Why private aviation's supply chain and labor crisis isn't going away

Labor, parts, raw materials, increased costs, getting paid, and emissions are all challenging private aviation supply chain executives.

By Doug Gollan, November 9, 2023

How fast is the private aviation supply chain crisis improving? That was the focus of an expert panel during the Corporate Jet Investor conference held earlier this week in Miami.

The answer is the supply chain crisis is significant and continuing, so fasten your seat belts.

Or perhaps more appropriately, take a seat.

It’s a very, very unique period in our history

– Kevin Michaels, AeroDynamic Advisory

You may be cooling your heels for a while.

It’s not new, as we reported from NBAA and EBACE.

A live survey of over 500 attendees showed most don’t believe current supply chain issues will be resolved until 2026 and beyond.

What’s more, it’s not an easy mess to untangle.

Issues are not just about a shortage of windshields and not enough workers. It’s deeper.

It includes access to raw materials, increasing costs, and even payment terms.

It’s not just as easy as cranking things back up.

Manufacturers now have to think about the carbon footprint of bringing various components to where they are assembled.

That means, in some cases, completely rethinking what was built up over the years.

“For the first time in modern history, it’s all about the supply chain determining how many aircraft can be built (instead of demand). You see this, especially in the air transport sector, but it’s carried over certainly in the business sector and military as well. You know what, it’s not just affecting production, but it’s affecting MRO and maintenance as well,” said Kevin Michaels of AeroDynamic Advisory, a consulting firm focused on the global aerospace and aviation industries.

He continued, “In the supply chain, it joins in things like castings and forgings of raw materials and electronics. It’s simultaneously affecting both parts… It’s a very, very unique period in our history.”

Tracking the Supply Chain

Bombardier’s Director of Procurement Nick McBoyle said, “It’s the whack-a-mole effect… We’re then into a cycle of operational gymnastics to make sure that we can continue the aircraft build as close to the schedule as possible and obviously get them out the door.”

We fall to the bottom of the supply chain in the entire ecosystem

– Scott Ashton of O2 Aero Acquisitions.

He added, “We’ve got a lot of focus, a lot of resources put into just watching that whole value stream through all those suppliers…We have a team of about 60 intervention specialists. They are embedded in our suppliers and their sub-dealers.”

Still, he said that that hasn’t been enough, noting, “[N]ow we’re moving to a proactive approach where we’re standing up what we’re calling impact supply management. It’s looking forward, so it’s working with our supply chain to start identifying potential points of failure in the future.”

Private aviation is also competing against other industries.

“With the aluminum cylinders, you’re competing with the medical industry for aluminum for oxygen cylinders. We’re competing for the same raw materials with other industries that are experiencing the same rapid growth that we’re experiencing and for much smaller quantities. We fall to the bottom of the supply chain in the entire ecosystem,” said Scott Ashton of O2 Aero Acquisitions.

Raw Materials

Of course, monitoring suppliers is just the start.

Michaels told listeners in terms of raw materials, 45% of the world’s titanium came from Russia. That’s now off-limits.

Some companies that were able to buy large supplies before sanctions were improved are now depleted.

But it’s not just titanium.

“Lead times (for high-strength steel) are up to 18 months now, and that’s what you use for ball bearings and things like that,” Michaels said.

Increased Costs

Prices are also increasing.

Andrew McElhinney of AE Industrial Partners said additional companies are challenged by “higher interest rates…and you’re seeing the cost of labor, cost of materials go up, which impacts margin unless you’re able to offset it with price increases.”

Michaels said airline maintenance costs increased from 8% of revenues prior to Covid to 14%.

Labor Shortages

And if you can get all the parts in place, that’s not enough.

McElhinney said, “We have 24 portfolio companies that really touch the full aviation ecosystem lifecycle through everything from front-end design engineering, manufacturing, companies that own and operate aircraft as well as aftermarket services. I think if you ask the management teams of every single company, it doesn’t matter the business model, asset-light versus asset-heavy where they play, what the biggest challenge is, it’s labor.”

