One way that airline fares have stayed relatively low is the relatively flat price of airplanes. The duopoly has competed on market share and pushed cost efficiency to keep airplane prices in check. However, there is a long term problem looming. With any kind of reasonable production rate, i.e. one lower than what Airbus and Boeing keep touting, the backlog for narrow bodies is the better part of a decade. Those prices have already been negotiated. There are escalation clauses, but they are not high enough to offset costs and do not flow through the supply chain regularly.
IAM 751 will vote on Boeing’s proposed contract next week. No matter what the outcome of that vote is, Boeing’s labor costs are about to rise. After Boeing settles with the IAM, there will be follow on effects. First and foremost, Boeing can look forward to more pressure from the IAM union that they will take on when they acquire Spirit. That agreement expires June 19, 2027, well within the current narrow body backlog. Beyond that, there will be wage pressure spreading through an industry that already experienced significant wage growth coming out of the pandemic.
When working on our Raw Material Market Reports, I am constantly reminded that raw material suppliers generally have production opportunities outside of aerospace. Indeed, most of their production opportunities are outside of aerospace in areas ranging from automobiles to the beer cans we enjoyed on Labor Day. Given time, opportunities outside of commercial aerospace exist for all firms. I have seen firms turning to medical equipment, space, and other adjacent industries in the past few years. I expect to see more. When I am asked, “When will commercial aerospace ramp up to meet the OEM forecast?” I now answer, “When there is a reason to do so.” Suppliers must invest money to increase production rates. Money that they do not see for months at best given current payment terms from the OEMs. Until there is money coming in to support significantly increased production, I will continue to bet against the production rates touted by the OEMs.
Cliff Collier
September 5, 2024
