Podcast: What Could Go Wrong In 2022

As the aerospace industry learns to live with COVID, it faces other big challenges from a stressed supply chain to geopolitical disruptions. Listen in as our editors discuss.

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Rush transcript:

Joe Anselmo:
Welcome to this week's Check 6 Podcast. I'm Joe Anselmo, Aviation Week's Editorial Director and Editor-in-Chief of Aviation Week & Space Technology magazine.

Many leading aerospace analysts are cautiously optimistic that the Omicron variant is a temporary disruption. They're forecasting that the industry's recovery from the COVID crisis will pick up steam in 2022. But the intense focus on COVID during the past two years has overshadowed some deep-seated challenges the industry is still facing. Today, we've gathered some of our leading editors to talk about what could go wrong in 2022.

This won't be a pleasant discussion, but it's an important one to have. Leading off this group is Senior Business Editor Michael Bruno. We're also joined by Jens Flottau, our Senior Commercial Aviation Editor, Steve Trimble, our Senior Defense Editor, and Graham Warwick, our Executive Editor for Technology.

Michael, let's start with you because there is a lot of concern about the health of the aerospace supply chain. Now, fill us in on where you see things.

Michael Bruno:
Yes, thanks. So, the mind wanders with the possibilities obviously when it comes to thinking of doom and gloom. I mean asteroid strikes and World War and things like that, pandemics, these black swan events that apparently keep popping up every once in a while, but you can't really forecast it in your annual planning at the end of the year for the coming year.

But we're getting back into the realm of what I call the possible things, the things you know are going to go wrong. In aerospace manufacturing, we're back to the bad old days before the pandemic of where the supply chain is crunched and they're crunched for multiple reasons. They're crunched because of growing prices. It's not just overall inflation that you read in the mainstream newspapers, but it's prices for raw materials that actually go into the aircraft. One analyst report, I saw said that those prices could increase 14% this year.

There's obviously a lot of talk about labor costs and the difficult in hiring people. Believe it or not, in aerospace, there isn't that many more people that are needed immediately, there are going to be many more people needed over the next five years as we get back to peak production in large commercial aircraft. But in the immediate sense, it's 2% or 3% growing the overall workforce this year.

The problem though, is that those people cost a lot more than they used to, so labor costs could be going up 7-8%. Aerospace is able to pass on a lot of these costs, and they don't necessarily all take effect immediately. The industry typically runs under long-term agreements for sure, but, nevertheless, 7% increase in labor, 14% increase in raw materials, a billion here, a billion there, and pretty soon you're talking about real money, that's a headwind on the manufacturing sector.

And so, overall costs could go up 8% and you can only pass through maybe 5-8% of that, or less than 8% according to the analyst reports I read. There are other problems that the suppliers have, they are over-capacitized, which means that basically they've got the factory space and they've got the equipment for reaching peak production as it was outlined before the pandemic. But they don't have the people, of course, as I just said, but what they also don't have yet are the agreements for how to capacitize these things, and what they do have a lot more of than they did before the pandemic is a lot more debt.

So long story short, you have these companies that are stretched, particularly in tier two, tier three, and they've got a lot of too much factory space that they're paying for, they don't have enough people to monetize it. When they want to try to get the people, they got to pay a lot more for it. So it's just a really, really hard time in the supply chain going forward. And if you talk to anybody at the top, in the tier one and the OEM level, they say, once again, supply chain. Supply chain's going to govern how much this increase happens during this post-pandemic production run up.

Joe Anselmo:
Jens Flottau, I was talking with an industry veteran and I was expressing optimism and enthusiasm about the recovery of air traffic, and he said, "Well, yeah, if you look at the big U.S. domestic market, that's true, but if you pull back and look at it globally, the picture is not nearly as bright.” And some people still don't think we're going to see traffic back at 2019 levels until 2024 or 2025. Where do you fall on all this?

Jens Flottau:
You're absolutely right, that's still totally unclear, but let me, before I talk about what could go wrong and where we could end up, I'd like to mention what is going wrong already. And that's capacity demand traffic. In Europe, we've basically seen a 20% cut in capacity over the last two weeks, just because of the Omicron surge. We've heard, or we've seen rather Scott Kirby, United’s CEO, writing a memo to his people saying that on one single day a third of the Newark-based staff  called out sick. We've seen Finnairs cutting its schedule for February by 20%, not necessarily because of lack of demand, but simply because so many people are sick and can't work. So, things are already going wrong. Of course, there's this hope unto an extent, the expectation that in second quarter, when Omicron is more under control or hopefully behind us, then there is going to be this recovery.