They have machines broken, and they can’t get it fixed because the repair shop doesn’t have people

– Scott Ashton, O2 Aero Acquisitions

“It may sound strange, but the labor factors in the raw materials also. Where are these mills that produce our aircraft? They’re in places like Ravenswood, West Virginia, and Quad Cities, Iowa. They’re in places where it’s harder to attract labor, so there’s a pervasive issue affecting all of us,” said Michaels.

Northstar Group’s Craig Pickens, who moderated the panel, noted even when companies offer higher pay packages, getting people to relocate is difficult. While during the Financial Crisis, people were losing their homes, now they are locked in by low-interest rates they can’t afford to give up.

Ashton added, “What I hear from our supply chain is what we experience if we can’t get people. A machine shop can’t produce a screw that we need to produce a regulator because they can’t get people. They have machines broken, and they can’t get it fixed because the repair shop doesn’t have people.”

There’s also no funnel of next-generation technicians.

Ashton said trade school graduates “really aren’t prepared for the type of technology that the aviation industry has.”

His company is launching mentoring programs.

Still, he told the audience, “It’s going to be a big constraint on growth in the industry in the next 15 to 20 years.”

While there has been a big focus on the cockpit, he said, “The industry is also very focused on pilot scholarships and getting people to learn how to fly. Our biggest problem in the industry is going to be technicians. Whether it’s working on aircraft or building to some assemblies, working in the factory, we’ve got to start providing scholarships for trade schools for kids, and we’ve got to get into the high schools.”

Emissions Concerns

Then there’s the question of where various parts and components are being made and the carbon footprint of transporting them to where they are being assembled.

Despite accounting for just 2% of aviation’s global carbon emissions, which itself is 2% of total carbon emissions, the business aviation industry is committed to sustainability.

McBoyle noted, “We’ve talked a bit about emissions here in terms of emissions that come from aircraft operating, but there’s something called Scope 1 emissions, which in Europe now is being measured. If you’re a publicly traded company, you have to have a non-financial statement that shows your CO2 emissions. What’s happening now is you’re seeing OEMs starting to look at what percent of my emissions to create this aircraft or this engine come from my supply chain. The farther away the supplier is from the final assembly, the more you need to think about this.”

While it is yet to impact U.S. OEMs, it is an issue in Europe.

Panelists said 20% of Airbus’ emissions come from shipping items to its assembly facilities in Alabama, Canada, Germany, and France.

Getting Paid

Add to all the issues payment terms. Yes, getting paid!

Some big companies stretch paying suppliers up to 150 days by making them jump through hoops.

What it means is smaller suppliers are cash-strapped, and in some cases, they are failing, not able to invest in ramping up production or even being bought out by their customers.

Ashton told delegates, “We’ve pushed back on some of the biggest aerospace companies on payment terms, and we’ve done it successfully because they know I can’t finance a massive multi-billion-dollar aerospace company; I just can’t do it. They’ve been willing to work with us…we just can’t survive on 90 or, 100 or 120-day payment terms.

Michaels noted, “Publicly traded companies are measured principally in free cash flow. If you can get paid for your aircraft, add deliveries (that have been) ordered with progress payments, and then you can delay paying your suppliers 120 days and use that cash that docks up your stock price. The dilemma is if Bombardier or someone else were to say, well, we’re going to bring our payment terms back down, they would get punished by Wall Street. It’s like everyone is looking at each other, and we’re all in this conundrum of those that are publicly traded, and it’s really hard to back away from that.”

Pilot Shortage

Oh, and what about pilots?

Picken said, “On the pilot issue, there was a question about how much COVID caused retirements, but I think the pilot issue right now, which is on the top of everybody’s mind, that started in 9/11.

He continued, “9/11 decimated commercial airlines, then march forward seven, eight years, you’ve got the Great Recession, which killed business aviation. You talk to a whole generation of pilots who got laid off two or three times through no fault of their own. The last thing they’re going to do is tell their kids, ‘Hey, go become a pilot. It’s a great career.’ Ultimately, now with Covid coming along, the airlines couldn’t cut from the bottom and protect their business.”

He said, “Covid is only one factor. It’s really a culmination of the last 21, 22 years of economic peace and balance.”

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