By Robert Wall and Doug Cameron
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 8, 2017).
The world's largest plane makers are testing a seemingly simple
formula to smooth production, cut costs and fatten profits: Make
more of the parts that go into their jets themselves.
In the wake of United Technologies Corp.'s proposed $23 billion
deal to buy Rockwell Collins Inc., that push is taking on more
urgency. The deal is the latest in a round of consolidation among
the world's biggest suppliers of aviation parts -- something Boeing
Co. and European rival Airbus SE have eyed warily.
Earlier this week, Boeing said it might cancel some of its parts
contracts if the deal undermines competition further in the
aerospace supply chain. Airbus had previously expressed its
skepticism over it.
Worried about getting squeezed by the consolidation, Boeing and
Airbus have moved to protect themselves by building more of their
parts in-house. This month, Boeing will start construction of a new
production facility in Sheffield, England, that will make some of
its own actuation equipment -- motors that help move a wing's
flaps. Airbus, meanwhile, is planning to build some of its own
nacelles, the metal casings that house a plane's engines. United
Technologies is one of the world's largest nacelle suppliers.
"We are constantly revisiting our 'make or buy' decisions," said
Fabrice Brégier, Airbus chief operating officer and head of
commercial planes.
Boeing decided two years ago to make some of its own nacelles
after years of buying them. In July, the company also said it is
planning to develop and build some aircraft electronics, a market
dominated by companies such as Rockwell Collins and Honeywell
International Inc.
The wings for a revamped version of Boeing's new 777 jetliner
also will be built at a new plant near Seattle rather bought from a
supplier. Boeing bought the wings from a supplier for its last big
project, the 787 Dreamliner.
"The opportunity ahead of us, in terms of transforming how we
design and build, how we manufacture, is even greater than some of
the product innovation that we're going to bring to the table,"
said Boeing Chief Executive Dennis Muilenburg.
Boeing and Airbus are slated to deliver new planes worth more
than $100 billion this year. Both have order-book backlogs that
stretch years and, combined, are worth almost another $1 trillion.
But parts that represent more than half the value of each of those
planes are mostly made by dozens of suppliers such as United
Technologies, Spirit AeroSystems Holdings Inc. and General Electric
Co.
Boeing and Airbus, under pressure to deliver all those planes,
have pressed their suppliers for cost savings and deadline
commitments. Plane makers' leverage, though, has lessened as the
circle of suppliers has shrunk in recent years. United Technologies
snapped up rival Goodrich Corp. in 2012. Its deal with Rockwell
Collins will make it the world's biggest plane-parts providers.
Another big tie-up in the works: Plane parts maker Safran SA is
haggling to buy cabin-interior specialist Zodiac Aerospace SA.
Bringing production in-house helps level the playing field.
Those parts makers have also traditionally been able to suck out
more profit for their components than plane makers like Boeing and
Airbus can extract for selling whole aircraft. Profit margins for
plane and engine makers have averaged 9% over the past two years,
compared with 14% for so-called "tier one" suppliers such as United
Technologies and Rockwell Collins, which make finished parts
directly for plane makers. Margins come in at 17% for tier 2
suppliers, which provide smaller components for those parts,
according to Boston Consulting Group.
Boeing and Airbus executives have said they now aim to capture
some of that extra margin for themselves. They also hope to get a
larger share of the lucrative business servicing those parts once
the plane is sold to a customer, usually an airline or an aircraft
leasing company.
That service revenue -- from routine maintenance to repair work
-- is more profitable still. For parts makers, the shift by Boeing
and Airbus threatens to reduce their own slice of those service
sales. Consultant Oliver Wyman estimates that commercial-aviation
service business is worth roughly $76 billion a year.
Take the airplane manufacturers' recent entry into nacelle
production. The parts typically cost roughly $1 million per plane
on a narrowbody jet, and $4 million to $5 million for long-range
jets.
Airlines -- which buy or lease Boeing and Airbus jets for their
fleets -- spend $1.5 billion to $2 billion annually to service
nacelles, said Kevin Michaels, managing director at AeroDynamic
Advisory LLC, a consulting firm. By making the nacelles in-house,
Airbus and Boeing save on the parts and may get to hold on to the
servicing revenue for the life of the part.
Boeing wants to double annual services sales to $50 billion in
five years, a figure analysts consider ambitious. The plane maker
opened a new unit in July to oversee the effort.
Analysts at Canaccord Genuity Inc. figure Boeing's current
service-related revenue makes up nearly 20% of its overall
aerospace and defense revenue. At Airbus, the figure is 15%. That
compares to 56% at GE and 52% at engine maker Rolls-Royce Holdings
PLC, two of the industry's biggest suppliers.
The Airbus and Boeing moves are still in their early stages and
have yet to affect either their earnings or those of parts
suppliers. The incumbent parts makers say they aren't yet worried
about getting squeezed out, given all the work to go around from
the two makers' big backlogs.
"They've looked at some of the components within the aircraft,
and think that they need to have more control on that," Kelly
Ortberg, Rockwell Collins' chief executive, told investors
recently, before announcing the United Technologies deal. "In fact,
there's probably opportunities for us to maybe support them in
different ways than we have in the past."
Write to Robert Wall at robert.wall@wsj.com and Doug Cameron at
doug.cameron@wsj.com
(END) Dow Jones Newswires
September 08, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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