Aerostructures was a popular segment for aerospace investors in the mid-2010s. Spirit AeroSystems, the market leader, was riding the rise of Boeing 737 and 787 rates as it delivered more than 500 Airbus A320 shipsets. GKN Aerospace and Triumph Aerostructures, the next-largest suppliers, rode a wave of good news, with the latter’s market capitalization quadrupling between 2010 and 2013. Airbus’ two aerostructures subsidiaries, Stelia Aerospace and Premium Aerotec, were also enjoying robust growth, with some speculating they might be spun out as Boeing did with Spirit years before, designating its activities “non-core.”

Fast forward to 2023, and nearly everything has changed. Spirit is beset with major 737 quality issues, dramatically higher labor costs, a deteriorating balance sheet and an 8.8% operating loss in its most recent quarter. GKN was purchased by turnaround specialist Melrose and will soon close its St. Louis facility, to Boeing’s chagrin. The former No. 3, Triumph, exited aerostructures after more than a dozen divestitures since 2016. Airbus recently merged Stelia with internal assets to create Airbus Atlantic, while Premium underwent painful restructuring. Airbus now considers aerostructures strategic. 

The aerostructures supply chain, which comprises 35-40% of the value of a typical jetliner, is in turmoil. Tier 1 suppliers, which accounted for nearly 60% of total activity in 2016 ($34.4 billion) while OEMs insourced most of the rest, are struggling. What are the implications for stakeholders?

One obvious development is that being a major aerostructures supplier has become less financially attractive. OEM supply chain initiatives, including unilateral price reductions and dramatic payment term increases, made an industry that had mid-to-high-single-digit margins untenable. Unlike other segments, most aerostructures suppliers don’t have aftermarket earnings opportunities because designs belong to aircraft OEMs.

 This timeframe also highlighted what many industry insiders long understood: Aerostructures profit margins don’t scale with the size of the business; most often, the reverse is true. The most profitable aerostructures suppliers are usually small, focused and agile. The dearth of new aircraft programs means that Tier 1s are saddled with underutilized design and R&D employees—a problem smaller, make-to-print suppliers do not face.

Technological changes in aircraft design also challenged aerostructures suppliers. As wing designs became more complex, an arm’s-length relationship became less viable. New aircraft designs require more frequent wing design changes. This may be why Boeing, Gulfstream and other aircraft OEMs have increasingly insourced internal wing manufacturing to the detriment of third-party suppliers.

More recently, the assumptions underpinning OEM price reduction demands, including stable raw material prices and compliant labor, ended. The COVID-19 crisis and geopolitical turmoil led to volatile raw material prices (most recently for steel) and surging wages. In June, Spirit Aero-Systems agreed to a huge wage increase over four years after a brief labor strike. Other major aerostructures suppliers will follow, as will aircraft OEM labor unions.

What are the implications of these changes for stakeholders?

First, the trend of more OEM insourcing will continue. Today, approximately 40% of work is insourced. Airbus and Boeing realize that aerostructures execution is crucial to achieving their higher production rates, as evidenced by the creation of Airbus Atlantic. Does this mean Boeing will buy back Spirit AeroSystems, as some analysts speculate? Not necessarily. Its financial targets and weak balance sheet mean that internalizing a large portion of its supply chain doesn’t make sense right now. Boeing CEO Dave Calhoun confirmed this in a June interview.

Second, there will be more churning of aerostructures suppliers. Many countries are interested in taking a much greater role in the aerospace supply chain—from South Korea and Malaysia to Morocco and India. Boeing’s aerostructures suppliers, including Mitsubishi, Kawasaki and Fuji (now Subaru), demonstrated over the last 40 years the value of stable suppliers that provide technology, market access and patient capital.

A final, critical implication for aircraft OEMs is that aircraft prices must increase. Airbus and Boeing famously held Airbus A320 and Boeing 737 prices nearly flat from 2000 to 2020 while depending on suppliers to make this flawed supply chain strategy possible. Both are now modestly increasing prices, but the imperative for greater hikes grows as aerostructures costs escalate.

For too long, OEMs assumed that compliant aerostructures suppliers were a given. That era is over, and aerospace stakeholders must plan for a new reality.