But I've seen more and more reports that argue 2023 return to normal is an illusion, it'll take a lot longer, it'll be ‘24 or ‘25. Now that's kind of the part of the what could go wrong part, traffic recovery, obviously the big topic, but then, following up on what Michael said about suppliers, Airbus has this gigantic program ahead of it to ramp up production from 40-ish [per month] right now to 65 within 18 months, which is the fastest expansion they've ever tried. And they're talking about 75 or something like that in the years beyond that.

And you could think of all sorts of things that can go wrong there from raw materials, supplier, staff shortages and so on. And obviously Omicron today already has an impact on operations at Airbus, they're monitoring every day how many people are sick, whether they can keep up production. And they're saying it's a challenge already. So, wait and see there. And then obviously on the Boeing side, I mean, we all know it's three words, 737/787/777X, they're not where they should be and their struggle's going to continue.

Joe Anselmo:
Steve Trimble, what could go wrong in 2022?

Steve Trimble:
Well, thank you for asking that question, it's the question I like to ask myself and other people a lot as a journalist. And in the defense industry at a big picture level, some of the things that didn't happen that we were wondering what were going to happen, for example, is defense budgets have not been affected by social spending on COVID nearly to the degree that we thought was possible in the last couple years. But there's still this sort of lingering cloud of uncertainty as we get into the third year of this, about how much longer that can last. And there's a couple bellwether big deals that are coming up. Canada is supposed to announce a fighter procurement that they've been talking about almost since I've been writing as a journalist about airplanes, 20 years ago. That is supposed to come to head this quarter, so we'll see if that happens.

There's a lot of those kinds of deals that are out there. And in the U.S., from a macro standpoint, the political situation has translated into a lot of budget uncertainty, the appropriations process, for example, is deadlocked for fiscal 2022, which is already in the U.S. system going on four months old. And as our colleague, Brian Everstine, reported yesterday, there really doesn't seem to be any end in sight to that appropriations deadlock, it could be a full year continuing resolution, which has a dramatic impact on DODs plans to ramp up development of certain programs, like in NGAD, the Next Generation Air Dominance program, the Ground Based Strategic Deterrent, and also to even ramp up production of other programs like B-21 bomber. We’re also entering this period where a lot of the very high profile investments that were made in 2017 and 2018 as part of the previous administration’s pivot to the National Defense Strategy using this sort of fast-tracked acquisition process are coming to a head right now.

Amidst all this disruption caused by Omicron and Delta variants of COVID, we're coming to the point where these five-year timelines that were initiated 2017 and 2018 for a lot of the yypersonic programs are coming due, and also Long Range Precision Fires. Some are doing better than others, but clearly the testing process so far has had a very mixed record with a couple successes and a whole lot of failures that we've been tracking.

And then just on the production side, it'll be interesting to see where things stand with a lot of aircraft production this year. So far the OEMs have managed to keep things relatively on track. I mean, a really important statistic came out just a week ago when Lockheed Martin reported 142 deliveries of F35s in 2021, their range, their guidance to Wall Street was 133 to 139. So they actually exceeded their guidance for the first time in quite a while.

But in the process, if you look under the numbers and look at the monthly totals, you'll see that more than half of those deliveries came in the last four months of the year, so 80 deliveries. And if you go back in Lockheed's production history, they've never delivered more than 55 aircraft over a four-month period before.

So it kind of speaks to the sort of Herculean effort that they sustained in the last trimester of the year, including 30 of those 80 in December alone.

So they've managed to pull that off in 2021, maybe they'll get things going again in 2022, but can they do that a second time? And if say Omicron hit their production system in October versus the end of December, how would that have affected their yearly deliveries? Who knows? So those are the kinds of... It's not just Lockheed, it's just a big high profile one with a lot of aircraft to look at, but you could kind of extrapolate throughout the entire production system and supply chains, not just in the U.S. but overseas. So those are the things I look at, there's plenty of other things that could possibly go wrong, but I'll leave it there.

