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Paris Preview: OEM Migration To Service Providers

Cyient's Anand Parameswaran examines how one of the aftermarket segment's dominant trends will play out at the forthcoming Paris Air Show.

Last time in Paris, Airbus pipped Boeing to the post in the race for orders, and at last year’s Farnborough Air Show we saw US$123.9 billion of deals recorded. The tarmac of Le Bourget is set to welcome the world’s airlines, manufacturers, militaries, politicians, dignitaries, industry executives and the general public, for what is sure to be another staggering biannual spectacle.

But, as the demand for data grows, Boeing and Airbus are moving away from the pure OEM play to become systems integrators and service providers. This is no more apparent than in the aftermarket as they look to grasp more control of this higher profit margin area. So how will this play out at the 52nd instalment of the show?

Acquiring a route into the profitable aftermarket

This aftermarket battle represents a major shift for the aerospace industry and is being played out in particular across the interiors and engines segments in dramatic fashion, the implications of which are rippling their way through the supply chain.

From an interiors’ perspective, Boeing’s recent announcement and closer ties with seat manufacturer, Encore, to deliver the LIFT seat, if a prime example. This was particularly interesting as it was reportedly born out of frustration with existing big players in the space like Zodiac Aerospace, and the Tier 1’s inability to keep pace with the huge demand on aircraft deliveries.

Outside of Boeing and Airbus, another prime example here is the recent acquisition by Rockwell Collins of aircraft cabin interior products and services manufacturer, B/E Aerospace, for $8.6 billion (including debt assumed). The move continues to diversify the company’s portfolio into the aftermarket from its traditional OEM play.

Cabin interiors continue to be pinch points disrupting the delivery of programmes, including the likes of the A350 and A321neo. Providers further down the supply chain may find their position under threat as OEMs look to step in and get deliveries back on track. Equally, the single-minded focus on deliver volumes can stifle innovation and interiors manufactures need to ensure that they continue to stay ahead of the curve on product development as well. The balance is one that will be hard to juggle.

Powering contracts in the engines segment

Looking to the engines segment at Paris, we could equally see similar OEM acquisitions and partnerships announced, along with an increase in the number of deals conducted on service models based on leasing, like Power-by-Hour contracts.

While such engine leasing models are not a new concept, they have proliferated widely throughout the industry in recent years, particularly on newer platforms like NGPF and LEAP. The model’s popularity lies in the fact that it benefits both parties. OEMs can realise more of their profit upfront while airlines receive a cheaper deal over the lifecycle of the engine and a more predictable ongoing cost structure. As with new airlines running lease-only aircraft procurement models, Power-by-Hour contracts will soon be the default for all, and will likely make up 60-70% of the deals we’ll see.

While OEMs gradually take control of the aftermarket, and major shifts in the global geopolitical order begin to transform the dynamics of the industry, this year’s show promises to shake up the status quo. It will be fascinating to see how these developments play out at Le Bourget.

Anand Parameswaran is senior vice president, aerospace & defence at engineering and IT specialist Cyient.

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