Airbus Has Some Supply-Chain Woes. In the Long Run, They’re Just a Blip.
Remember the supply chain? Airbus Chief Executive Guillaume Faury sure does.
Faury should be living in something close to CEO heaven right now. His only serious competitor, Boeing, lurches from crisis to debacle. His order book is full for the next decade.
Markets tell a different story. Airbus shares have plunged by a quarter from a peak in March and are off 7% year to date (better than Boeing’s 26% loss, to be sure).
The Toulouse, France-based jet maker’s problem is that it can’t build planes fast enough. Or more precisely, it can’t predict how fast it can build them. In late June, Faury dialed back his 2024 production forecast from 800 aircraft to 770. Enormous fixed costs multiply the effect on the bottom line. Faury slashed guidance for this year’s operating profit from as much as seven billion euros ($7.66 billion) to €5.5 billion. Airbus stock is down 10% since the announcement.
Airplanes depend on the mother of all supply chains, which experienced the mother of all whiplashes as aviation came near death during the pandemic, then roared back afterward. Scott Hamilton, founder of industry consultant Leeham, recently saw Airbus A320s whose delivery was held up by missing USB ports for the in-flight entertainment system.
But the heart of the problem is engines. Leading suppliers are Pratt & Whitney, now a subsidiary of RTX, and CFM International, a joint venture between GE Aerospace and France’s Safran Aircraft Engines. These contractors, and their long tail of subcontractors, shed thousands of skilled employees during the dark days of 2020, and are struggling to replace them.
“There’s a huge shortage of specialists and professionals,” says Rico Luman, a senior transportation economist at Dutch bank ING. “They can’t easily speed production back up.”
To make matters worse, jet engines launched earlier this century are proving less durable, though more fuel-efficient, than workhorses from the 1970s, Hamilton says. That’s bringing them in for maintenance or replacement earlier than expected, aggravating the backlog.
Airbus outran its key suppliers in 2022, building “gliders” that waited in hangars for engines to be installed. Still, Faury described this year’s shortages as “a new situation that we were not expecting” in the investor call after the June production revisions.
“They seem to be surprised time and time again by the supply chain lag,” Luman comments. “I’m not sure what went wrong in the management board.”
Many businesses would be happy to have Airbus’ problems. The travails of Boeing’s competing 737 line have cemented the A320 family’s position as the premier single-aisle jet, says David Wireman, global co-lead for aerospace at consultant AlixPartners. “Airbus will continue dominating the narrow-body market so long as Boeing is constrained by the current platform,” he says.
Both duopoly companies are selling aircraft for delivery in the mid-2030s. Against that unprecedented demand backdrop, Airbus’ production headaches might look like a blip, says Nicolas Owens, aerospace equity analyst at Morningstar. “If they deliver a few less planes this year, a few more next year, that’s a wash,” he argues.
Owens has kept his fair value estimate for Airbus’ Paris-listed shares at €163, 15% above the current price.
Still, matching supply inputs to sales for the world’s most complex machines will remain a headache despite, or because, of surging customer demand. And mistakes, as Airbus has seen, can be expensive.
Expect more turbulence.