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The tension between Russia and Ukraine, and actually the tension between Russia and most of the world, has been making headlines for the past days and weeks. Obviously developments in the area keep the financial markets in its grip. At the time I started writing this report, Russia said troops were returning to their bases after a drill. However, at the time I was writing the conclusion of this report troops entered the self-declared republics of Donetsk and Lugansk showing how quickly things have changed. The markets have also reacted with the Dow Jones Index futures being down 1.8%.

Just like with many global and geopolitical developments, there is often a link with the aviation sector and in this report, I will have a look at how an escalation could endanger certain parts of the aerospace supply chain and ultimately affect Boeing (NYSE:BA ).

Backlog Boeing aircraft for operators in Ukraine and Russia (The Aerospace Forum)

The first thing I have had a look at is the backlog attributed to Ukraine and Russia using the TAF Boeing Backlog Monitor. In total there are 41 aircraft in backlog destined for airlines in these countries. To be precise there are 7 aircraft attributed to Ukraine and 34 aircraft including the Boeing 737 MAX and Boeing 777F attributed to Russia. These orders are valued $2.8 billion. That might seem like a lot, but measured against the backlog from airlines in this country represent less than 1% of the total backlog. Not included are aircraft ordered by lessors and destined for operators in Russia and Ukraine. So, if these orders would be cancelled or deferred due to the current situation and economic impact of an escalation, the pain would be limited. However, if an escalation of the conflict would have bigger consequences for the world economy more orders would obviously be at risk. However, the potential pain is not so much in the backlog at this point but in the supply chain.

Boeing 787 materials (The Boeing Company)

The bigger problem would appear to be on supply chain side and more particularly focused on Titanium. Titanium has been fielded in aerospace applications due to its beneficial specific properties, partially offset by the price tag that it comes with. On the Boeing 787, around 15% of the weight is titanium or the titanium alloy Ti-6Al-4V as widely used in aerospace. That means that on each Boeing 787-9, there is over 19 tons of titanium. Titanium sheets cost around $20.85 per kg. Not counting the costs of producing the titanium parts and scrap material, there would be around $0.4 million worth of titanium on each Boeing 787. With a sales price of around $135 million to $145 million for a Boeing 787-9, $0.4 million might seem small but that only covers the price of sheet metal and not the complex processing and manufacturing of the actual parts. So, as a cost component this could go up significantly and cover around $14 million to $17 million per aircraft representing up to 12.5% of the sales price of a Boeing 787-9.

Admittedly, the use of titanium has been higher on the Boeing 787 due to the extensive use of composites but on traditional aluminium designs this share is still around 7%.

So, what is the link between Russia and the aerospace supply chain? Titanium.

Looking at the titanium production, Russia holds the third spot with a share of around 13 to 13.5 percent after China and Japan and Ukraine has a share of 2 to 2.6 percent. A combination of Russia and Ukraine, which at this point is still hard to imagine, would hold a production share of over 16%. Since demand for titanium has reduced due to the pandemic, the data for 2019 has also been considered and that data shows Russia having a share in sponge production of 22% and 4% for Ukraine. So, Russia holds a key role in the titanium market and titanium is extremely important not just for commercial aircraft, but titanium also is used for the production of defense equipment and as a result is of paramount importance for the national security.

Over the years, Boeing has intensified its ties with Russia for the production of titanium parts. In 1997, Boeing signed an agreement with VSMPO, the world’s biggest producer, to provide titanium to Boeing and several follow up agreements were reached. In 2006, titanium supply for the Boeing 787 was added and the establishment of a joint venture was agreed on. On the Dubai Airshow of 2021, Boeing and VSMPO-AVISMA signed a Memorandum of Understanding affirming that the company would remain the biggest supplier for Boeing’s commercial airplanes programs in the future. So, the Russian involvement in the supply chain is big and not easily replaceable. Another spicy detail is that the parent company of VSMPO-AVISMA is Rostec, a state-owned conglomerate.

On the Singapore Airshow, which took place recently, Stanley Deal (CEO and President of Boeing Commercial Airplanes) maintained that Boeing would have the possibility to work through any disruption in the titanium supply chain. Given the importance of Russian titanium, it is hard to see how Boeing would be able to replace VSMPO-AVISM, the world’s biggest manufacturer of titanium. Altering the supply chain requires advance notice and investment, so that does not happen from one day to the other. What is likely is that there are no short-term disruptions expected in the titanium supply chain and Boeing is counting on having enough time to reform the supply if needed.

Dave Calhoun, CEO of The Boeing Company, said the following during the presentation of the Q4 2021 and full year 2021 results:

And then the only other medium term, I haven’t been asked, maybe I will, I won’t call it short term, but medium-term question, of course, is titanium. And as long as the geopolitical situation stays tame, no problem. If it doesn’t, we’re protected for quite a while, but not forever.

So, there is reason for concern though Boeing is counting on having sufficient time to remap the supply chain if needed. The big question is whether it will be needed. At the time of writing, Russian troops have already entered Ukraine and the world has vouched to slam Russia with sanctions. While that could pose a threat to Boeing as it depends on the Russian titanium, it might not even be needed to remap the titanium supply chain. The reason for that is that titanium is critical to the production of defense equipment and countries, including the US, might be looking for an exemption of tariffs and sanctions on titanium and titanium parts.

Russia plays a key role as a supplier of titanium and titanium parts. If a full invasion does happen, that would create an even bigger player on the titanium market, which will be even harder to ignore. If countries will be as resolute with sanctions as they have promised, that could spell trouble for Boeing, because while Boeing has some buffer it is not protected against a disruption in the supply chain forever and if things move fast Boeing will have little time to remap the titanium supply chain. However, more likely is that if sanctions against Russia take effect titanium will be excluded due to its importance for applications that play a key role in national security and at this time we are not expecting a bold move from Russia unilaterally cutting off that supply.

However, what is likely is that as sanctions take effect - with or without exemption for titanium or titanium parts - Boeing will use that time to further diversify its titanium supply chain but its dependence on Russian titanium is likely to stay for a long time.

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This article was written by

His reports have been cited by CNBC, the Puget Sound Business Journal, the Wichita Business Journal and National Public Radio. His expertise is also leveraged in Luchtvaartnieuws Magazine, the biggest aviation magazine in the Benelux.

Disclosure: I/we have a beneficial long position in the shares of BA, EADSF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.