Challenge #2: Supply Chain; The issue that never went away

25 Jan 2024

“You will not find it difficult to prove that battles, campaigns, and even wars have been won or lost primarily because of logistics.” General Dwight D. Eisenhower

The Suez Canal connects the north Atlantic and northern Indian oceans via the Mediterranean and Red Sea. It was completed in the late 19^th century and allows traders to avoid the South Atlantic and southern Indian oceans. Using the Suez, journey time is significantly reduced by 1 to 2 weeks making it one of the arteries of global trade with an estimated 12% of trade ships passing through every year.

Disruption to the Suez Canal is nothing new; two world wars, the cold war and the Suez crisis in the 20^th century all saw trade using the shortcut come to a standstill. However, since then, global reliance on trade and supply chains has increased significantly; choke points to major trading routes have an immediate and international impact.

The attacks on ships using the Suez Canal are well publicised. What is less well known is that the UK Government states “it is first and foremost for businesses to manage their supply chains, with government intervention reserved for those areas where it is necessary, such as in the cases of market failure”.

In other words, military interventions notwithstanding, the UK Government’s new strategy – as of January 2024 – will only consider critical imports and supply chains; this includes a ‘Critical Imports Council’ to work with businesses to improve analysis of potential supply chain shocks.

However, this is of cold comfort for businesses who form part of a supply chain. Many suppliers to the business aviation ‘machine’ are still struggling to recover three years after the global pandemic. “The people shortage happened in months, the supply recovery is years,” stated Embraer’s Mike Amalfitano at the JetNet iQ Summit, adding “it takes a long time to recover that skillset across the supply chain.”

How does this all add up? Running an aircraft is 35% more expensive than it was 3 years ago.

Aside from the Suez issues and post-pandemic hangovers, there are other issues with the supply chain squeeze:

• Higher interest rates affect the investment levels that business is prepared to commit to.
• The wider inflationary environment in food, transport and housing which increases cost of labour and services.
• Payment terms are a huge issue for small businesses that are remote not only from the end client, but also geographically. They do not have the same economic or corporate capacity as the bigger players but are being forced into payment terms that can cripple a small business. For example, some large OEM’s standard payment terms are 120 days. When coupled with high interest rates, long payment terms may spell doom for businesses further along the supply chain.
• Problems in the supply chain cascade down to the support network: General Aviation Manufacturers Association president and CEO Pete Bunce points out: “an aircraft operator needs to be serviced and all of a sudden we get word that a first-tier supplier can’t provide an essential engine or avionics on time because they can’t get parts, so they may have to take parts off the production line and give them to the aftermarket line to be able to fix it.”
• Capacity is not where it was pre-Covid. Pre-Covid, if a part could not be repaired, a new part would be purchased and installed. This is now difficult with a reduced spare parts inventory.

Another way of thinking about the problem comes from MIT Professor Jonathan Byrnes writes: “Many supply chains are perfectly suited to the needs that the business had 20 years ago.”

The good news is that demand for aircraft parts and maintenance in both business and commercial aviation has rarely been higher. This demand is due to low aircraft inventory and OEM’s struggling to ramp up new aircraft production.

The Financial Times survey of commercial aircraft stakeholders clearly shows that MRO capacity and supply chain issues are the key concerns for redelivery of aircraft.

The challenges to business aviation are strikingly like those in commercial aviation, but there is the added complexity of the support network which feeds the day-to-day operations of business aircraft

A speaker at CJI Miami 2023 neatly described this as a “cycle of operational gymnastics” and explained, ”yes, demand throughout the parts and maintenance supply chain was high, but the issues with labour, raw materials, logistics and increasing costs made it a game of ‘whack a mole’ for many”.

What can be done about these challenges?

• Labour is the biggest challenge: the industry must focus on getting quality staff as well as retention.
• Plan for a capital structure based around the reality that the current interest rate regime will continue for 3-5 years.
• Smaller suppliers should push back on payment terms which do not work from a revenue perspective (e.g. 120 payment terms) and have a reasonable conversation with big clients regarding share success.
• The supply chain needs to adapt worldwide to ensure the distance of parts and supplies is minimised. Emissions come from the supply chain due to parts being shipped from around the world is increasingly being scrutinised by EU regulators.
• Recognise the opportunity for OEM’s and other big players in business aviation to forge more transparent and eco friendly relationships with smaller suppliers.

If you want to see more from Martyn Fiddler, please follow us on linkedin: Martyn Fiddler