OEMs Expect Tension as Many Push Into Aftermarket.jpg UTC

OEMs Expect Tension as Many Push Into Aftermarket

Services set to become more competitive as OEMs fight for aftermarket share.

It may be just business, but already the CEOs of major aerospace equipment makers are sending warning shots to each other as manufacturers increasingly look to capitalize on the aftermarket.

Discussion over the aftermarket push dominated parts of quarterly teleconference updates this week at Boeing, United Technologies Corp. and Northrop Grumman after Boeing Global Services formally began operating this month.

“We’re going to move forward in a disciplined way, but in an aggressive way,” Boeing Chairman, President and CEO Dennis Muilenburg said during a July 26 teleconference with financial analysts and reporters. He tried to frame the approach as mostly cooperative and beneficial with other providers.

“Going forward we expect that market to expand, and so while there are some places where we will logically have some competition between ourselves and our supply chain in terms of competing for certain service market segments, in large part this is about growing the market together and adding more value to our customers.”

A day before, UTC Chairman, President and CEO Greg Hayes deemed it all one of “fundamental strategic issues” that the aerospace industry will have to deal with in the future. “The model has always been that the OEs take big risks and invest big dollars along with the first-tier suppliers to develop all these innovative products and solutions,” he said in a different teleconference. “If we're going to change that model where the OEs are going to take more of the aftermarket or demand more of the aftermarket, we're going to have to think about how we price our products to the OEs.”

He cited the Pratt & Whitney Geared Turbofan (GTF) as an example. “If you think about it, we spent $10 billion on the GTF platform just getting it to market, and …we'll spend $1 billion a year on negative engine margin,” he said. “If all of a sudden I lose that aftermarket, I don't have a business going forward.”

Hayes said the “big OEs” should talk more about partnerships and risk-revenue sharing agreements, and they already have started.

Boeing recently released its first services market outlook, which forecast $8.5 trillion worth of demand for commercial aviation services over the next 20 years. Airlines are expected to spend $1.1 trillion alone on flight operations in that time, while total spend on aviation information technology could be $740 billion.

Related to the aftermarket buildup are potential and ongoing efforts by OEMs to vertically integrate their manufacturing capabilities, rather than outsource work, so they can better capitalize on services revenue in decades to come. UTC Aerospace Systems President Dave Gitlin told Aviation Week in May his group already sees other OEMs insourcing some work.

For his part, Muilenburg said Boeing was looking through about 40 different categories of support and parts where it may invest. “In some cases those will be vertical capabilities and some cases new partnerships with our suppliers; and in some cases, when we need to build an additional supply chain component, we’ll make those kinds of investments,” he said. “I think a good example there is the 777X landing gear as an example.”

However, not every major OEM sees it the same. In his own teleconference July 27, Northrop Grumman Chairman, President and CEO Wes Bush implied a more collaborative approach to the supply chain. His company appreciates the investments suppliers make alongside Northrop, he told an analyst who asked.

“If we can do something more effectively, that is more affordably, with more innovation outside, that's our first choice,” Bush said.

“Because we do participate at the very high end of technological spectrum in the work that we do, there's just inevitably a fair amount of our effort that is internally focused and derives from the internal investments that we make and the capacity and capabilities of our extraordinary team at Northrop Grumman,” he continued.

“But even there, over time, we attempt to take a lot of that and place it in the hands of able suppliers that we trust to not only perform on it, but to continuing to invest in it as we go forward. So we do not have in place an overt strategy to drive more vertical integration. That's not the way we think about it.”

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