Joe Anselmo:
Graham Warwick, you're the Dean of Aerospace Journalists, you've been covering this industry more than 40 years, you've seen lots of ups and downs. As you look at things, what should we be worried about?

Graham Warwick:
Well, I personally worried about some analysts standing up saying it's going to be different this time. I hope they never get allowed to say that ever again. For all the disruption that burst the last bubble we were experiencing over the last couple of years, we actually made quite a lot of technological progress over the last couple of years, but and we've kind of set ourselves a very ambitious technology plate, for 2022 and for 2023, we have got a lot of technologies that have got to get from the, not quite from the drawing board, but into flight, but certainly from non-representative prototypes to certifiable aircraft and certifiable systems. And that's across electric propulsion, hydrogen propulsion, advanced air mobility. Really the rubber hits the road, or the electrons hit the wire starting this year. We will see the testing of actual certifiable airplanes start this year. They've all got ambitious schedules, they're kind of aiming for 2024, 2025 across a wide range of different technologies to get these into service.

And I think that we will certainly see delays this year, I think all of these schedules are overly ambitious when you're dealing with certification. We will probably see some technical failures, and we will almost certainly see some financial failures over the next two years -- maybe not in 2022, but I think that when we get into 2023 and these schedules start to stretch out, I think some of these startups will begin to suffer.

At the moment, there's a lot of money in the pot, there's a lot of optimism, but we're already starting to see cautious wording. As these companies go public, they're having to be a bit more cautious in their projections. And we're already seeing some of the fudging of the wording when they start talking about those sort of things. So I think that we need to prepare ourselves for what is going to be a slog on the technology side over the next two years, we have a couple of key things coming up that I think will focus the industry's attention.

One is that International Civil Aviation Organization, I think in September, is supposed to agree on  a long-term sustainability goal for aviation. At the moment, they have sort of an aspiration, but they need to set out an actual goal to get to what we assume is going to be net zero by 2050. They've been doing a lot of work to work out how the heck to get there and they've got to approve that in September. And as we've just seen with COP26, I suspect we're going to see a lot of political wrangling over what that target is. There are some countries that do not want to move as fast or can't move as fast as others, and as we've seen at ICAO in the past when they drive to get to a global consensus, they always kind of slide to the bottom of the what's possible, so you'll end up with something I think generally everybody will feel is not strong enough, but it will be a global agreement.

And then I think sometime this year, I'm not quite sure but there's supposed to be some big UN-level get-together on space debris. We've seen an awful lot of talk about this coming towards the end of 2021, the Chinese accusing Elon Musk of parking his satellites in the way of their space station and all that sort of stuff. People are getting really worried, and they think there needs to be some sort of global agreement on how we police the use of space and how we set about trying to clean it up if we can clean it up. But we saw one deliberate destruction last year, and we certainly saw at least a couple of near-misses and one possible actual collision, small collision. And I think 2022, we will see something significant hit something significant in space, and that will add some impetus to that. So I think it's going to be a challenging year for technology and the promises of technology.

Joe Anselmo:
Graham touched on geopolitics, We have Russia right now threatening to invade Ukraine. China seems to be rethinking the integration of its economy into the world economic system. How big of a threat is that, that geopolitics could upend things?

Michael Bruno:
I can answer that one from the point of view of the many different analyst reports and surveys when they go out and they talk to the industry and movers and shakers and power brokers, and a bunch of them come out at the end of the year and that's a top question that gets asked, ‘Where did geopolitics rank?’ And right now in most of those surveys, I would say that it ranks about second or third. If you take the pandemic, COVID-19, and you make its own question, that's probably roughly number two, believe it or not. Most people think in these surveys, when you're asked to look a year or two years, three years ahead, the pandemic becomes endemic, doesn't go away, but we learn to live with it somehow, some way. So it's not the top priority, assuming a major new variant doesn't come wipe us all out, God forbid.

The top issue is typically supply chain, but then number three is geopolitics and geopolitics, it's interesting in these surveys, in that geopolitics used to be bottom of the lists. These things would list top 10 concerns, what keeps executives up at night, geopolitics was down there at nine or 10. But it's an enduring theme now, ‘What's going to happen with China?’ Our friend, Richard Aboulafia at AeroDynamic Advisory talks a lot about it looks like there's a permanent decoupling of China from the U.S. or the West when it comes to economics. And that means everything to the commercial aerospace sector, because China is responsible for a quarter to a third of the backlog or current deliveries, depending on how you measure it of large commercial aircraft, big, big, big, big move if they decouple and they decide to go with their own C919.

