By Scott Hamilton

Oct. 17, 2022, © Leeham News: The aerospace supply chain faces new strains due to rising energy costs, Airbus CEO Guillaume Faury said last week.

Bloomberg News reports that Faury said some suppliers are shutting down due to high costs.

“We see another thing coming, which is the consequences of energy prices skyrocketing leading to some suppliers trying to adapt, sometimes stop producing, waiting for the situation to normalize,” he said. “That’s very low in the supply chain, but it’s probably something new,” Bloomberg wrote. It was reporting on Faury’s appearance before the UK Aviation Club.

At an unrelated event last month, two top US suppliers said they continue to see financial distress in the supply chain. Some lower-tier suppliers had filed for bankruptcy and more may be expected.

Continued distress

Labor, material, utilities (i.e., energy), logistics, and supply shortages combine to create cash flow problems, said Tom Gentile, the CEO of Spirit Aerosystems. Spirit is a key supplier to Airbus and Boeing.

“It’s creating a squeeze on cash flow. We’ve actually seen more bankruptcies in the last six months than we saw during the whole pandemic. I would say we’re on the road to recovery, but it’s still stressed,” Gentile told the US Chamber of Commerce Aerospace Summit.

“I think we are going to see more bankruptcies. I think the issue is right now in our industry, most of the contracts are long-term and they’re fixed. Prices aren’t going up, yet costs are going up. Profit margins are getting squeezed and I think that’s going to continue. It’s happening on the defense side and on the commercial side.”

Paolo Dal Cin, Senior Vice President, Operations, Supply Chain at Raytheon Technologies, agreed.

“There’s definitely financial distress out there. I would say, however, that that’s something that we’ve tried to stay very close to throughout the pandemic. We worked closely with our defense customers to advance payments to suppliers throughout the pandemic on the defense side.

“On the commercial side, we have actually a pretty good program of monitoring supplier health and engaging with suppliers in various ways to help them with their cash cycle. We do a lot of purchase of receivables programs where suppliers can get paid upfront,” he said.

“When they deliver, they choose to. We’ve been pretty active at supporting the supply base in that. I agree there are investments needed to start production back up at least to increased rates. Some suppliers are going to struggle with that and we’re seeing it.”

Going deep into the chain

Dal Cin said Raytheon is diving deep into the supply chain to monitor financial health and quality.

“All of a sudden, we’re dealing with a supplier literally six tiers down to help them understand that the product they produce that they’ve got a problem with is actually impacting us at Raytheon Technologies or our customers at Airbus or the defense department.

“That’s something that we just never had to do. We’ve gotten better at doing it. I think as we move forward, we’re going to have to get very good at increasing and illuminating supply chain risk through various tiers, much deeper than we have in the past,” he said.

It’s the weakest link

As the above illustrates, the challenges Airbus, Boeing, and the top-tier suppliers have isn’t just about the high-profile engines, parts, and labor shortages that are giving fits to on-time deliveries and ramping up production. It’s the weakest link in the entire supply chain. And it’s not about just the guy who makes the widget. Airbus’ Faury was speaking about the energy costs in Europe, where the Ukraine war has made mincemeat about energy costs and energy supplies. In some locations, European energy costs skyrocketed way beyond any forecast as the war began.

Ambitions by Airbus to ramp up production to record highs and for Boeing just to return to normal are going to be hard-pressed to meet their goals, let alone delivering the ambitious number of aircraft envisioned in their 2022 market outlooks over the next 10 years.