AIN Roundtable—Managing Supply Chain through Overheated Demand

While the supply chain has turned a corner from the early post-Covid days, struggles remain. Driving this is unprecedented surging demand across the aerospace spectrum, from airlines to the global defense sector. AIN brought together thought leaders in the supply chain and broader market to share insights on how the industry is working to meet that demand, despite ongoing supply-chain struggles. Here are highlights from those discussions. FDH Aero sponsored this roundtable.

The Participants

Matt Lacki—President of FDH Hardware

Lacki joined FDH Aero nearly four years ago and last year became president of its FDH Hardware organization. Before that, he spent nearly a decade in private equity and banking, including as an investment partner with Huron Capital. He also spent nine years with the U.S. Army. With a background of more than 60 years, FDH Aero is one of the largest independent aerospace distributors, supplying hardware, electrical, and other products and services across the military and civil aerospace markets with 34 locations and 1,500 employees.

Žilvinas Lapinskas—CEO of FL Technics

Lapinskas has led FL Technics as CEO since 2013 and before that headed up the Lithuanian company City Service, which is one of the largest property management, building maintenance, and utility service groups in the Baltic region. FL Technics is a global MRO group headquartered in Lithuania and with major facilities in multiple locations in Europe, as well as in Indonesia and, most recently, the Dominican Republic. With more than 4,000 employees, the company also has more than 100 line maintenance stations, making it one of the largest independent line maintenance networks.

Mike Stengel—Partner at AeroDynamic Advisory

Stengel joined AeroDynamic in 2017 after serving with ICF International’s aerospace practice. At AeroDynamic, he oversees the firm’s aftermarket-related intellectual property and has led or contributed to more than 100 consulting engagements surrounding business strategy, market analysis, and transaction advisory for clients across the aerospace industry. AeroDynamic is a management consulting firm focused on the global aerospace and defense sectors, providing expertise in areas of strategy, growth, and transaction support for OEMs, aftermarket organizations, the supply chain, and investors.

THE DISCUSSION 

On the State of the Supply Chain

Matt Lacki

The supply chain is still certainly strained post-Covid, and now there’s increasing demand with increasing build rates. Many of the large OEMs have all-time-high backlogs, which is leading to all-time-high production. This leads to an all-time-high demand for the parts that we generally distribute, both on the hardware side and on the electronics side. Certainly, air travel has grown significantly post-Covid, and that obviously is putting a strain on the aftermarket. It feels like the aftermarket has recovered somewhat, but on the OEM side, there’s still a lot of shortages.

While commercial OEMs are managing historically high backlogs and the commercial aftermarket remains under strain, demand is also rising across the military market, which is relevant to us because defense represents a large share of our business and gives us a clear view into the pressure customers are facing across both sides of the industry.

On key parts, many factories have more than one year of backlog, and so they struggle with capacity, both on the manufacturing side and on the people side. That creates a lot of strain across the supply chain.

Žilvinas Lapinskas

Demand for MRO services is growing, the market is growing, and more airplanes are coming. Of course, we feel that growing demand, and it has influenced supply chain shortages, influenced our TAT [turnaround time]. On the OEM side, we still feel that they are lagging in recovering after Covid. We can find parts in the aftermarket.

Problems with the delivery of new airplanes from Boeing and Airbus, and then GTF [Geared Turbofan] engines problems from Pratt & Whitney, are also influencing [the situation]. Older planes have to fly, and the number of retirements is not so big. For the older planes, the TAT in the hangar is longer, and they need more parts.

And of course, the candidates for teardown are fewer than we could expect in a normal situation. Sometimes, we have a situation where we have the aircraft in the hangar, we have tooling equipment, we have manpower, and we cannot do the job because our hangar is in Indonesia, and we found a part that is only in the U.S. So, we have to wait two, three, or four days till the part comes. It’s challenging. In my view, that situation will not change for the better soon.

Mike Stengel

There’s certainly no shortage of demand for new aircraft and new engines, and this is probably one of the first times in the history of the industry where we are supply-constrained rather than demand-constrained. Matt and Žilvinas mentioned the growing backlogs already—approaching a decade for a narrowbody.