Russia is problematic for many instances, not only because of the existential threat that it poses for the United States and the West in regards to nuclear and cyber-weaponry, but also, we really do still rely on them for many things, including titanium. So, industry has these day-to-day concerns that are based in geopolitics and nobody expects that to go away. And then, there's the random black swans. What happens if things with Iran or North Korea flare again, if business gets shut down in the Middle East? All of these things are now weighing on executives' minds in a permanent way, and that didn't used to be the case a couple of years ago.

Joe Anselmo:
Steve Trimble, I think I cut you off. I apologize, but Michael was talking about geopolitics and you were about to jump in behind him on something, so why don't you go?

Steve Trimble:
Well, yeah sure. I mean, we just, in terms of a geopolitical discussion, I mean, in terms of what could go wrong, I mean World War III could go wrong. I mean that's not necessarily probable or likely, but we're getting back to the point where those kinds of things become possible. Just look at what China's been doing with ICBMs and the huge ramp up and testing of these sort of even exotic concepts like fractional orbital bombardment systems.

North Korea has just tested some maneuvering re-entry vehicles, which of course is going to make Japan and South Korea very nervous, there is still the whole issue over Taiwan. If you go to Russia and Ukraine, I mean, we're back to where we were in the mid-1980s when I was a kid and my dad was in the Air Force and we were stationed at Florennes Air Base with 48 ground launched cruise missiles with nuclear warheads on them as part of this larger deployment that was done in response to Soviet Union’s deployment of SS-20s to Eastern Europe in the late 1970s. That all led to the signing of the INF Treaty in 1987, and which banned all of those missiles.

Of course, that treaty went defunct in August of 2019 and right now, and what I was referring to earlier with long range precision fires by the Army, they're planning to deploy a long Range hypersonic weapon, the Dark Eagle missile, with a hypersonic glide body and a Precision Strike Missile, or PrSM, in the 2023 timeframe. These were missiles that were banned under the INF Treaty but are now possible and those are done actually in response to Russian missiles that now exist, that also were previously banned under those treaties. And so we're going back to this point where we could have a face-off between Russian and American missiles in Western and Eastern Europe, perhaps even in Ukraine. And that's what's precipitating this crisis is in a large part is that Russia is anticipating that, and they don't want those missiles on Ukrainian soil or anywhere near Ukraine.

And once you get into that, you get into these 10-minute response time windows that put everybody on higher trigger alert, and it gets very frightening for everybody, so hopefully... They're in Geneva right now discussing how they can maybe come to an agreement, although it doesn't seem very likely on doing something about that category of missiles, but we'll see how that works out, but when you talk about what could go wrong, we're back into an era where things that seemed like we had moved past all that in the 1990s, we're back in it again.

Joe Anselmo:
Scary stuff. Jens, Airbus has a lot of smart people working there, and they're talking about ramping up to unprecedented production rates. So given everything we've just been talking about does Airbus just think that good times are coming back soon and in the next few years, all this all these bad times will be a distant memory?

Jens Flottau:
Apparently so, but the suppliers don't follow that conclusion, they're much more skeptical. But don't forget, I mean, they sit on 7,000 something firm orders that need to be delivered. They've just lost a competition to Allegiant in the U.S. partially because they couldn't deliver aircraft soon enough. And there's probably going to be some more cases like that. So they have an incentive, particularly the sales part of Airbus has a big incentive to grow production simply because they don't have anything left to sell for the next few years.

 But yes, it's a risk. There's an operational risk that they just can't deliver on their promises. And of course there's a financial risk in that their customers can't afford taking deliveries. And speaking of risk on the airline side, there is substantial evidence that risk is turning into reality in the way that the established part of the industry is shrinking. And we've got this big transformation towards low-cost carriers, accelerating in a big, big way. That all needs to be taken into account as well. And based on the orders that we've seen last year and in the years before that will start to really come into reality very, very soon, including this year.

