Welcome to the Velocity Podcast by management consulting firm Oliver Wyman. Join Salena Hess, Konstantinos Varsos, and Craig Harry from American Airlines for this episode where they discuss the post COVID impact on inventory management for MROs.
Salena Hess
Hello, I'm Salena Hess. I'm part of the transportation group at Oliver Wyman, and we're here at MRO Americas in Dallas. Today I have with me Kostas Varsos, a partner in our group, and Craig Harry, managing director of supply chain at American Airlines. Welcome Craig.
Craig Harry
Salena, thank you very much. Happy to be here.
Salena
So COVID has been a rollercoaster for airlines over the past couple years, to say the least. But what we wanted to talk about today was the effect that the pandemic has had on the supply chain of airlines and what recovery looks like at this point. To start us off, Craig, can you tell us what happened over the past couple years?
Craig
Yeah, pretty dramatic, and I think like a lot of crises, it came on very quickly. Certainly, back in about March or April 2020 we thought we were just staring into the abyss. We couldn't see anything other than putting airplanes into storage as fast as possible. No passengers, no cash flow, negative cash flow, and a need to quickly render a more survivable situation for the airline. So, for our business, we're trying to figure out how to stop spending money on aircraft, aircraft parts and maintenance, but keep in mind that some point down the road there will be recovery. The crisis will pass at some point. We had no idea when so we're trying to avoid making decisions or selecting strategies that would hinder us later. So that was the challenge, was go address the current crisis, but position ourselves to be able to recover later whenever that came.
Salena
Along those lines, were there any decisions that ended up paying off in the long term for the airline in the early days of COVID when there was a lot of uncertainty? Was there anything that ended up being a win sort of at this point?
Craig
Yeah. What I think there was critical and challenging internally to come to this consensus is we needed to make sure the supply chain stayed warm, right. We couldn't just shut things off. That was the knee jerk reaction, was to sort of stop everything, stop spending money. But we were very concerned that that would render the supply chain cold and very difficult to restart later, particularly if demand picked up more quickly than anybody expected at that point in time. Ultimately, that was a good decision because that's what happened. By summer of 2021, the market is beginning to show some recovery, at least domestically in the US, and we're putting airplanes back into the air quickly and we needed our suppliers to be able to support us through that process. I think if we'd been even more aggressive in slowing down our business in the spring of 2020, we would've been in an even more challenging situation when we started seeing recovery in the back half of 2021.
Salena
So, if you weren't trying to slow down at that point, were there any challengers you saw from suppliers trying to keep up with that pace?
Craig
Yeah, yeah, in terms of our suppliers, what we saw from our suppliers, what came into greater relief was the true nature of our suppliers. We have good performance suppliers historically that have performed well through the COVID era. There have been challenges, there have been shortages, but they've mostly been able to resolve those and support us even as we began to bring volume back into the market. The suppliers that frankly it's been challenged historically haven't done well, we saw some improvement in the first half of 2020. We thought we would see maybe some benefit. They would be able to benefit from the reduction in volume. What we found, though, was by summer of 2021, those poor performing suppliers were performing poorly again. They just weren't able to get ahead of demand and even today, in early 2022, are still our most challenged suppliers.
Konstantinos Varsos
So let's talk about today. When it comes to suppliers, what do we see? Do we see any shortages or any pricing changes?
Craig
Yeah, yeah certainly. I think we're all feeling the impact of price increases, price escalation, and it's a bit shocking. I think we become so accustomed to the economy in general, very, very modest inflation in the last several decades. Aviation has always been higher than that, the way catalogs escalate it at a higher rate. But certainly, in the last 12 months, it's been pretty extraordinary and really concerning. Right, so across the board, we're seeing cost increases. We are protected in some ways as much as we could through contracts that provide escalation protection, but not everything is under contract. And we are seeing that pressure, and I think to be very transparent, we are pushing back as hard as we can as well. It's creating quite a battle, quite a day-to-day discussion with our suppliers around pricing.