Even the widebody market, which had been taking the longest to recover during Covid, had a banner year last year in terms of orders, and the asset values for those aircraft are growing again for mature aircraft, like GE90-powered Boeing 777s. And so now you could see the widebody market starting to show traits of what narrowbodies have shown for several years now. Backlogs are lengthening further, and the OEMs are getting into a similar situation where they can’t deliver fast enough to keep up with demand. That’s assuming there are no boulders thrown into the pond with the developments in the Middle East and no major changes to the demand profile for air travel and such.

This is also true for not just commercial transport, but also for business jets and military. A common theme we tell a lot of clients is that all tides are rising in aerospace, regardless of the end market, which is unique. That hasn’t happened all at once when you look across the history of the industry.

The average age of the fleet has continued to go up since 2018. We’re living not just in the world of post-Covid consequences, but also going back further to the initial grounding of the 737 Max. In our research, when we look at how the fleet evolves after a black swan event, whether it was 9/11 or the 2008 financial crisis, or Covid, the average age of the fleet has always gone up. Once it goes up, it’s very difficult to bring it back down.

ON BOTTLENECKS

Matt Lacki

With many parts, especially on the fastener side, it feels like they’re made on machines that are 50 years old, so the expertise required to operate those machines has been built over decades. Many of those people retired or left post-Covid, and there’s definitely a massive gap in terms of manufacturing expertise and talent.

Some of the other gaps involve certain raw materials, and then certain factories have just really struggled with certain parts—fittings come to mind. There are some other factories that have really struggled to meet the demand that’s needed.

Those struggles continue every day. This makes it really challenging because we sit in the middle between the suppliers and the OEMs; the suppliers deliver it 50% on time, and the OEMs want delivery at 95% to 100% on time. Because we sit in the middle, we view the talent gap as a place where we can provide a ton of value. Many of our team members are engineers, and we can bring that high technical competence directly to the table.

Žilvinas Lapinskas

After Covid, I would say from 2022, there were two hot topics in the aviation industry, especially in MRO: the supply chain and the lack of manpower. In 2026, four years past, we have the same topics: supply chain and lack of engineers. The only way for us to keep and grow our business is to have more engineers. We’re trying to attract the young generation to come into the aviation maintenance business. We publish a lot of articles about the aviation maintenance engineer profession, promoting it. Then, we started to give scholarships to the universities for young people.

I meet with the best students to talk to about the company, about the market, about the future, and about the possibilities to work at FL Technics. If I meet 10 or 12 people, it’s not enough. But I know that when they come back, they will talk with their family, friends, colleagues, classmates, and so on. Then that information goes on, and we see that the number of students who are going for [aviation maintenance at] Vilnius Tech University doubled. So, I think it’s quite a good result.

The average age of our engineers in the hangars is also not getting younger, so the only way is to get young people to join aviation maintenance. And of course, we have to wait maybe eight years for them to get enough experience to replace the old certifying staff. But this is the only way, because if we start to get the guys from other companies—from our competitors—we have to overpay. It means costs rise, and we have to put those costs on our customers. It’s not so easy.

Mike Stengel

On the talent pipeline, the strategies that suppliers, OEMs, and MROs have put in place may not show immediate results. These are multi-year kind of initiatives before you see the benefits, and especially because [to] a lot of people, an MRO or working a factory job may not be as appealing as it used to be. So, you need to go further back in the talent pipeline, down to middle schools and high schools, to remind students that this is a viable career pathway and there are a lot of options in this industry, and help them understand how things have modernized—it can be a lot more exciting than it may seem from the outside. But by going back that early in the education pipeline means it’s a very long-term investment and bet.

As for other bottlenecks, engines are number one in our book, just with the complexity of the manufacturing. There are some critical processes, like forgings, where we still need more investment into capacity to meet future build rates. That’s on top of aftermarket requirements. We do see some positive signs, like Pratt & Whitney is investing in their Columbus, Georgia site with new forging capacity. There still needs to be more.

The other one that may surprise a lot of people is interiors on the new-build side with widebody production coming back. Widebodies tend to have more custom and bespoke interiors. Customization and bespoke are the enemies of supply chains, where you have less consistent runs. That means some deliveries of aircraft and certification of interiors have been delayed, and there’s also a shortage of people at the regulators to certify these interiors.