Joe Anselmo:
We're running short on time, but Graham, we haven't talked much about sustainability and that's such a huge topic for this industry. And this industry is under so much pressure to become more sustainable. I mean, is that a positive or a negative?

Graham Warwick:
Well, I mean if we succeed, it's a positive for the Earth basically. It is a negative in the near term because it's costly. We are already seeing the airlines adding surcharges to ticket prices to pay for the extra cost of the sustainable fuel. So there is a financial impact on the cost of travel from being sustainable or trying to be sustainable. But the reality is, if you don't try, there's still a cost because the cost of carbon is... Tax on carbon is going up as well. So the costs are there and it's just sustainable fuels or whatever will allow you to offset those costs. But generally things are going to get more expensive because sustainable technologies by and large, at least to purchase them are more expensive.

If you get to hydrogen electric long term, it could be cheaper to operate, but we've got an awful lot of money to spend to get to a point where we could reap the benefits of the efficiency. So we saw tremendous activity towards the end of 2021 in terms of airlines finally committing to using SAF. Before that, there were one or two airlines that were regularly the leaders, now there's kind of a phalanx of airlines that are investing and moving forward. But there's been a lot of promises made, there now needs to be billions of dollars in investment raised to build the plants to produce the fuel. So what we're going to see through 2022 is ‘How easy is it to start to raise the money needed to build these plants?’

So it's going to be costly in the near term in terms of investment, in terms of spend, and then sometime round about 2035, we will start to turn the corner to where it actually becomes a better way to fly, certainly a less expensive way to fly. But the pressure's not going to come off. We are only just at the beginning of seeing the impact of climate change on a regular almost daily basis. And that is just going to scare the bejesus out of the populous and their politicians. And we are going to see some irrational, some rational decision-making come as a result of that, but it isn't going away.

Joe Anselmo:
Any closing thoughts? Anybody have closing thoughts?

Michael Bruno:
I think I would just add something that Graham said earlier, it got me thinking. Believe it or not, there's been a lot of euphoria over the past couple of years. I don't mean to imply that the pandemic was a good thing, it was a horrible, horrible thing, not only for the individuals affected, but for the aerospace and defense industry it was the biggest shock certainly in anybody's lifetime, quite possibly in the history of the century-old industry. But there were a lot of good things that have come out of it, there was public support for the industry in a way that had never been demonstrated before, money flowed in to support companies and workers, new technologies, climate change, the greening of aerospace all came front and center and there was an agreement that this thing needs to be tackled and it's now raison d'etre for industry.

On the military side, there was more money flowing into the supply chain, for instance, and OEMs got lots of big new deals. So, I mean, there was, believe it or not, a lot of great things that happened. And we are now entering the after party, the morning after where that euphoria is subsiding, and you've got to get down to work. And part of what that getting down to work, what Graham was just talking about with sustainability, not to be too doom and gloom, but when the reality hits of the amount of change that this industry and all of its operations have to go through in order to meet the goals that were already agreed to, or on the military side Steve's world, the fact that the amount of money may go away, or at least the amount of increases may not be there to sustain what you've already planned and which you're already expecting, there're going to be a lot of more tough choices. And we just haven't been used to that many tough choices in past couple of years.

Joe Anselmo:
Graham, let's give you the final word.

Graham Warwick:
I'll just say that, Joe, if you look back over the hundred plus years of the aerospace industry or the aviation industry, it generally comes out of bad periods better. It generally learns good things as it goes through bad happenings. So I kind of think that there will be... Well, we're going to have more of these. I mean, we didn't expect this one, we won't expect the next one, but the industry during these times of stress, the industry kind of learns things, learns from them and gets better is as well to that. So we will be looking back and seeing the lessons that we've learned going through this.

Joe Anselmo:
Yeah to that point, the 1920s started with the Spanish flu and turned out to be a pretty great decade for aviation. So let's hope for a repeat 100 years later. Graham, Michael, Jens, Steve, thanks so much, it was really a wide ranging conversation. We'll have to come back in a year and see how we did, but really appreciate you guys taking the time to give your insights.

That is a wrap for this week's Check 6 Podcast. You can subscribe to Check 6 in Apple Podcasts, Google Podcast, Stitcher and Spotify. Special thanks to our producer in Washington, D.C., Michael Johnson. Join us again next week for another Check 6 and stay safe.