Efforts from original equipment manufacturers (OEMs) to wring costs and extract profits from supply chains are flowing downstream, triggering similar pressure from smaller suppliers and affecting aftermarket spares prices.
“As part of its Partnership for Success (PFS) initiative”—Boeing’s effort to secure cost-savings from its main program suppliers—“we believe that Boeing is aggressively using its new program leverage to capture more of the aftermarket economics,” Canaccord Genuity analyst Ken Herbert explains in a recent aftermarket snapshot. “For example, we have heard that many suppliers, if desiring to be on the 777X, will now have to provide a much greater amount of material for the aftermarket to Boeing, rather than directly to the aftermarket.”
Such an arrangement helped landing gear manufacturer Heroux-Devtek win a coveted spot on the 777X supplier team (Aviation DAILY, April 7).
These deals help Boeing keep new aircraft production costs, and presumably prices, lower, while providing some post-delivery revenue tailwinds.
Herbert says Boeing’s reach is extending beyond its own supply chain.
“We also believe Boeing is getting more direct in trying to set limits on the price increases suppliers can pass onto the aftermarket,” Herbert writes. In the past, spares often sold for as much as three times the price they have in the OEM supply chain. Herbert says Boeing “may be looking to limit” the escalations to twice the OEM price.
The efforts are forcing downstream suppliers to take action. Parker Aerospace is under heavy pressure from Boeing to reduce its prices, and with 70% of its work outsourced, Parker has little choice but to pass the squeeze down the supply chain.
“It’s definitely more Boeing than Airbus,” Parker Aerospace President Roger Sherrard told Aviation Week. “But with Airbus and Rolls-Royce now seeing the higher profitability of their peers –- Boeing and GE -– there’s a lot more pressure coming from them than in the past.”
Suppliers have complained that PFS initiative is a one-way street that benefits the company much more than them. Sherrard says that while the cost-cutting pressure is intense, Boeing is more engaged in working suppliers to find ways to operate more efficiently.
“There’s 600-700 [Boeing] engineers out there working with the supply chain,” he says.
Parker’s parent Parker Hannifin has had initiatives for more than a decade to cut supplier costs and improve manufacturing efficiencies. Now the company has launched an initiative with its suppliers similar to PFS to accelerate price reductions.
“This is definitely real and its not going away,” Sherrard says. “We’re doing the same thing with our supply base.”
Aftermarket providers are feeling the squeeze as well. A Canaccord survey compiled within the last few weeks shows that 63% of maintenance, repair, and overhaul (MRO) providers feel that OEM competition is increasing. Recent empirical evidence suggests OEMs are both ramping up their pursuit of aftermarket dollars and, in some cases, out-pacing the field.
Boeing leveraged a joint venture with SIA Engineering, landing nose-to-tail GoldCare deals for 47 Singapore Airlines Group family aircraft in the process, with much of the work being subcontracted back to the group’s MRO arm.
GE reported a 16% year-over-year boost in commercial engine spares sales, well above the calculated sector average of about 10% growth, according to Canaccord figures.