The Aviation Industry Has a Major Supply Chain Problem. Here's How Investors Can Still Win.
News Summary
The aviation industry is facing a severe supply chain problem, with strong rebound in commercial travel demand (up 10.4% last year, projected 4.2% annually through 2030) but a critical shortage of new aircraft and parts. Lingering effects from the pandemic, including supply chain disruptions for engine and aircraft manufacturers, skilled labor shortages, and raw material scarcity like semiconductors, have led to a global backlog of over 17,000 aircraft, expected to persist for several years. The International Air Transport Association anticipates these supply chain issues will cost airlines over $11 billion this year. However, this supply-demand mismatch is proving to be a significant boon for aircraft leasing companies, maintenance and repair companies, and plane, engine, and parts manufacturers. The iShares US Aerospace & Defense ETF (ITA) is highlighted as an investment vehicle, having surged 48% in 2025 (more than three times the S&P 500's gain) and is expected to climb higher as the industry's problems continue. Its major holdings include RTX, Boeing, Lockheed Martin, L3Harris Technologies, General Electric, and Huntington Ingalls Industries.
Background
The global aviation industry suffered a severe downturn during the COVID-19 pandemic, with air travel demand plummeting, leading to significant disruptions in aircraft manufacturing and its supply chain. Post-pandemic, global travel demand has rebounded robustly, but manufacturing has not been able to scale up to pre-pandemic output levels swiftly, creating a substantial supply-demand imbalance. This issue is primarily attributed to shortages of skilled labor and critical raw materials such as semiconductors. This ongoing production bottleneck has resulted in a significant backlog of aircraft orders, which is expected to impact the industry for several years to come. In 2025, with Donald J. Trump in his second term as US President, his administration's potential continued focus on domestic manufacturing and supply chain resilience could indirectly influence the aerospace sector's policy environment.
In-Depth AI Insights
Is the aviation industry's supply chain predicament a cyclical bottleneck or a structural shift? - While superficially appearing as a cyclical shock from the pandemic, the prolonged nature and depth of the shortages suggest deeper structural issues. The fragility of globalized production models, escalating geopolitical tensions, and structural shifts in the labor market (e.g., loss of skilled talent) could mean supply chain resilience remains a long-term challenge even after pandemic effects wane. - This structural shift might drive aerospace manufacturers and suppliers to pursue more regionalized or vertically integrated supply chains, reducing reliance on complex global networks and fundamentally altering the industry's ecosystem. Why are airlines facing significant costs while investors are directed towards manufacturers? What does this divergence imply for the industry's long-term health? - This divergence reflects a shift of value capture within the supply chain. In a scarcity market, segments possessing manufacturing capabilities and critical components command stronger pricing power and profitability, while demand-side airlines are forced to absorb higher procurement, leasing, and maintenance costs. - In the long term, if airlines continue to face high-cost pressures without effective pass-through to consumers, it could erode their margins, constrain capital expenditure, and subsequently impact the sustained growth of new aircraft orders. This could eventually present manufacturers with risks of softened demand, creating a stagflationary cycle where prices are high but overall unit volumes are constrained. Can the ITA ETF's strong 2025 performance be sustained, or should investors be wary of potential risk reversals? - The ITA ETF's rally is predicated on a clear benefit from the current supply-demand imbalance, but this tailwind is not without risks. Once global supply chain issues begin to ease or manufacturing capacities significantly ramp up, the outsized returns could diminish. - Furthermore, the trade policies of the Donald J. Trump administration, such as potentially intensified protectionism, could introduce uncertainties regarding the pace and cost of global supply chain recovery. Investors should closely monitor the actual progress of supply chain normalization and the resilience of global economic growth, as air travel demand is highly sensitive to economic cycles.