As the aerospace and defence (A&D) industry was gradually recovering from the disruption caused due to the pandemic, Russia’s invasion of Ukraine further disrupted A&D supply chains and trade flows. Let’s talk about the impact of the invasion on supply chains and approaches that A&D companies should consider to build resilience and navigate current and future disruptions.
Building more resilient supply chains
The COVID-19 pandemic caused widespread disruption across the aerospace and defence industry. Commercial aerospace companies experienced a decline in demand and production as passengers stopped travelling, workers went home and customers deferred delivery of new aircraft. As most A&D suppliers are highly specialised with unique expertise and complex equipment, they struggle to make quick changes to production in response to varying demands. The challenge is accentuated as many suppliers serve both commercial aerospace and defence. Any spillover risk from commercial aerospace could leave defence OEMs vulnerable to sourcing critical parts for their programmes and platforms.
Even as the industry was gradually recovering from the disruption caused due to the COVID-19 pandemic, Russia’s invasion of Ukraine (the invasion) has further impacted A&D supply chains and trade flows. The invasion is causing additional stress on an already weakened global aerospace supply chain, limiting the industry's ability to meet demand. It has also raised fundamental questions about whether the industry is too dependent on particular countries or regions and if diversification should be considered.
This article analyses the impact of the invasion on the A&D supply chain and provides approaches that A&D companies should consider to build resilience and navigate current and future supply chain disruptions.
Three ways the invasion could impact supply chains
Forced decoupling and the resulting impact of critical minerals on A&D companies
The invasion has forced a global decoupling from the Russian supply of critical minerals, which increases industry reliance on other concentrated hubs. Ten critical minerals pose a significant supply security concentration risk due to the forced decoupling from Russia.
The forced decoupling reduces the supply of these minerals and increases industry reliance on other concentrated hubs such as China for Titanium and Africa for PGE, as they are the lead global producers of six of the eight prioritized Russian source-critical minerals, producing over 50 per cent of the worldwide production. This could create additional concentration risks, impacting metals and mining’s global multi-tier supply network.
As a result, A&D companies could face significant issues, including production delays due to raw materials shortages and international shipping bottlenecks. And longer delivery times could delay A&D manufacturing activity dependent on imported goods. Furthermore, soaring prices for energy, transportation and critical materials increase operating costs, potentially impacting margins.
Uncertainty around the demand for commercial aircraft
As of May 31, 2022, about 40 countries have closed their airspace to Russian airlines. Russia has, in turn, banned airlines from most of those countries from entering or flying over Russia. Moreover, Ukrainian airspace is closed, putting a halt to the movements by air of roughly 3.3 per cent of total air passenger traffic in Europe, and 0.8 per cent of total traffic globally, as of 2021.
As for cargo, Russia accounted for 2.5 per cent of global total dedicated cargo flights in 2021, but the importance of these flights for global heavy-weight cargo is significant, and the corresponding capacity will be difficult to replace. Both domestic and international dedicated cargo flights for Russia have deteriorated markedly since the invasion started. Rising jet fuel prices and the loss of capacity are likely to push air cargo rates even higher, which are already close to record highs.
Increased defence spending and localisation
The invasion has prompted many countries to raise their defence budgets. European countries and those outside of the continent are increasing or contemplating an increase in their defence budgets in response to the invasion. As a result, the defence industry is expected to see an unprecedented boost in revenue.
The invasion is also changing the defence procurement balance. It could catalyse changes in procurement priorities, and defence companies must be ready for this change. For example, Ukraine’s successful fielding of the Turkish unmanned combat aerial vehicle (UCAV) against Russian forces could encourage defence customers to choose UCAV from different vendors that match their operational requirements. Compared to the US alternatives, these solutions are generally cheaper and can be procured rapidly off-the-shelf with no government-imposed constraints on the end-user.
Furthermore, the invasion has highlighted the importance of digitally integrated air defence systems and military cyber security within the defence supply chains. As the potential for cyberattacks continues to grow, defence industry affiliates could look beyond the minimum requirements within the self-reported compliance checklist and build a proactive, broader approach to managing risks within their enterprises.
The way forward
To better manage supply chain volatility and disruptions, A&D companies should build resilient supply chains. They should have a comprehensive long-term strategy in place, which can help build resilience in the face of shifting geopolitical landscapes and trade flows. Industry leaders should put their energies into supply chain improvements and make strategic decisions that mitigate risks and drive long-term growth. Download our full report to explore ten critical approaches to consider in building and managing supply chain resilience.