Pontifications: Fine balance needed by Boeing in aftermarket services drive

By Scott Hamilton

April 30, 2018, © Leeham News: The Wall Street Journal Friday reported Boeing was poised to purchase a supplier; a deal could be announced as early as today.

The acquisition, if it happens, will be a major step toward increasing the business at Boeing Global Services (BGS).

It will be another step in the vertical integration that recommenced under Boeing CEO Dennis Muilenburg, an outgrowth of too much outsourcing with the 787.

Coincidentally, the day before, Wendi Folkert, director for Supply Chain Propulsion Strategy for The Boeing Co., acknowledged that the growing BGS has to balance against competing with Boeing’s own suppliers.

Folkert made her remarks at the I-90 Aerospace Corridor Conference in Spokane (WA).

Phil Krull of Embraer Executive Jets will present at the Southeast Aerospace and Defence Conference in Mobile (AL) in June. Airbus, NASA, Pratt & Whitney, Bombardier, Southeastern state governments and suppliers will also present.Go here for Agenda and Registration information.

Already under pressure

“We depend on three million parts a day coming into our factories,” Folkert said. The increased production rates put pressure on the factories that already supply these amounts.

The supply chain also is under pressure from Boeing’s Partnering For Success (PFS) program that began under former CEO Jim McNerney and continues with increasing demands for cost-cutting under Muilenburg.

PFS is the program in which Boeing demanded major cost cutting from its supply chain. This includes not only shaving prices but cutting costs through improved efficiencies, which may require capital investment in new equipment.

Boeing then advanced to PFS 2.0, rescheduling the payments to as long as 120 days.

Both PFS 1.0 and 2.0 brought howls from the supply chain. Some suppliers wouldn’t, or couldn’t, go along and were replaced by Boeing.

Vertical integration

A new threat to the supply chain is Boeing’s decision to in-source work that had been out-sourced for decades or specifically for the 787 program. The 787 out-sourcing proved to be a major disaster in costs, design and production. Lessons learned resulted in the decision to in-source the wings, for example, on the 777X development.

Other outsourcing in place for decades has been in-sourced, reflecting a changing philosophy.

One of Folkert’s jobs is to determine what parts of the propulsion system can be brought back in-house. Boeing retains Intellectual Property rights and gains after-market services potential.

For example, after decades of out-sourcing the 737 nacelles, Boeing now produces these at its Charleston (SC) 787 plant for the 737 MAX.

Vertical integration was the focus of several presentations last February at the Pacific Northwest Aerospace Alliance (PNAA) conference in Lynnwood (WA).

Kevin Michaels, managing director of AeroDynamic Advisory, cited the benefits of vertical integration—but also the potential risk in a cyclical downturn.

“Vertical integration has been a hot topic within the entire aerospace industry in the last few years,” Folkert said. Boeing created a joint venture for seats and plans to re-enter the avionics arena for flight control systems.

“We have to balance that risk-reward,” she said. The costs for designing and building within Boeing and at the same time ensuring a healthy supply chain in what may now become competing sectors are debated internally, she said.

“There are definitely some pockets where we want to focus on that activity, but overall [risk-reward] has got to be on our mind.”

Folkert said Boeing doesn’t mind that some IP is owned outside the company, but other IP ownership and aftermarket potential is something Boeing wants to retain.

Aftermarket services

Another threat to the supply chain is the strategy, rolled out last year, to dramatically expand Boeing’s footprint in the aftermarket business. Boeing Commercial and Boeing Defense currently have less than $10bn in aftermarket business. Muilenburg wants to increase this to $50bn in 5-10 years.

One way is through acquisitions, such as the potential deal that might be announced today. Another is through the creation of joint ventures, such as the seating business, or expansion into sectors like avionics.

A this is simply to make a push to expand Boeing’s maintenance, repair and overhaul business that already exists through Aviall, a Boeing subsidiary. This aggressive push, along with in-sourcing and the other initiatives, directly compete with the aftermarket business its supply chain relies on for a source of profits.

