Challenges in the growing commercial aircraft sector

The commercial aircraft industry continues to grow reaching new production levels. To meet the increase in demand and to prevent newer entrants from gaining share, major OEMs are increasing their production rates. While this is good news for companies across the value chain, a number of challenges remain. In this article for Finance Monthly, Strategy& explores those challenges, and how companies can craft the right strategy to thrive in these market conditions.

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Spotlight On...

Challenges in the Growing Commercial Aircraft Sector

SPOTLIGHT ON...

Contact
Raman Ram Principal - Aerospace and Defense Practice Email: [email protected] Randy Starr Partner - Global and US Aerospace and Defense Practice Leader Email: [email protected] Web: www.strategyand.pwc.com

Raman Ram and Randy Starr, Strategy&
“The right strategy will depend on the supply chain dynamics, the extent
Raman Ram Randy Starr

collaborate, and the nature of supply chain relationships.”
years. The trend has been more pronounced in some areas of the supply chain than others. Airframers and systems providers have the power to recapture some of the value, but this requires becoming good at estimating what the sourced parts should cost. Should-cost estimation capability has atrophied at many companies, suppliers that pass along high cost structures, and opportunistic ones that exploit the absence of economic transparency. The issue is more critical on customized parts which account for a large share of spend and where pricing is not transparent. To identify where to start the transformational journey to re-capture value, we dimensions - relative economic performance and supplier power ratio. Relative economic performance compares The supplier power ratio highlights the concentration of suppliers to customers in a given market. Depending on the product being sourced and the supply market structure, airframers and system providers are faced with three strategic options to recapture value – threaten to defect to alternate suppliers; collaborate with suppliers to jointly reduce costs; or pursue long-term strategies like designing-out assemblies or vertical integration. The right strategy will depend on the supply chain dynamics, willingness of suppliers to collaborate, and the nature of supply chain relationships. Third, the growth in new aircraft deliveries will challenge acquisition premium. Finally, what about the suppliers who do not have positions on new growth platforms like 787, A350, 737MAX, A320neo, 777X, etc.? For suppliers that do not have positions in growth platforms, there are few opportunities for meaningful organic entry -- for a long time. They need to start considering inorganic moves, but opportunities at major subsystem level are few – only component and assembly level is practical for most. When faced with a growth challenge, it is natural to look to adjacencies for salvation. However, many companies fail by making moves too far outside their core capabilities. Companies pursuing the inorganic approach need to understand their core capabilities and seek to augment them through targeted acquisitions to expand their core positioning. Lacking this, the incremental value created alternatives, and customers’ usage horizon for the asset. wide-bodies – although the extent of reductions will vary. To maximize lifecycle value in the face of accelerated retirements, alternate approaches are required. This may require going beyond traditional spare parts, repair, and distribution to integrated material support including new, repaired, used serviceable and surplus parts, and valueadded services like kitting, inventory, supply chain and asset management. This will also require mature pricing capabilities for tailored solutions taking into account

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aircraft.

he commercial aircraft industry continues to grow reaching new production levels. Boeing and Airbus delivered approximately 1,300 aircraft last year, and regional aircraft Production backlog between

OEMs Embraer, Bombardier, and ATR delivered an additional 225 aircraft. Boeing and Airbus is at an all-time high of over 10,000 The low cost of capital, and new product introductions enabling a step change reduction in airlines’ operating costs, are driving orders to unprecedented levels. At the same time, Bombardier and state-supported entities from China and Russia are challenging the Boeing-Airbus duopoly in the single-aisle market. To meet the increase in demand and to prevent newer entrants from gaining share, major OEMs are increasing their production rates. Production increases also help

body aircraft that have been beset with delays and cost overruns. While this is good news for companies across the value chain, a number of challenges remain. First, the supply chain needs to adapt to handling increased production rates. The limits of production systems will be tested, and systemic problems will emerge in the form of parts shortages, re-work, defects, out-ofsequence activity, and unplanned overtime to impact delivery and cost. Further, natural disasters, geopolitical events, and labor issues could disrupt an already constrained supply chain. Not all suppliers are equipped

and capability. In addition, proactive risk management is required at all levels in the supply chain to identify and address weak links to ensure increasing production rates are met. Second, value has shifted away from airframers and major subsystem providers to their suppliers over the past 15

aftermarket players focused on legacy and current generation equipment. With the sustained high fuel prices and operating cost reduction brought about by new aircraft models, the lifecycle of current generation aircraft will shorten. The average retirement age of regional jets has already reduced considerably and the same is expected for current generation of narrow- and

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