Former Program Manager at Safran Nacelles
Paul has over 25 years of experience in the aerospace supply chain. He started his career at Goodrich Aerostructures designing and building the nacelle for the A321 in 1996. In 2000, he moved to Safran Nacelles as Program Director before moving to Airbus in 2006 as a Director responsible for airline customer support. In 2009, Paul joined Parker Aerospace as Programme Manager in Toulouse before moving to GKN in 2015. Read moreView Profile Page
Paul, a pleasure to have you with us today. Can you start by providing some context to the disruption that you are seeing today, in that engine supply chain?
There are two sources of disruption that we’re seeing at the moment. One started over a year ago, when the 737 MAX was grounded and CFMI, Safran and GE stopped the supply of parts into building engines. That’s created quite a lot of disruption, as you can imagine, for the whole supply chain, with something like 100 engines a month being produced, for that aircraft. Since then, of course, Covid-19 has raised its ugly head and people can no longer fly. Planes are no longer in the air, so airplane engines are not turning. All of a sudden, engines are not wearing out and counting their hours. If engines are not being used, they don’t need overhaul. People can’t take new aircraft, so we’re seeing a second wave of demand reduction, coming from new aircraft not being delivered and from the after- market world, suddenly not wanting the spares or the overhauls that they had anticipated.
What second-order impact is that having on both of those two spaces of disruption?
On the 737, there is no production. We’ve gone from 100 engines a month, to nothing, so that’s a very big first-order impact. That affects, of course, the engine manufacturers and partners, Safran and GE and their supply chain directly and the supply chain to the supply chain and so forth. Then, for the other engines, those airplanes are still in production, though production has been heavily reduced. We’re still seeing demand for LEAP-1A engines on the 320 family, Trent XWB on the 350. The Dreamliner has stopped, temporarily, so the volume of Trent 1000 and GEnx engines has been reduced; the manufacturers haven’t stopped those lines yet, because there is a restart, not too far away.
But clearly, the demand for those engines has been reduced significantly. So the whole supply chain is suddenly having to slow down and we’ve got a large amount of work in place that we’ve got to negotiate with our customers and their customers, ultimately, the airframers. What do we do with the stuff that’s in work, for many more engines than they need today?
How does that negotiation, typically, go?
Unfortunately, there isn’t a uniform approach. There are so many people involved that the OEMs are not able to organize it all, with everybody, in parallel. Some people are negotiating, proactively, with their customers, to negotiate how to take the work that they’ve already got and how to absorb the work that’s coming in. Others who are not being so proactive are finding out the hard way, that what they’ve just built won’t be accepted. Today, we work in a digital supply chain so the demand for our components comes, digitally, from our customer. It’s known as the supply signal. We’re seeing that changing, overnight. It changes as suppliers go back to the OEMs and disagree with the change and propose an alternative change and, little by little, it’s negotiated.
Again, it does depend very much on the relationship between the supplier and the customer.
How are you looking at the level of oversupply that you are, potentially, seeing in the market, with the drop in demand and the aircraft production and engine production having to adapt to that? Also, how is that level of oversupply impacting on the pricing of parts and components?
At this point in time, the pricing of new components is fixed by contract. That’s not changing. However, once you get out into the open world, clearly, there’s going to be an oversupply of parts and in such a situation, where there is reduction in demand, an oversupply of parts, by the good old-fashioned law of supply and demand, the price will fall, for those who are prepared to sell.
What typically happens, in terms of pricing dynamics? What is the level of pricing change that you have seen, in the past, or even today?
There is little pricing change, officially, because what tends to happen is, people negotiate a push out of the work or a deferral of order. There might be some local negotiations if, for example, an operator has an engine that they had scheduled for overhaul and it’s coming up to the time when it should be delivered to the engine shop, one can imagine a negotiation so that it does actually get delivered, even though the operator doesn’t really need the overhaul now, because his plane isn’t flying. There will be a negotiation there, just so that the overhaul shop can keep his staff employed.
I guess it starts at the operator level, where the airline is deferring orders, they are not flying, so there’s no requirement for these parts or engines or aircraft. What are the second-order impacts on the supply chain? As you said, furloughing employees, restructuring suppliers. Would this have structural impacts on when demand does pick up and the supply chain maybe be very slow to react, to actually recover?
There are clearly going to be some impacts and we’re starting to see impacts now. Over the last five or six years, the pressure on the supply chain – particularly for the narrow-body engines, the CFM56, the LEAP, in particular and, to some extent, the geared turbofan – has all been about reducing cost. Suppliers have invested in new equipment, ramped up capacity, in order to produce the components in the most efficient way possible, and at the capacity that is required. It’s still early days in these programs. A lot of this investment hasn’t been paid off yet. We’re in the rather difficult situation where there are people out there who are going to find themselves financially challenged, as organizations.
A large proportion of the industry is going to have to reach for refinancing, to some extent or other. Some of those who are more exposed than others, may not make it out of this crisis. Right now, it’s not going to have an impact. When production starts up, initially, it won’t have an impact, because on the LEAP and on Pratt & Whitney’s programs, the supply chain is now multi-source. Whereas, 10 or 15 years ago, most of the supply chain was single source. If you lose one, you’ve probably got somebody else who can keep supplying the parts.
There are two problems in that. One is that there will a lot of pressure to come back up to the high levels of production, as soon as possible, because both Airbus and Boeing have very long order books. If you’re missing half of your supply capacity, you won’t be able to get back up to those volumes. Secondly, the supply chain is a very long supply chain. If you’re not careful, you might have smaller suppliers, partway down the chain, at different places and if too many of them go under, the supply chain becomes too delicate and isn’t able to ramp back up. We will see problems where there’s too much of a delay. Somebody has no stock left, somebody has no staff left, someone has got no consumables left and getting everything back in, to support the rate, is going to be a real challenge.
When things start flying again, when aircraft deliveries start happening again, it’s not going to be a huge problem straightaway, but I think, in 12 months’ time, we’re going to be in a tricky situation.
You mentioned the pressures in the narrow-body supply chain, over the last five or six years. Who has been driving that and what has really been the impact on the fragility of the chain?
Clearly, the end customer, the operators have been driving it. The competition between Boeing and Airbus has been very ferocious. The engines on the 320neo and on the 737 MAX are the most advanced engines that have been produced today. There is a lot of technology that wasn’t in the previous engines. That technology is significantly more expensive and has put a huge pressure on the supply chain, to reduce the cost of those parts. It’s that pressure from the end user and from Airbus and Boeing, in order to sell aircraft, that has forced the supply chain to reduce margins and invest in new equipment. That’s made certain elements of the supply chain less robust than they were previously.