As Canada’s aerospace industry starts its path to rebounding, there are opportunities for small and medium-sized shops looking to get in the game
by Noelle Stapinsky
As vaccination rates continue to rise and restrictions begin to ease, the world is moving through 2022 with a certain amount of normalcy. For Canada’s aerospace industry this return to normal is vital. The past two years have been incredibly turbulent for the industry with aircraft grounded, strict travel restrictions, and varied testing regulations, not to mention losing a startling amount of its workforce. In fact, the pandemic has caused the biggest and sharpest downturn for aerospace in its history.
“We saw 70 per cent of the world’s commercial aircraft fleet grounded at one time in 2020,” says Peter Graham, national aerospace and defense sector leader for KPMG Canada. “Thankfully a lot of that is behind us. Certainly, there’s the return of the commercial air passengers. The US is leading that one and it is very close to pre-pandemic domestic travel levels. International travel is still down, but the importance for the industry is that the existing fleet is being used. That means there will be more maintenance, repair and overhaul (MRO) activity, which means spare parts, service, and airlines thinking of replacement and expansion of their fleets.”
The conflict in Ukraine and sanctions imposed on Russia are creating further challenges for the industry, which are yet to be fully understood, and all signs point toward more defense spending by Western countries facing growing threats to national security, Graham added.
Prior to the pandemic, the aerospace industry was navigating tough labour challenges, citing that it would require 50,000 workers over the next decade, according to the Aerospace Industries Association of Canada’s (AIAC) Vision 2025 report. “We just had some recent statistics come out with respect to the aerospace industry and we saw just over 30,000 jobs lost over the course of the pandemic and the GDP decreased by $6.2 billion,” says Mike Mueller, AIAC president and CEO. “We talk about airlines not flying as much and the reduced capacity that they’ve had across the board, which has been a huge impact on the industry. But there are still tremendous opportunities out there and as aerospace and aviation starts to come back, we are already starting to see companies ramping up and the supply chain starting to adjust to that.”
Now that the sector is starting to recover, it will need the workforce lost due to the pandemic and more to have the capacity to succeed. “The main competitive advantage in Canada is our skilled workforce, so it’s something we’ve been working with the government on and having discussions with them,” says Mueller. “One of the discussions we have been having is how do we ensure that the skills pipeline is there.”
In February, AIAC and the Canadian Council for Aviation and Aerospace (CCAA) hosted a workforce conference to bring industry and government together to discuss the challenges of skilled labour shortages. Monte McNaughton, Ontario’s minister of labour, training and skills development, was one of the guest speakers who discussed how children start to determine their career paths between the eight- and 12 year-old age range. “I think there’s a whole host of opportunities there to start talking about the skilled trades in aerospace, and in particular, how it’s a great career path,” says Mueller. “The wages are higher than average manufacturing jobs, and it’s just a great industry to be in.”
Mueller continues, “There is also up-skilling and reskilling, which we’ve been in talks with the federal government about. There’s not one single solution to this, but as we work together, we will get there.”
Supply and demand
One of the major challenges today, as it is with all industries, is the supply chain. “We can’t start a meeting with our clients without discussing supply chain challenges,” says Graham. “And part of that is the workforce. If your suppliers don’t have the workers they need, it can be a little slow to get what you need, when you need it. And everyone’s struggling with that. Transit times are also a problem. What once took two months to get something from China, is now taking months and months because of shortages on their end and logistical problems at the North American ports, and then the rail or transport to the final destination.”
When you think about such challenges in a growing market, when business would slow down, companies could handle it better and use up the inventory on its shelves. “But now, we have the complete opposite problem,” says Graham. “We have rising demand and the shelves are empty.”
Graham says, “I’ve been advising clients for over 20 years. Before the pandemic it was always about offshore and lowest cost. No one talked about the shipping, as it was a percentage of the total cost of the item manufactured in Asia, which was negligible.”
Today, choosing to use offshore suppliers means considering the extra risks involved, delivery delays and logistical troubles. That is why the focus has now shifted to de-risking the supply chain by having multiple, possibly smaller, suppliers in North America.
