With Airbus and Boeing actively working to resolve supply chain challenges, Bruce Andrews, partner at Alderman & Company, expects notable changes in mergers and acquisitions within the mid-tier segment of their supply chains.

Another potentially serious quality problem has occurred in the efforts of Boeing and Airbus to produce enough aircraft to satisfy the ever-increasing global passenger demand.

The latest issue is ‘questionable components fabricated with titanium alloy supplied by an uncertified titanium supplier using falsified documents’.

An unapproved supplier falsified its documents, claiming the material was supplied by another Chinese supplier (Baoji Titanium Industry), which is a certified and approved supplier of aerospace titanium material.

Spirit AeroSystems purchased finished components from Turkish Aerospace Industries and upon inspection noticed holes in the titanium components which are extremely untypical. Turkish Aerospace sourced the raw material. Both Boeing and Airbus were notified of the potential material concern by Spirit and Boeing immediately and voluntarily reported it to the US Federal Aviation Administration (FAA).

Airbus, Boeing and the FAA are now jointly working to determine the cause and potential effects of the falsified documents.

Industry sources report that tests to date of the subject titanium alloy made under the falsified documents have shown that the material appears to meet all property requirements. It seems that this material has been used in Airbus 220 and Boeing 737 MAX heat shields and Boeing 787 Dreamliner cargo doors, as well as a structural component that connects the engine to the airframe of the B787.

Under an abundance of caution, all remaining components that have been fabricated using the questionable material with the fraudulent documentation have been taken out of the supply chain prior to assembly. Those components in service will be removed as the airplanes become due for their normal maintenance schedule.

Unfortunately, this titanium investigation comes on top of the numerous serious quality setbacks for Boeing. In January, a door panel detached from a Boeing 737 MAX 9 aircraft during flight, leading to multiple federal investigations.

In April, Boeing informed the FAA about another incident concerning potentially altered inspection records associated with the wings of B787. Boeing disclosed to the FAA that it might have omitted mandatory inspections for the aircraft’s wings and would need to conduct re-inspections on some of the B787s currently in production.

Furthermore, at a congressional hearing in June, Boeing’s chief executive, Dave Calhoun, was grilled for the company’s misplaced primary focus on shareholder returns.

For Airbus, this material issue for Airbus comes on top of a material defect issue in the first and second-stage turbine discs of the geared turbofan and V2500 engines, associated with contaminated powder metal used in the fabrication process. That problem affects the A220 and A321 fleet and is reducing aircraft availability by nearly 30% of the fleet, because of the need to inspect the engines and the roughly 300 days out of service time associated with this inspection/repair.

Beyond the immediate concerns of production delays and safety implications, the latest titanium documentation incident highlights the broader challenges facing global supply chains in the aerospace industry today.

While there are many causes to these problems, we believe the primary cause is the Covid-19 pandemic and the associated loss of human talent in the industry, and the rapid increase in demand. With a significant loss of human talent and rapidly rising airline demand for new aircraft, manufacturers face exceptional challenges to scale up production while maintaining stringent quality control measures across their entire production and supply networks.

The current issues facing both Airbus and Boeing will probably further delay deliveries to airlines awaiting new aircraft, affecting their operational plans and potentially leading to financial penalties for the manufacturers. These delivery delays probably could exacerbate the supply chain issues the aviation industry currently faces, leading to greater mismatches between global supply and demand for flight and travel.

Moreover, as both Boeing and Airbus are under scrutiny from regulators and the public, any lapses in supply chain oversight, such as the titanium documentation issue, could further erode airline and public trust and confidence in their respective aircraft models, which are built on decades of reputation for delivering safe and reliable aircraft.

To take matters into their own hands and demonstrate they are taking safety seriously, Boeing is reversing its 20-year-old strategy of outsourcing major systems. Boeing is in the process of re-acquiring Spirit AeroSystems, which it sold off many years ago (the former Boeing Wichita facility). We expect Boeing will increase its quality control over suppliers and may take more actions to further reverse its 20-year legacy of outsourcing major systems.

As Airbus and Boeing take proactive steps to address these supply chain issues, we expect this will have a significant impact on M&A activity in the middle market of their supply chains.

As Airbus and Boeing focus more on quality, and Boeing clearly focuses less on stockholder returns, we expect profit margins to rise for suppliers.

For decades suppliers won awards from the OEMs based on price. In today’s environment, we believe price is no longer number one.

Accordingly, with less pressure on prices, margins will rise, and as margins rise, so will earnings. And as earnings rise, we believe we will see a substantial increase in M&A in the supply chain.

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