Airbus veterans called up to rescue aviation supply chain

They are the A-team — respected veterans of Airbus, Europe’s aerospace champion, recalled from retirement to defend the industry’s fragile supply chain against a devastating collapse in demand.

Each has been chosen to lead a national task force: Tom Williams, former chief operating officer of Airbus commercial, for the UK; Didier Evrard, ex-head of aircraft programmes, for France; and Bernhard Gerwert, previously chief executive of the defence arm, for Germany. 

The aim is to bring together each country’s big aerospace manufacturers to plan for the survival of their shared domestic suppliers. Even before the pandemic, many suppliers had been weakened by the grounding of Boeing’s 737 Max single-aisle jet after two fatal accidents. 

Now many companies in Europe’s €127bn-a-year civil aerospace industry face a crippling cash squeeze. Payments for orders that came before demand collapsed will begin to dry up from the end of this month. Meanwhile, bills for goods ordered when forecasts were brighter are now falling due.

“This wave is coming towards them and they are under pressure,” said one senior industry executive.

But the task forces have a longer-term mission too, and one that is already under strain from mixed political and business motives. It is to win government support for a radical restructuring of their highly fragmented domestic supply chains, so Europe’s three biggest aerospace industries will be competitive when demand eventually returns.

“There has to be a reshaping of the landscape,” said Mr Williams, who retired in late 2018 after two decades at Airbus. “A number of companies have struggled to earn a decent level of profitability. We need to create companies that are more robust to protect core technologies for the upturn.”

Chart showing the impact of Covid-19 and other big world events on airline capacity

Right now, many customers are refusing to take deliveries, suspending contracts, cancelling orders or demanding price cuts. They will run down their own buffer stocks before coming back to suppliers for more, exacerbating the impact of the downturn. 

“This is the reality,” said Michel Crozier, who runs the Safran Electrical & Power factory at Villemur-sur-Tarn, near Toulouse, pointing to a rack of aircraft wiring sitting on his factory floor with a label: “Customer order cancelled. To be reallocated”. Mr Crozier explained: “A finished product where the need is no longer there because the company isn’t taking a plane any more.”

Many of the world’s leading carriers have become cash-strapped as reduced demand forced them to ground planes
Many of the world’s leading carriers have become cash-strapped as reduced demand forced them to ground planes © David Ramos/Getty

Before the pandemic, companies such as Safran Electrical had raced to keep pace with the world’s appetite for air travel. At the start of 2020, waiting times for Airbus’s most popular single-aisle aircraft ran to more than six years. 

“Up to eight or 10 weeks ago they were being driven by the primes [the top manufacturers such as Airbus] and biggest suppliers to increase production. Everything was about buying new machine tools and ordering lots of long lead-time material,” said Mr Williams. “There was a lot of cash going out the door quickly.” 

Almost overnight, that growth turned into dramatic decline. Revenues evaporated at companies making spare parts for the $77bn-a-year maintenance, repair and overhaul market, as two-thirds of the world’s commercial fleet was grounded in the first quarter. 

In April, the world’s two big aircraft makers, Airbus and Boeing, slashed production by between a third and 50 per cent respectively to reflect reduced demand from cash-strapped airlines. Airbus could go further this month when it unveils job cuts, expected to total more than 10,000.

That abrupt U-turn is now ricocheting through Europe’s aerospace supply chain. Companies took advantage of wage support schemes offered in France, Germany and the UK before moving to job cuts. The biggest, such as Rolls-Royce and Meggitt, have announced workforce reductions of 15 per cent or more. Smaller companies such as UK turbine blade manufacturer JJ Churchill have cut the workforce by 40 per cent and will invest in automation. 

“The whole supply chain, from tier one suppliers like us, down to our own suppliers, are going to have to adapt,” said Philippe Petitcolin, chief executive of engine maker and equipment supplier Safran. “The supply chain is going to have to reduce capacity by a minimum of 30 to 40 per cent for the years ahead, not just for a few months.”