You hear stories about Delta taking delivery of a bunch of [Airbus] A321neos that were meant to go into a transcon fleet with a more premium configuration and new Delta One seats. They were sitting in the desert and were actually being reconfigured into a domestic configuration just so Delta could fly them. They don’t expect the new premium configuration to be certified until next year or the following year. It’s not an ideal outcome that they have to wait for those premium seats to come to the market. There have been some other examples, like A350s getting delivered with empty first-class cabins, and the airline has to retrofit them later.

ON SOLUTIONS

Mike Stengel

I think the OEMs and people in the higher tiers of the supply chain are slowly recognizing that it’s not the same supply chain as from 20 or 30 years ago, where they may have had their pick of the litter. All tides are rising regardless of the end market, which means suppliers deeper in the supply chain have a wider variety of options and markets to serve.

It’s almost like the higher you are on the supply chain, the more you have to be a customer of choice. They’re looking at their commercial terms, like payment terms. Some are even going as far as to establish take-or-pay agreements. Traditionally, most long-term agreements in aerospace will guarantee a price and market share, but not volume. But now, a take-or-pay agreement would have a volume guarantee. You’re paid regardless of the outcome, just to secure the capacity.

That’s a tailwind for suppliers for visibility on their business and revenue, and it helps them understand better where they can invest more, too. That flows down to how private equity might assess a business in the supply chain, as well as the growth prospects and how attractive it is to invest in.

Between what we’ve all said about the aftermarket and also with Boeing turning the corner, finally, over the past year or so—starting to consistently achieve higher output on the 737 Max—that’s a positive sign for investors.

Matt Lacki

There’s certainly been a flurry of M&A activity on the manufacturer side, especially on the fasteners part of the business. We’ve also seen some people invest in capacity, and we’ve seen new sources develop around the world—such as in India and China. We’ve tried to grow relationships with our existing suppliers, figure out where there are new approved sources, and partner with them as well to meet the demands of the OEM.

Many of these suppliers, being capacity-constrained, are trying to consolidate their customer base, which is good for distribution. And then, many of the large OEMs are also consolidating their supplier base, so everyone wants less on either end.

That gives us an opportunity to really sit in the middle and provide expertise and try to figure out where the right sources are, where the new sources are, where the approved sources are—again, ultimately to bridge that gap between the delivery rate and then what the OEM expects.

Some of the part manufacturers are increasing capacity. But you can build all the machines you want; you just don’t have the labor to keep up with them.

We will see more capacity in the next few years, but the ability to operate at the level of quality that a Boeing or Airbus expects is really hard to do. It will come, but it will be very slow, because getting those machines to operate at the right level of proficiency to deliver again on the quality standards is very, very challenging. We’ll see some, but we’re not going to see a ton of it tomorrow.

Žilvinas Lapinskas

We see that OEMs are building new factories, but I agree completely with Matt that it will take some time. You can build the building, you can buy the machines, but then you have to get the people, train them, and get the approval. You have to wait for the regulator to come to do the audit, as we have at our Punta Cana [facility in the Dominican Republic]. We [were] waiting for roughly five months.

These are not fast decisions, and it influences our ability to provide the service on time. As an example, we were waiting for some parts from brake producers during the high season last summer. We’re very strong in the wheels and brakes business, but we could not deliver the brakes on time to our customer, because those parts were not arriving. And we’re speaking about the serious producer, not about the factory somewhere in a village. It’s a big challenge, and it will take some time to get back.

Some brakes were removed from airplanes parked because of the GTF engine problems. So, we removed the brakes and used them in the existing fleet that is flying, because the other aircraft are waiting for the engines to come back from the shop. You have to be very creative in this kind of environment.

Speaking about expansion, we will look at each business case carefully, if we see the demand in the market. For example, we are working on an additional hangar investment in Jakarta, a plus to our existing operations. We see a demand, we see the labor, because in Indonesia, it’s a good situation with the engineers. There are more than 20 universities and colleges that produce 3,000 or more engineers per year. This is the only market where we are not facing big labor problems. In all other countries, it’s a big problem.

