A version of this article appears in the June 9 edition of Aviation Week & Space Technology.
Boeing’s annual investor day last month produced myriad stories on its bread-and-butter airliner programs, but lost among them was the company’s revived emphasis on post-
delivery services as part of its growth strategy.
Ray Conner, president of Boeing Commercial Airplanes (BCA), told investors the aftermarket is a “critical element” in the company’s expansion plan. Boeing forecasts a $2.5 trillion services market through 2033—a figure that both surpasses the new narrowbody market opportunity and includes everything from routine maintenance, repair and overhaul (MRO) work to support businesses such as pilot training.
The company does not break out commercial aviation services (CAS) revenue from total BCA sales, which were a record $53 billion in 2013. Conner says Boeing is the third-largest commercial aftermarket services provider, behind GE, which generated $7.9 billion last year, and Lufthansa Technik, which brought in $5.7 billion.
Canaccord Genuity estimates Boeing’s annual CAS revenue is $6.5 billion, including $5.5 billion of traditional aftermarket services such as parts sales, maintenance and engineering. While CAS provides just a bit more than 10% of BCA’s total revenue, it has greater margins and huge upside, with Boeing projecting a doubling of the global airline fleet to 41,000 aircraft by 2033.
“[We] believe that CAS margins are better than the BCA average and that the services segment represents both a competitive advantage and a financial strength that has not been fully exploited,” Canaccord’s Ken Herbert writes in a research note. Boeing’s 2014 guidance puts BCA’s margins at about 10%.
Boeing has struggled to tap into the most basic piece of the aftermarket pie: MRO services. Some aspect of its GoldCare offering is used by 50 operators for about 1,600 aircraft, or less than 15% of BCA’s in-service fleet.
Compare that to the major engine makers’ aftermarket operations, and it is easy to understand Boeing’s motivation. Consultancy TeamSAI estimates the percentage of current-generation engines under manufacturer-provided care ranges from 40% for CFM56s to more than 90% for Rolls-Royce Trents. Engine overhauls are more complex and materials-intensive than airframe work, so it is easier for engine OEMs to grab aftermarket work.
Having failed to corner a major piece of traditional MRO work, Boeing is focusing elsewhere. Leveraging its supply chain, it is cutting deals that include parts distribution rights, as was done with 777X landing gear manufacturer Heroux-Devtek.
Boeing also is targeting what every operator ranks second after safety: improved efficiency. Shortly after its investor day, Boeing announced the purchase of AerData, the Netherlands-based provider of maintenance record management software with a strong presence in the leasing business. Days later, Boeing revealed it is buying fuel-efficiency software specialist ETS Aviation and plans to fold it into Boeing’s Jeppesen UK subsidiary, which is part of CAS.
The moves follow what analysts suggested Boeing’s strategy would be.
“We believe that the focus for investment will be in the information services, or digital, area, as well as in the material segment,” Ken Herbert of Canaccord writes. “We expect the company to pursue both organic growth as well as acquisitions as it looks to accelerate this business and start to push the commercial services strategy more aggressively.”
Joe Nadol of J.P. Morgan notes that distribution specialist and Boeing subsidiary Aviall could be a candidate for expansion via acquisition. He also points out that Boeing’s aftermarket push is neither new nor necessarily worrisome for traditional aftermarket players.
“This has been a long-standing goal that has so far had an apparently modest impact,” Nadol writes in a research note.
Conner did not attach specific targets to the CAS push, but he left little doubt about Boeing’s general aspirations. He says the top three providers combine to hold just 25% of the services market, leaving a lot available for the taking.
“We plan to increase our market share, hopefully beyond being third place behind GE and Lufthansa Technik,” he adds.