also look at the shipsets of components needed to support both Boeing and Airbus on similar systems and technology groups. For example, the same supplier provides Integrated Drive Generators for both the 737Max and A32Xneo. Are we really expecting them to deliver a step function change in production output to meet Rate 70 (Airbus) and 50 (Boeing)? That's not about just getting a little leaner and squeezing out some more productivity, that would involve massive capex outlays for new lines, working capital, etc. And that's just for the top-level assembly OEM. We're expecting them to approve those business cases based on what? Promises? PS: aftermarket demand is also ramping at the same time...
Executive Director- NIMA | President-Integrity Sourcing Solutions
6 个月Cliff- as always, you are spot on. I started to advise suppliers at the outset of COVID to diversify into other high-value-but-more-stable markets like medical. Since then, some of them have pivoted completely out of aerospace work. Constant pressure to reduce costs, extended payment terms, etc have made the aerospace industry a challenging environment for profitability- especially for tier 2-3 suppliers that can't afford to be a bank for OEMs. Thank you for pointing out a supply chain environment that has some significant dysfunctional elements.