“If I think of our small to medium privately owned metalworking shops, there’s a lot of opportunity for that particular sector because those smaller shops are known as the ones that are adaptable and innovative,” says Graham. “They can be nimble and produce on a shorter notice.”
Another aspect for metalworking shops is that “there’s a lot of transit that happens with aerospace parts. Not only do you need the precision, but also there are a lot of chemicals, procedures and coatings that have to be done to them. It’s common for a fundamental piece of metal to start in Asia, and then it might cross the Canadian/U.S. border two to three times before it goes to a supplier or the OEM. Every time that item crosses the border you have a risk of delay, risk of logistic changes, and supply chain interference. If you can do more of that work in Canada, I see great opportunity for machine shops here,” says Graham.
Getting in the game
Indeed, having the ability to prove flexibility and adaptability is what all customers want their vendors to have. It’s all about being willing to take on innovation and the adoption of new technologies. Graham points to the new engines being produced by Pratt and Whitney. “They’re telling us that all of their engines can take up to 50 per cent of sustainable aviation fuel (SAF), and their intent is to have all of their new engines be able to handle 100 per cent of SAF,” he says. “That would require new metals, such as titanium. So if you’re a shop that’s willing to work with new specialized metals, rare earth metals, coatings and technology, which might require some capital investment, that’s what it will take to get involved.”
Interestingly, the pandemic has accelerated merger and acquisition (M&A) and collaboration activity for many small to medium-sized enterprises (SMEs). “We’ve done a lot of work on collaboration and how companies can work together to secure bigger work packages,” says Mueller. “But the first step to getting into the sector is by getting involved with AIAC and the regional associations to start building those networks, understanding the industry, which is highly regulated, and understand what opportunities are out there.”
Graham agrees that by combining forces, Canadian metalworking shops could open new possibilities. In terms of M&A activity, Graham says, “we have a sector that is once again showing growth forecasts that are credible and we have a lot of liquidity in the market. We work with not only corporate clients in aerospace, but also financial investors, private equity, pension funds, etc., and they’re considering investments in aerospace. The banks are lending into these deals and there’s a lot of money chasing the same assets. So when the valuation multiples go higher, those that don’t have to sell, but could, might be encouraged to. There’s a lot of what we call portfolio reshaping [happening].”
This is when larger companies and OEMs start divesting non-core business, which creates an opportunity for businesses to either acquire or achieve that part of the supply chain demand. Graham says, “you can either grow organically by chasing a part of the market, get new clients and try to build out your titanium division or specialty, for example, or you can buy a company that’s already entrenched in that…external growth is a way to achieve growth very quickly.”
Last spring, the federal government recognized aerospace as being a strategic sector and set aside $2 billion in its 2021 budget to support the industry.
“Throughout the pandemic, the wage subsidy program was an absolute lifeline for the industry. And I know a lot of the machine shops took advantage of that,” says Mueller. “That’s one of the really good things that the government has done.”
“But the one thing that is very concerning to me, which I know will have a ripple effect on the supply chain, is the manufacturing tax that is proposed in the budget,” continues Mueller. “We haven’t seen the legislation on that yet, but there’s basically a tax on the sale of aircraft under 49 seats, which would have a pretty big impact on business aircraft, helicopters, and a whole host of areas, where we are world leading. From some of the analysis we’ve done, if that tax comes in, it will be $1 billion in lost revenue, and we would lose over 1,000 direct jobs in the industry.”
In fact, Canada ranked as second in the world for manufacturing business jets in 2020. “We’re already seeing some companies with a major reduction in demand for business aircraft and others are slowing. It’s concerning that this tax is working at cross-purposes to what’s in the budget. You have support on one hand and a pretty significant tax on the other hand. And we are in talks with the government about this,” says Mueller.
Along with the $2 billion in funds allotted in the 2021 budget for small businesses, Mueller says that there is also about $250 million for innovation investment and development. “Over the next five months, we will be consulting the industry on what are some of the innovation thrusts we should be looking at as an industry, what an aerospace innovation ecosystem would look like for Canada, and how do we want to position the industry for the next 30 years. Aerospace is driven by innovation and if we’re not innovating, we’re falling behind. Knowing more about that process and how to participate, I believe that getting machine shops to be part of that is going to be critical.” SMT