If we see the demand and the opportunity, then we make a calculation, and we go. Being in Central America, we can deal with North America and Latin America. Of course, we are trying to get the customers from the U.S. Our launch customer is JetBlue.

On the Role of Logistics

Matt Lacki

Prior to Covid, there was a big focus on centralizing decision-making and centralizing customer service and other parts of the business. Now, we’ve gone the opposite direction, where we’ve tried to put local teams around the world.

We have solid teams in India, the UK, Germany, Italy, and Singapore. We try to put local teams at every major hub for aftermarket or for OEMs, and empower those local teams to make decisions, to put warehouses and inventory as close to the customer as possible. So, parts made in Europe stay in Europe. Parts made in Europe don’t have to travel to the U.S. to go to Brazil. There’s less travel or more simple travel for those parts around the world.

The local teams that are there with the customers are able to make decisions on their own. It sounds simple, but it’s highly complex, and there’s a lot of things that come up day to day.

When a customer needs something that they didn't anticipate, or there’s a quality issue, or some regulatory issue, the local team is empowered to solve those problems. Local teams can make local decisions fast without bureaucracy, and where we keep inventory as close to our customers as possible. I think it goes a long way in this environment where production time matters.

The other simple things are—this sounds insanely easy—answering the phone and answering emails. You’d be surprised, but that matters a lot to customers, and so we think the biggest thing that’s changed is to be responsive, be local, and try to drive the very highest service level that we can drive to the global customers. You can’t make decisions in Texas for customers in India; that doesn’t work.

Because many of the OEMs want to consolidate their supplier base, many of the manufacturers want to consolidate their customer base. The only way to do that on either end is through distribution. Part of the market will always be direct to OEM. But there are many OEMs and subcontractors that the manufacturers are just not going direct with, and that’s a really big opportunity for distribution. And then certain OEMs do not want to deal with 2,000 different suppliers on a complex bill of materials, and that is just perfect for distribution.

We manage 2,800 suppliers, and we serve 10,000 contractors, which takes the burden off both our suppliers and customers because they only have to deal with us.

Mike Stengel

Whether it’s manufacturers wanting to consolidate or whether they’re buying or selling, there are more consolidated purchasing channels. I think distributors have an important role in today’s world, where there’s still some uncertainty geopolitically or in build rates. Distributors fill a natural role of smoothing out the demand signals and the supply signals for everyone, and they act as that risk buffer. That’s ultimately one of their key roles. So, I think there is a growing role of distributors, both on the supply chain and the aftermarket, for those reasons.

On Managing Inventory

Matt Lacki

One of our biggest value adds is just inventory availability. If you ask the manufacturer, you ask the OEM, the most important thing we do is hold inventory.

And so that’s not just a single source; that’s seeking out new sources and partnering with those new sources around the world, bringing customers to them, so that we’re aggregating demand and buying at scale. That helps them, that helps us, and then we build that inventory for customers.

Inventory availability is key. It’s not just having the most inventory, but it’s having the right inventory, and then making sure that you’re building that inventory base with alternative sources, and helping those sources get the right approvals and the right customers to grow.

The right inventory is a complex question because of the amount of the bill of material, the complexity of the bill of material, and the vast amount of platforms that are out there. But I think our strategy has been to focus on our key OEM partners and really try to uphold a significant amount of inventory to support them through production.

To consistently ensure we have the right inventory, we can’t, nor do we, operate in a vacuum. We are deeply embedded with our customers to understand exactly what they need and when they need it. This allows us to work with them on the long-term, multiyear plan and gain greater transparency into their future demand.

Žilvinas Lapinskas

We buy spare parts and consumables, not only for our operation, for our hangars or line maintenance business, but we also buy to sell. When we get requests, it doesn’t matter whether from our hangar, from the line maintenance business, or from our customers; we are asking our suppliers and making a decision from whom to buy.

We [may] have a situation where we can buy the spare with the 10% higher price, but the lead time is tomorrow. Or we can buy it overseas, and then it will come in three days, but the price is 10% less. It depends on different situations.

