Volume 1: Beyond the Horizon: Canada's Interests and Future in Aerospace – November 2012
Opportunities and challenges
As it faces changing market and production conditions, the Canadian aerospace industry has a number of key strengths. These include its long track record, demonstrated ability to innovate and adapt, world-class technological capabilities, highly skilled workforce, vibrant and diverse centres of activity, exceptionally close relationship with the American industry, and reputation for reliability.
These qualities—supported by a web of academic and research institutions, trade agreements, public policies of general application designed to foster productivity and competitiveness, and sector-specific programs—are core to the success of the Canadian aerospace sector and help position it to seize emerging opportunities.
The fortunes of Canadian firms depend on capturing a meaningful portion of the demand for military and civil aircraft, both in emerging markets with rapidly expanding fleets and in established markets where commercial carriers plan to replace aging planes with more fuel-efficient models.
For Canadian original equipment manufacturers (OEMs), this means identifying which markets are likely to be most receptive to Canadian offerings and vying with huge players like Boeing and Airbus. Bombardier has launched the CSeries because it believes that there will be demand for more fuel-efficient aircraft in the lower end of the single-aisle segment of the market. Its partnership with China's national aerospace firm, Comac, should facilitate access to the enormous Chinese market and help both companies compete globally. Other OEMs are also endeavouring to access emerging markets: Viking Air, for example, has found buyers for Twin Otters in China, Russia, Vietnam, Argentina, Peru, and Turkey, and Bell Helicopter Textron Canada is expanding sales of commercial helicopters in countries such as Brazil, India, and China.
For Canadian tier 1 integrators and smaller suppliers, the opportunity presented by rising commercial demand is different: they must strive to secure a place on the platforms that all OEMs, wherever based, are developing to meet this demand. Because the design, development, and manufacture of a new aircraft is such a long-term undertaking, to be frozen out of its supply chain means lost sales, not simply for the immediate future, but for years and perhaps decades. Although a proven record of reliability and a history of partnership with an OEM are to the advantage of integrators and suppliers, in a globalized industry, price and quality considerations frequently trump sentiments of loyalty between OEMs and suppliers. Each new product results in a new wave of negotiations and contracts. To succeed, Canadian firms must be included in design conversations and sales consideration from the outset, and demonstrate that they can offer excellent products at competitive prices. Long-term supplier relationships will be a product of consistently high performance to a global standard.
A substantial slice of the global demand for aerospace products can be met only through innovations that meet customer expectations in areas such as fuel efficiency, noise abatement, and the ability to service isolated locations over long distances, and monitor coastlines. Canadian technological capabilities, as well as patterns of collaborative research within the aerospace sector's centres of activity, should help. So should the country's geography, which creates a natural domestic market and proving ground for innovations in some of these fields.
But even as existing aerospace markets expand, new markets emerge, and demand grows for cleaner, quieter technologies, the Canadian aerospace sector faces challenges.
First, countries such as China, Russia, and India do not simply offer expanding markets for Canadian products. Their own aerospace ambitions make for increasingly fierce competition. These new players—and some established aerospace nations as well—are more inclined than Canada to stray from open and competitive market principles in order to develop products, out-manoeuvre competitors, and capture sales. They have not been hesitant to use the power and resources of the state to incubate, support, and grow their own aerospace industries—whether that means having the state take partial or outright ownership of aerospace companies, providing generous public support for aerospace research and commercialization, or aggressively using state-directed procurement.Footnote 3 Furthermore, they are not always parties to international agreements that apply to the aerospace sector, and even where they have signed on, the transition to full implementation of the agreements' provisions can take years, and there will likely remain a readiness to test those agreements' limits.
"Developing economies around the world are working hard to build their own aerospace industries. To ensure that we continue to participate in the success of this global industry we need new initiatives, re-invigorated policies, and vision from our elected leaders. Our continued success depends upon it."
Canadian Auto Workers, Pulling out of a stall: Plotting a renewed course for Canada's aerospace industry, submission to the Aerospace Review.
