Supply chain strains that are limiting the aerospace industry’s attempts to ramp up post-pandemic production are likely to last for several years, analysts have warned.
Both Airbus (FR:AIR) and Boeing (US:BA) have struggled to meet production targets, which has meant order backlogs have grown to levels that are only just below the records set at the peak of the last cycle, according to Rob Morris, from consultancy Ascend by Cirium.
With order books already stretching into the 2030s, airlines are scrambling to secure planes. On the opening day of this week's Paris Air Show, Indian budget airline operator Indigo placed the biggest single order in aviation history – for 500 of Airbus’s A320 narrowbody aircraft. This follows on from a 470-plane order split between Airbus and Boeing by Air India in February this year and a 300-plane deal between Boeing and Ryanair signed last month.
Airbus and Boeing both also upgraded their 20-year forecasts for the commercial aerospace market.
“To some extent, I wonder whether airlines are worried that they are going to be left on the rank when all the taxis have left, and therefore they’re ordering aircraft now while they can,” Morris said ahead of the trade show.
Airlines have expressed frustration with delays to plane deliveries, which have been blamed on both labour and supply chain shortages.
Holding pattern
The International Air Transport Association’s (IATA) director-general, Willie Walsh, said the plane makers “have been far too slow” in dealing with supply chain blockages. Delivery delays of up to six months per aircraft are “raising costs and limiting our ability to deploy aircraft”, he told IATA’s annual conference earlier this month.
Boeing has been struggling with problems with several of its models. The grounding of its 737 Max after two fatal crashes meant the US planemaker was burning through billions of dollars of cash even before a global pandemic, which led to large-scale layoffs.
This meant it faced “a real shortage” of labour (especially production line engineers) as demand snapped back, explained Mathew Adamo, managing partner of advisory firm AIP Capital.
Labour shortages at castings and foundries have made it harder to source engine parts and some of the materials needed to make advanced alloys previously came from Russia, whose Ukraine invasion further upended supply chains, Adamo said.
Although Boeing’s production rate is now picking up, it still only produced around 43 planes a month in the first quarter, compared with 67 prior to the Max groundings. Production rates for 737 narrowbodies, for which it has more than 3,600 orders, stood at just 31 a month in the first quarter, although the head of Boeing’s commercial aeroplanes business Stan Deal told Bloomberg that he expects this to increase to 42 per month by the end of this year.
Airbus is also struggling to ramp up production of its A320 narrowbody family of jets – it recently pushed out a target of producing 75 A320s a month by a year to 2026. It produced 35 A320s per month in the first quarter, which increased to 47 a month by May.
Although RBC Capital Markets analysts have more confidence in Airbus’s ability to execute its plans over the next three years, they still see “substantial risk” around its revised targets.
Much of the focus so far has been on engine parts, but it expects “persistent delays in the areas of electronics and interiors” both this year and next.
This matters to the UK market. The industry’s pre-show backlog of 13,401 orders is worth around £200bn to the UK economy, according to Aimie Stone, chief economist with trade body ADS.
Engineering group Senior (SNR) said in an April trading update that ongoing supply chain challenges meant its revenue would be “more weighted to the second half of the year”. House broker Numis said a “strong recovery” in commercial aerospace by 2025 could boost its earnings per share by 70 per cent by then. Aerospace revenues are “generally on an improving trend” for Bodycote (BOY), according to RBC Capital Markets’ Mark Fielding.
Both remain reliant on the improving performance of the major plane makers, though, whom Cirium’s Morris pointed out had been failing to meet rate targets even before a global pandemic hit. He does not expect a full supply chain recovery until 2026.
Rolls-Royce (RR.) or Melrose (MRO) may seem like a better recovery play, as both have a significant portion of revenues linked to engine flying hours, which should continue to rebound regardless of manufacturer build rates. Both have already witnessed share price gains of almost 70 per cent since the start of the year, though – Rolls-Royce shares now trade at 24-times FactSet consensus forecast earnings and Melrose shares are at 27-times.