Chart showing aircraft production volumes

The further down the scale, the more intense the pain, in a supply chain where small companies with fewer than 100 employees are the norm, especially in the low margin, but critical segments such as machining, structures and surface treatments.

In the UK, 725 out of 820 aerospace suppliers have fewer than 50 employees, while those with under 250 employees account for just over a third of the industry’s 118,000 jobs, according to UK trade body ADS. In France and Germany, close to 60 per cent of aerospace suppliers generated annual revenues of less than €50m in 2018, according to a 2018 survey.

Many of these smaller businesses are disproportionately focused on commercial aerospace, with little diversification to offset the current downturn. 

“Before, it was a challenge for the supply chain to meet delivery targets and maintain quality while ramping up production rates,” said Robert Thomson of management consultancy Roland Berger, which has been helping to assess the impact of the crisis on Britain’s supply chain. “Now the risk is about survival.”

That vulnerability is particularly concerning for aircraft and aero-engine makers, who need suppliers to be able to invest in expansion when the time comes. It is also beginning to worry defence ministries, who fear that a weak aerospace supply chain could jeopardise some of their programmes.

Safran is one of many companies now struggling in what was a booming aerospace supply chain industry
Safran is one of many companies now struggling in what was a booming aerospace supply chain industry © AFP/Getty Images

While the cheap loans offered by many governments have been welcome, many aerospace companies are not keen to take on more debt. An industry looking at a three to four-year recovery needs “patient capital” designed to fit the recovery cycle, said Paul Everitt, head of ADS.

Equally, each country’s industry knows that competitors will be looking to exploit the crisis to snare a bigger share of the global market. The UK’s share of the global industry has slid in recent years. France, with annual industry revenues of €65.4bn, has overtaken the UK, now at £36bn, while Germany’s industry has caught up fast at €40bn in annual turnover.

In previous crises, the French government has supported industry-led funds to invest in domestic aerospace. Now Marwan Lahoud, another former Airbus executive, is raising a new fund with a target of €1bn from private investors and the industry. The government is expected to put in additional money as part of a multibillion-euro aerospace support package to be launched later this month. 

The aim of the fund is no longer to support SMEs with minority stakes as in previous initiatives, but to take majority positions in promising aerospace suppliers in an attempt to drive consolidation. 

Yet tensions are emerging over how the funds should be used. Some industry investors object to funding the growth of rivals, or of enabling suppliers to build the scale that will allow them to push back on pricing.

“There are a lot of common interests — and also some divergence,” said one person close to the discussions. “It is bloody difficult to do.”

In the UK, questions centre on whether the government would support foreign-owned companies with local sites. In addition, any fund would have to overcome the government’s aversion to a policy that might be seen as “picking winners”.

Chart showing number of commercial jets in service

But in all three countries there are worries that if domestic companies are not strong enough to drive consolidation, local aerospace expertise will be acquired by foreign buyers.

“Investors in the US aerospace business are among the groups who are looking for opportunities in Europe irrespective of Covid,” said Alex Murrill, an investment banker at Baird. “People are seeing opportunity in a crisis.”

The supply chain could be reshaped in other ways, such as transferring orders from the least efficient to the best in class, which in some cases could force the weakest under. 

It is a Darwinian battle, say executives, where only the fittest will survive. “Given the duration [of the crisis] that we expect, we can’t support all the suppliers the whole time. It isn’t possible,” said Mr Petitcolin of Safran.

Big original equipment makers such as Airbus, Safran, GKN and Rolls-Royce have already begun to reallocate orders, or even take work back in-house to minimise the impact of the crisis on their own workforces. 

Warrick Matthews, head of procurement at Rolls-Royce’s civil aerospace division, said his company would seize the chance to accelerate rationalisation of its 700 civil aerospace suppliers. “I want to come out with the highest-performing supply chain both in the UK and globally,” he said. “Will we have fewer higher-performing suppliers coming out of this crisis? Yes, that is my desired state.”

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