We are good at the analysis and prediction of the usage of the spare parts and consumables. We buy a lot in advance, because we know that we will sell—maybe not tomorrow, maybe in two weeks. It helps us because we have it at the right time and in the right place.

Quality and Pricing

Mike Stengel

I know there have been some high-profile, quality events surrounding certain engines, like the [Pratt & Whitney] geared turbofan. They’re working their way through—they are inspecting the engines for the powdered metal issues that they had. But besides that, we don’t hear about a lot of persistent quality issues.

For a lot of OEMs, quality is high on their vendor selection criteria. And in today’s environment, just given all the constraints and all the growth in production rates in the aftermarket, most will prioritize quality and on-time delivery over price. But, they will use measures like long-term agreements, three to five years in most instances, maybe longer for some critical materials, or processes to hedge on their price. Or, they’ll incentivize suppliers if they’re able to achieve a cost reduction on certain parts. Then they share in the benefit.

There’s a lot of tactics that customers can use with their suppliers to incentivize cost reduction and make sure everything stays economical while everyone still continues to make an acceptable margin.

Žilvinas Lapinskas

Quality is the requirement of your customers. They cannot accept anything other than the best quality. When we buy airframes, we do teardown, and we have to repair those parts in the different component shops. We have more than 100 different component repair shops in our network, and we have contracts and experience working with them. We categorize them: those that are more reliable and those that are less reliable. We are trying to work only with the most reliable shops.

We know that when we send the part to them to repair, it will come back in good condition with all the proper documents, on time, and the price we agreed to before the repair. It’s predictable. They are reliable shops, and we have a really good partnership with them.

We’ve done this for many years, and we are not simply working with the shops that cannot deliver the proper quality, which is according to our standards for our customers. So, no changes in the strategy; we are strict with these repair shops, and we are getting the results we are happy with.

It’s very important: If you have an AOG aircraft and send a part that is not working, then it could take an additional two days, which will cost the customer a huge amount of money. An aircraft makes money only when it flies. When it’s not flying, then it’s an asset that produces a big headache and financial losses.

Matt Lacki

We have lots of different sources that we inspect. In some cases, we are outsourced quality for our customers, so we invest heavily in quality. We know, generally, for certain parts in certain factories where there are historical challenges and where people excel. We try to have the highest standard of quality. We think about, in some cases, we may be the last touch on a part before it goes into an aircraft. So we invest heavily in quality, both in people, expertise, and technology.

The more customers we have that use the same parts, it allows us to buy in larger quantities, and larger quantities usually come at a better cost, and that’s by design because the manufacturers ultimately want to make longer runs of scale. So, the more customers that use the same part is one part of the equation, the other part of the equation is finding alternative sources where there may be an incumbent that controls a large portion of that particular part.

We want to create competition, but we also have partnerships, and we understand who can make what part when. Lead times matter a lot; quality matters a lot. It’s certainly not always cost. The ability to deliver and deliver on time can matter more than cost.

In Sum

Žilvinas Lapinskas

Some of the players call the situation a perfect storm. Mature aircraft are in big demand, because newer planes are late and then these problems with these engines. It means that the mature aircraft have to fly. And sometimes, the decisions made on this don’t look logical because six years ago, the decisions would have been different. For the MRO, it’s a really good cycle.

Mike Stengel

Despite the constraints and challenges in the supply chain, I’d say overall a positive long-term outlook for the industry, whether you’re looking at commercial transport, military, or business aviation. We remain on the more optimistic side for the state of the industry and the outlook, and we just need to push through some of these bottlenecks.

Matt Lacki

There’s more demand than there is supply, and that creates a lot of interesting challenges. There’s also a lot of geopolitical challenges that have occurred in the last 18 months and other challenges, but it also creates a lot of opportunities. It’s an exciting time in the industry if you can solve problems, be flexible, and move quickly.

I think our ability to put people around the world to provide solutions around the world is unique—it fits this particular time period well. It’s certainly a challenging time; there’s nobody I talk to who doesn’t have a mountain of emails, calls, and meetings. We want to make it easier for our customers to do business in perhaps the most highly complex industry in the world. By anticipating our customers’ needs and combining our global reach with local expertise, we can turn these current industry challenges into real opportunities. It’s a very exciting time in aerospace.