June 19, 2015 / 6:23 PM / 2 years ago

Supply chain wary as Airbus and Boeing push output envelope

PARIS (Reuters) - A rare note of dissent permeated the Paris Airshow this week as suppliers worried they might lose out if they invest to meet higher commercial jet production targets that ultimately prove unsustainable.

An Airbus A350 flies over a Boeing flag while landing after a flying display during the 51st Paris Air Show at Le Bourget airport near Paris, June 18, 2015. REUTERS/Pascal Rossignol

Airbus and Boeing plan to raise production rates of best-selling single-aisle planes by 25 percent to 50-52 a month in 2017-18 and executives at the Paris Airshow discussed the possibility of ramping up output toward 60, or even above.

That prompted some rare public pushback from suppliers including major engine suppliers GE GE.N and partner Safran SAF.PA, who said they needed to secure the start of a steep rise in output before committing to even higher targets.

Their CFM joint venture makes the new LEAP engine to power Boeing’s revamped 737 MAX and some of the Airbus A320neo planes.

There is also concern over how long any higher production rates may last, although Airbus AIR.PA CEO Fabrice Bregier dismissed talk of a bubble.

“I think (planemakers) will run into some resistance, based on how much money the supply chain will have to put up and whether the 60 rate will last for any amount of time,” Agency Partners analyst Nick Cunningham said.

Suppliers fall into two main categories: those already producing at high volumes on existing technology but required to take a gamble by investing in extra capacity; and those involved in new technology, mainly in and around the engine, who face uncertainty about their future capacity and costs.

“The important moment will be the entry into service of the A320neo. If that goes smoothly then I think many people will be more comfortable about discussing further rate increases,” the head of a major components supplier said, who asked not to be identified because of relationships with manufacturers.

The A320neo enters service with Pratt & Whitney UTX.N engines later this year, followed by a CFM version in 2016. The CFM-powered 737 MAX enters service in 2017.

COMPANY-SIZED GAMBLE

Several suppliers expressed doubts over whether planemakers would be able to increase production as much as they hope, though the industry has often dug deep to secure its growth.

Airbus said it would make a decision this year on a further increase, but Boeing BA.N said it would be cautious about taking any decision to raise the level towards 60 a month. Industry sources say it has, however, been testing the ability of the supply chain to handle 60, or even 70 planes, a month.

For the very largest suppliers, it may simply involve a judgment on commitment and timing. For others lower down the food chain, it presents a potentially company-sized gamble.

”They might be quite inclined to say, “I‘m sorry, but I can’t do that,” Cunningham said.

An executive at an aerospace parts manufacturer told Reuters that suppliers were being asked to double capacity, while at the same time facing severe cost pressures, or else having to invest in tooling that would previously have been funded externally.

“You have to pay to play,” he said.

Yet suppliers know a successful partnership guarantees a slice of the jet industry’s record order books, whereas falling behind the industry’s sharp growth could lead to the exit door.

Responding to the concerns raised by GE and Safran, Airbus sales chief John Leahy said on Thursday the European planemaker was in a better position than Boeing because it had two engine suppliers for its single-aisle jets.

“If one engine manufacturer did not want to follow us in increasing production, that would be very disappointing,” he told reporters.

STRESS TESTS

The production increase has generated a forensic review by manufacturers of each supplier, studying everything from balance sheet to customers, and even whether it faces union pressures.

Top suppliers have sought dual sources for parts and are already “stress-testing” their own supply chains for weak spots, practising producing at higher output rates.

German engine maker MTU Aero Engines MTXGn.DE, which partners with Pratt on the geared turbo fan for the A320neo, said it feels well prepared for the production increase and could go further under certain conditions.

“There are areas where we can increase the number of shifts; that’s not a problem as long as we don’t then have to invest in more new buildings,” Chief Operating Officer Rainer Martens told Reuters. “Increasing the number of machines we use takes around 1.5-2 years, but that too is doable.”

Britain’s Meggitt MGGT.L, which makes fire protection systems, said it was focused on current targets and would need to understand the time frame of any further rate increases.

“We could be reasonably comfortable that we’ve got the flexibility but it’s making sure that all elements of the supply chain can be ready for it. You only need one or two critical pieces that can’t make it and that makes the whole thing impossible,” CFO Doug Webb told Reuters.

Editing by David Clarke

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