Second, access to emerging markets can be unpredictable and, in some cases, depends on establishing a production footprint that satisfies foreign governments. Given the intense competition for market position in these countries, Canadian firms, despite their efforts, could be shut out. The not-so-subtle link between operations and sales in countries with growing aircraft markets could also make it more difficult for Canada to attract foreign aerospace firms to establish subsidiaries and place facilities in this country, where the market is small and access to it is not contingent on local operations.
Third, the globalization of supply chains has reduced the advantage Canadian companies once enjoyed as a result of geographic proximity to Bombardier and Boeing. This has been accompanied by competitive pressure on suppliers to consolidate—as OEMs and tier 1 integrators increasingly prefer to deal with a manageable number of proven suppliers—and to conduct the research necessary to develop new or updated systems or components, forcing them to shoulder new costs, accept more risk, and build design capacity not required in the past.
Figure 9: Global supply chain for the Bombardier Global Express
Description of Figure
This diagram of Bombardier's Global Express business aircraft illustrates the global nature of aerospace supply chains. The diagram indicates the supplier of each major component of the Global Express and the country in which each component is manufactured.
In Japan, Mitsubishi Heavy Industries produces the wings and centre fuselage. In the United Kingdom, Bombardier/Short Brothers produces the forward fuselage and horizontal stabilizers. In Canada, Messier-Bugatti-Dowty produces the landing gear, while Bombardier/De Havilland produces the aft fuselage and vertical stabilizer, and also performs the final assembly of the entire aircraft. In the European Union, Rolls-Royce produces the power plant, and Liebherr LLS produces the environmental system. In the United States, Honeywell produces the avionics, and Parker Aerospace produces the fuel system and hydraulics.
Figure 10: Global supply chain for the Boeing 787
Description of Figure
This diagram of Boeing's 787 twin-engine jet airliner illustrates the global nature of aerospace supply chains. The diagram indicates the supplier of each major component of the Boeing 787 and the city and country in which each component is manufactured.
In Busan, Korea, KAL-ASD produces the wing tips, flap support fairings, and aft fuselage. In Nagoya, Japan, Mitsubishi produces the wing, Fuji produces the center wing box, and Kawasaki produces the fixed trailing edge, main landing gear wheel well, and mid forward fuselage. In Melbourne, Australia, Boeing produces the moveable trailing edge. In Toulouse, France, Latécoère produces the passenger entry doors. In Foggia, Italy, Alenia produces the horizontal stabilizer. In Grottaglie, Italy, Alenia produces the center fuselage. The engines are produced by Rolls-Royce in Derby, United Kingdom, and by GE in Evendale, Ohio. In Gloucester, United Kingdom, Messier-Dowty produces the landing gear. In Linköping, Sweden, Saab produces the cargo access doors. In Winnipeg, Canada, Boeing produces the wing/body fairing and landing gear doors. In Wichita, Kansas, Spirit produces the forward fuselage. In Tulsa, Oklahoma, Spirit produces the fixed and moveable leading edge. In Chula Vista, California, Goodrich produces the nacelles. In Charleston, South Carolina, Boeing produces the aft fuselage. In Frederickson, Washington, Boeing produces the tail fin. In Auburn, Washington, Boeing produces the tail cone.
Figure 11: Consolidation of supply chains
Description of Figure
This vertical bar chart illustrates how the number of suppliers on more recent platforms and systems has been reduced relative to older programs. For Embraer, the EMB145 entered into service in 1996 and was built with 350 suppliers, while the EMB170-190 entered into service in 2004 and used fewer than 40 suppliers. For Rolls-Royce, the Trent 500 engine entered into service in 2002 with the help of 250 suppliers, the Trent 900 entered into service in 2007 with 140 suppliers, the Trent 1000 entered into service in 2011 with 75 suppliers, and the Trent XWB will enter into service in 2014 with fewer than 50 suppliers. For Airbus, the A330 entered into service in 1994 with 150 suppliers, while the A350 will enter into service in 2014 with 70 suppliers. For Bombardier, the CRJ700-900-1000 entered into service in 2001 with 130 suppliers while the CSeries will enter into service in 2014 with 30 suppliers.
