Aviation Supply Chain Has Too Many Weak Links

Jun 13, 2024

The aerospace supply chain may be too complex for its own good.

Boeing Co. and Spirit AeroSystems Holdings Inc. this week disclosed yet another production glitch affecting the structure of the 737 Max. This time the problem is improperly drilled fastener holes in a component that helps maintain cabin pressure. In April, the issue was incorrect installation by Spirit of rear fittings that attach the Max’s vertical tail to the body of the plane. Boeing muddled through the vertical fin snag without having to adjust its full-year delivery goals or its plans to ramp up production for the 737 program. The planemaker may not be so lucky this time: It will most likely take several weeks to fix the improper holes on already completed aircraft, a disruption that may pressure the delivery timeline, Citigroup Inc. analyst Jason Gursky said.

Boeing is evaluating whether it will still be able to deliver 400 to 450 of the planes this year in the wake of the latest Spirit manufacturing glitch, Bloomberg News reported, citing an emailed statement. The production hiccup is also likely to delay Boeing’s ability to stabilize the Max supply chain at the targeted 38-jet-a-month pace. Spirit said this latest issue shouldn’t derail its delivery schedule for 2023, but that range has already been lowered twice because of the vertical tail issue and a roughly one-week work stoppage in June after a surprise rank-and-file vote against a labor deal. Spirit is aiming to produce 370 to 390 units for the 737 program this year.

For Boeing, the emergence of yet more manufacturing challenges for a Max program that has already had more than its fair share of quality-control issues is unwelcome. Every inch of the plane was supposedly meticulously analyzed during a nearly two-year global grounding, so it remains mind-blowing that Boeing could still be unearthing fresh glitches. The combined impact of Boeing’s infamous “partnering for success” program that squeezed suppliers for lower costs, the 737 Max crisis and the pandemic “left suppliers fragile and vulnerable from both a personnel and financial perspective,” Bank of America Corp. analyst Ron Epstein wrote in an April report. “Pick your cliche, we like, ‘When you see one roach, there are likely more.’” It seems he was right; the question now is how many more roaches are left.

As I wrote in May, the good news, if you want to call it that, is the problems with Boeing’s planes appear to be getting increasingly manageable. Improperly drilled holes and incorrectly installed fittings are far less existential challenges than the flaws in the Max’s flight-control software system that caused two fatal crashes. Jefferies analyst Sheila Kahyaoglu estimates that one month of delays on deliveries of the 737 Max-8 model would cost Boeing $300 million in free cash flow, but that bucket of money is simply shifting to whenever the company can finally hand over the jets to customers. For context, as of the second quarter, Boeing was aiming to generate $3 billion to $5 billion of free cash flow this year.

The bigger issue is Spirit. The supplier will likely be on the hook financially for the cost of repairs and inspections, but with what money? Even before this latest stumbling block, Spirit had said it might burn as much as $250 million in cash this year — and that’s including a $100 million benefit from cash advances by customers that can’t afford to let such a key supplier hit the skids. But the company will eventually have to pay this money back, and those same customers don’t seem inclined to renegotiate contracts that have resulted in about $640 million of forward loss provisions on Spirit’s balance sheet amid significant labor and supply-chain inflation. Vertical Research analyst Rob Stallard has compared the relationship to “indentured servitude.” Whatever you want to call it, the dynamic is unsustainable.

Read more: Boeing Supplier Spirit Has Few Good Options

Spirit is currently the weakest link in the aerospace supply chain, but it’s far from the only one. Spirit had multiple suppliers for the aft pressure bulkhead, and just one failed to conform to specifications, according to Kahyaoglu, so only some Max jets are affected. In theory, this is the system working as designed. If Spirit had relied on only one supplier, the problem would have been more widespread. But the death knell for sprawling, outsourced networks of airplane-parts makers rings louder with each new unexpected manufacturing setback. If large aerospace manufacturers want their production process to run smoothly, they may have to do more of the work themselves.

Whereas Airbus has kept much of its supply chain vertically integrated, Boeing sold the Spirit assets to private equity firm Onex Corp. in 2005 in a bet that the company could boost profit margins by outsourcing fabrication work to focus on design and final assembly. Assets is the appropriate term here because this wasn’t a fully developed, self-functioning operation at the time; the deal essentially consisted of manufacturing plants in Kansas and Oklahoma. Spirit’s recent struggles have sparked speculation that Boeing may need to bring Spirit back into the fold to help stabilize its supply chain; planes can’t fly without fuselages. But Spirit’s efforts to diversify away from Boeing into the Airbus A220 and A350 programs may complicate such a deal because the European planemaker is unlikely to want its primary competitor making components for its jets. There are no obvious alternative buyers — at least none that wouldn’t have to undertake serious financial gymnastics to pull off deal.

The easier, although costly, option may be to string Spirit along until it’s no longer needed. Boeing has already started to do some aerospace structures work in-house again: The company is fabricating the composite wing for the 777X jet itself after building a highly automated manufacturing facility. “If Boeing can automate other areas of structures fabrication, we might anticipate a shift away from outsourcing work to Spirit AeroSystems and other aerostructures suppliers,” Melius Research analyst Robert Spingarn wrote in a June report, noting that Spirit is guaranteed work on Boeing planes that are derivatives of long-standing programs such as the 737 but not new aircraft designs. Airbus, meanwhile, now considers its Stelia Aerospace and Premium Aerotec interior and fuselage subsidiaries to be a core part of its business rather than arm’s-length ventures, a strategy shift that management believes gives the “production system greater flexibility and resiliency,” Spingarn wrote.

There have been pockets of interest in vertical integration elsewhere in the aerospace world: At the Paris Air Show in June, Parker-Hannifin Corp. and Eaton Corp. both talked about bringing parts of their supply chain in-house, particularly complex machining operations, according to a Bank of America report. RTX Corp.’s Pratt & Whitney division recently opened a $650 million, highly automated facility in Asheville, North Carolina, for jet engine airfoils. Airbus and Safran SA teamed up with Tikehau Capital to acquire Aubert & Duval — a developer of alloys capable of tolerating high temperatures — to “secure the strategic supply chain, for themselves as well as other customers.”

Insourcing component work isn’t a panacea: About 1,200 of RTX’s geared turbofan jet engines manufactured from 2015 and 2021 need to be pulled off Airbus jets and brought into the shop for accelerated and enhanced inspection over the next year because of a “rare” powder metal condition that shortens the lifespan of the high-pressure turbine disc. The powder metal in question is manufactured internally, so there’s no supplier underling to blame in this case. But RTX has the financial wherewithal to fix the problem and fund compensation to affected airlines. You can’t say the same about many of the companies that occupy the lower tiers of the aerospace supply chain.