Salena
At this point, are there any opportunities in the aftermarket?
Craig
Yeah, I think so. We've seen some examples, particularly with fleets that aren't flying. We've seen some surplus materials that are available that maybe weren't in the past, and that's been pretty beneficial to us, I think, at least on a spot case as we need it. I think competition in the aftermarket is interesting as well. We're definitely an advocate of having a good competitive market in an industry that has a lot of monopolies because of the way OEMs are structured. So we're trying to develop that, to foster that as much as we can. The real challenge is the constraints of the market and is about material availability. If it comes back to the OEM providing materials and the OEM is unable to for a host of supply chain reasons, we're still at a disadvantage.
Konstantinos
So, we have seen, then, the impact of current events in your supply chain. Is that a fact then?
Craig
Yeah, I think so. I think it's pretty dynamic even today where we're looking at the impact of China lockdown, which is dynamics happening. It seems evolving almost by the day, and that draws a lot of concern regarding the supply chain and anything coming out of those regions.
Salena
What types of things are you doing as an organization to guard against that unstable supply chain or changes in demand that you have?
Craig
Yes, a lot of time with our suppliers we spend time with our suppliers normally, of course, but a lot more targeted questions about the state of their supply chain, what they're seeing in the world, what they're experiencing themselves, and trying to understand, too, not just where they're seeing risk, but how well are they assessing risk? Some suppliers, you talk to them, you get a sense, they know they're a business, they know the nature of their supply chain. Others not so much and those causes us more concern. We're trying to adapt to it day to day. That's part of the challenge is you feel good. You come in the morning, you see an email from suppliers saying they're not shipping today, and now it becomes a scramble.
Konstantinos
And Craig, what did you guys do in those situations?
Craig
We had some interesting examples. We've all heard about shortages of microprocessors and chips and a lot of that in aircraft as well. We've had cases where suppliers would come to us telling us that they can't produce their widget, their box, because they didn't have the piece parts, the microchips inside. There were cases where we went and sourced for them. We were able to find sources of some parts at distributors that they didn't find themselves so outside of our normal realm, but a good success. In other cases, we found examples where we could take some equipment that has been removed from aircraft maybe a couple years prior for the reasons and redeploy that. Maybe we could modify it in a way that fulfills the mission of the materials that aren't arriving from suppliers. It's been an interesting sort of creative process, a little bit nerve wracking at times. We are potentially risking not being able to fly an airplane if we don't have these components and we've been fortunate to this point, everyone that's come our way, we've managed to find a way through with the supplier, typically, alternate sourcing, us contributing from some other resource as well or developing some alternative. So, you know, so far, we've been fortunate.
Salena
Thinking about the demand you've had for inventory over the past couple years, it's certainly challenging to forecast what the future demand is going to look like for the airline as the schedule changes so much. So, how are you managing that at this point?
Craig
Yeah, it's been a challenge. We typically use history to forecast future demand and to provision based on that. Our history right now is not very helpful in that regard with reduced volumes in 2020/21 and a big change in our fleets. We've been adding narrow bodies at a pretty high rate, and we've retired a lot of aircraft as well. So I think the best thing that we've done, the most effective thing that we've done is went through an inventory optimization project. We've looked at inventory demand by location, by fleet type, and by flight hours or departures to really understand what we have used historically, better position ourselves, provision ourselves for that type of use and then forecast forward. As we add volume back to the airlines, we add flight hours to departure is we can provision based on that guidance. That will, I think, be more effective ultimately anyways, but certainly get us through this window of time where our demand just doesn't line up well to our history.
Salena
So, demand for travel is certainly surging back at this point, but how are you getting ready for that pandemic recovery and increase in flights that are coming, especially this summer?