To reduce the risk and cost of managing their supply bases, airframe manufacturers are moving from a business model with many direct supplier relationships to one where they partner with fewer tier 1 integrators. In turn, the tier 1 integrators are adopting the same model and reducing their supply bases by choosing fewer tier 2 suppliers. This is leading to the concentration of aerospace work with fewer tier 1 and 2 firms.
The chart above shows examples of older versus newer programs for Embraer, Rolls-Royce, Airbus, and Bombardier. For each company, the number of suppliers in newer programs has decreased significantly.
Fourth, rising oil prices over the last decade have led to a surge in the price of fuel, which currently accounts for about one-third of airlines' operating expenditures. As fuel costs rise and profits shrink, airlines are bargaining harder with aircraft manufacturers, squeezing margins throughout the aerospace supply chain.
"The nature of complex aerospace programs and the growing number of original equipment manufacturers competing on a global scale creates not only complex technologies, but very complex supply networks. It also creates the urgent need for increased competitiveness from our domestic supply base. To realize our full potential we need to actively develop globally competitive supply chain expertise in aerospace in Canada and rapidly advance small and medium sized enterprises from Tier 3 and 4 level suppliers to Tier 1 system integrators and Tier 2 equipment providers."
Final Report of the Supply Chain Working Group, September 2012.
Fifth, declining defence budgets among Canada's allies are shrinking demand and prompting the producers of military aircraft to be ever more assertive in holding on to maintenance and repair work and the technical data required to perform that work. Similarly, in the civil aerospace segment, Canadian companies specializing in aircraft maintenance and repair are being squeezed between OEMs who wish to retain a greater share of this high-margin activity and low-cost MRO providers, many of whom are closer to the growing markets in Asia, Latin America, and the Middle East.
Figure 12: Airlines' fuel expenses as a share of operating expenses—2000 to 2012
Description of Figure
This vertical bar chart shows the share of airline operating expenses devoted to fuel from 2000 to 2012. The importance of fuel expenses as a share of operating costs declined slightly from 14% in 2000 to 13% in 2002, before rising rapidly to 33% by 2008. In 2009, the share of operating costs devoted to fuel fell to 26% and remained at the same level in 2010. The share rose to 30% in 2011 and is forecast to reach 33% in 2012.
Source: International Air Transport Association, Financial Forecast, September 2012.
Finally, the aerospace industry is inherently cyclical, with ups and downs driven by the long lead times needed to design and commercialize new products and platforms, the instability inherent in aerospace manufacturing schedules, and the fluctuations in capital spending by customers in the civil and military markets. When sales dip, Canadian firms are vulnerable to the loss of highly specialized employees, who may be lured out of the country by offers of employment from foreign competitors. This risk is heightened during a period when firms and governments from other countries—particularly those committed to quickly building their own industries—are searching the world for the best talent.
Figure 13: Cyclical nature of the aerospace industry as illustrated by global commercial aircraft deliveries—1971 to 2011
Description of Figure
This vertical bar chart shows the evolution of global commercial aircraft deliveries from 1971 to 2011. The chart illustrates that deliveries are very volatile, dropping significantly following recessions, with a lag of one to two years (such as in the early 1980s, mid-1990s, and early 2000s), and rebounding strongly during subsequent economic recoveries. Despite this volatility, there is a general upward trend.
Sources: Bombardier Analysis, OAG Aviation Solutions.
The Canadian aerospace sector is at a critical juncture. Emerging conditions carry tremendous potential for growth in sales, increased profits, more high-quality employment, more technological progress, and increased prosperity for Canada. But there are also real risks of contracting market share, diminished industrial capacity, and the loss of innovation and skilled jobs. Industry, government, academic and research institutions, and unions—individually and collectively—will have to undertake a series of practical, results-focused actions to respond to these conditions. If we get it right, Canada will still be a global aerospace power to reckon with 30 years from now.