LEAP and CFM Supply Chain Disruption

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?