Craig
A really interesting aspect there and a place where airlines are taking slightly different paths. Ironically, for American Airlines, we did most of our regrowth in 2021. Most of our capacity, both domestic narrow bodies and even wide bodies, we returned to service in the second half of 2021. We've been drawing back into that footprint since last summer, since summer of 2021 and we're about there now. We're about back to the same size we were in 2019. The domestic fleet is very busy. The aircraft are very full, and the wide bodies are totally utilized as well. And we did a lot of domestic flying with them in 2021. They're mostly flying international this year. We are shy a few airplanes because of some 787 deliveries that are delayed, but we're back to the full-size airline. So, we feel really good about that, and we feel we're well-resourced and in a good place to go take advantage of summer demand.
Konstantinos
So, Craig, knowing what we know now, how would you approach a crisis like this in the future?
Craig
I think even more so from day one of the crisis, we've got to think towards what recovery looks like. We've got to make sure that even as we're solving the current crisis and responding to it, we need to keep a very watchful eye on what recovery looks like, even if we don't know the timeline yet, because that recovery is going to be a challenge, it's going to be uneven, it's going to create problems throughout the supply chain. We need to make sure we are as well positioned as we can be given these conditions to take on that recovery. It feels a bit hockey stick like, this recovery. Demand has returned in a quick way and we're not all quite ready to support that demand. Again, some of our suppliers are positioned well and doing well, others are really struggling. As we talk to them and we hear the same stories we tell ourselves is when the crisis came upon us, we had to react. We reduced our operations, we shed resources, we canceled orders, we shut down parts of businesses. Now that we have to get that volume back, now that there's the demand, a lot of us are behind the power curve and we are not recovering fast enough and we're missing opportunities in the market because we're struggling in the supply chain.
Salena
So, in closing, what is one thing that worries you going forward and one thing that you're optimistic about?
Craig
I think they're related. I think we have a whole different view on what the supply chain is. So, for a couple of decades, we've been talking about cleaning up the supply chain, reducing inventory, just in time deliveries, in cases of airlines, putting the inventory burden back on our suppliers. And that is painful when something like this happens. When there's this much disruption in the supply chain, there is not a way of recovering well. So, I think what happens now is we spend a lot more time talking about supply chain resilience and durability, how we address shocks in the supply chain, and how we build the better capability so when there is a shock, there's something that comes at as unexpected, we're much better positioned to endure through that and recover. So, I think that's what concerns me is the next event, whatever it is, we don't know what it's going to look like and how it's going to affect us, but from this experience, we can be in a much better place to endure through that and be successful.
Konstantinos
So, Craig, we heard you say, “Don't waste a good crisis." What did you mean by that?
Craig
So, in an environment like this, in a crisis, you have to go out and do things you wouldn't do normally, but you can also go out and do things that you want to do that you couldn't do normally. Take advantage of this disruption and go make improvements, go change strategy in a way you couldn't do during normal course of business. So, we looked at things like retiring certain fleets, right. They were on our mind, they would have retired in a few years anyways, let's retire them now and simplify the fleet now. That was a good opportunity. We used it as an opportunity to go out there and optimize our inventory. That's hard to do when we're running at normal speed. We had a chance to go do that now with our volume being down a little bit. And we had an interesting topic around our fleet rationalization, developing common interiors for our narrow body fleets. We had a project underway for a couple of years to go do this that would run for several years and when the crisis hit us, we talked about do we stop that program to save the cash. And we quickly came to the conclusion, quite rightfully, that no, we continue on. This is the chance when the fleet's not being heavily used to get these modifications done so by the time we come out of the crisis, the fleet has been reconfigured and ready to go.
Salena
Craig and Kostas, thanks for being here today. It's been a fascinating conversation. Always a pleasure speaking with you.
Craig
Salena, thank you.
Konstantinos
Thank you.
You've been listening to the Velocity Podcast by Oliver Wyman. You can find more podcasts in this series at Oliverwyman.com. Thank you for listening
This transcript has been edited for clarity.