How does Boeing do this without hurting its suppliers?

“There’s not necessarily an easy answer,” Folkert said. “We are trying to make ourselves, Boeing, as competitive as possible in [the aftermarket]. Our customers are demanding it. We’re trying to make sure how do we balance growing our supply chain while still having the ability to meet our own needs as well. It is a balance and we’ve got to find that fine line because we can’t afford to completely alienate all of our suppliers. That is not our mission. Sometimes they may think that, but that is not our mission.”

22 Comments on “Pontifications: Fine balance needed by Boeing in aftermarket services drive

  1. I love the “Our Customers Are Demanding it”, just demanding I say, demanding!

    Good luck with Avionics.

    Maybe Rockwell is up for Sale?

    We shrink, we grow, we shrink we grow, each one of us has to be our own CEO.

  2. At what point would an increased control of the aftermarket by Boeing start negatively influencing airlines and leasing companies decision to buy Boeing planes?

      • It’s a bit overblown though, in reality. Controlling MRO to a greater degree is inevitable especially with the growth in total numbers of aircraft over the past 30 years, and the need for quality control. Rolls for instance is pretty well known for having a very limited number of shops authorized but no similar piece here has been written about their philosophy on it. Boeing acquiring substantive vertical components isn’t surprising or hostile given their revenue goals (although with KLX they seem to be advertising a goal of $71 million a year in cost savings. Horrible!)

        Yet Delta, for instance, is an authorized RR MRO/overhaul shop, I believe, though this wasn’t noted in this anti-Boeing commentary.

        “Delta is said to have selected the Airbus A321neo in its recent competition over the Boeing 737-10 in part because Pratt & Whitney was more willing than CFM to grant the MRO rights.”

        I also haven’t seen any push back on the tech ops side, if anything it’s been an advantage in sales, although I guess it might be seen as giving smaller airlines greater analytics vs. the big guys than they otherwise could muster independently. Darn you Boeing!

        There is a real value to going somewhere between an Apple computer support philosophy (closed/no modifications, touch the inside and it’s void), and Boeing’s historical one, which was born in a different era with vastly less global requirements/customers.

        • Well the fact that the A321 is a better aircraft of course plays no part in the Delta order!

          And Delta could have chose the V2500 but went with the CFM for the CEOs ?

          Or all those 737-900s with CFM, nah.

          I don’t see where you read this as anti Boeing.

          Boeing never has made avionics, so they are going to compete with Rockwell and Honeywell who have gazillions of years of experience and put out great products?

          To me that is delusional. They had a good electronics division and threw it out.

          Now they want to not only bring it back but compete with it?

          Be interesting if they put it take it or nothing position.

          Quality control? Hmmm. Maybe they should look at quality of management that each new CEO is looking for the Glory but want to make sure the pain is on the workers?

          We grow, we shrink, we grow, we shrink.

          Next CEO, oh, we need to OUR source that, sorry, that was wrong I meant OUT source.

          • I dunno about the 321 being better all around, but sales seem to support your theory. To the extent Boeing intends to compete vs. UTC/Rockwell, I would guess it will do so thru acquisitions, mainly. Parts/logistics are one thing, avionics another.

            On the DL 737 saga vs. A320NEO, I’d just note that I quoted a Leeham piece on the MRO component (DL plays both sides; CFM and Pratt). But the issue isn’t that cut and dried of course. DL also is the key regional MRO shop for Rolls (also in Atlanta). And although Rolls is generally an Airbus partner, their ‘controlled/limited’ MRO contracts juxtapose nicely vs. CFM/GE’s philosophy, though their failures today dovetail into the highly editorialized AOG 787 issues.

            The disparate commentary re: Rolls failures from a MRO throughput vs. the Boeing future possible failures due to restrictive services goals, is amusing. I strongly doubt Boeing and Rolls are on the best of terms, commercially, moving forward.

          • Leeham also cited the Home Town advantage for 737 choice as a factor.

            I personalty think someone was just spewing smoke.

            Like when the stock market drops. Well today, Piggly Wiggly CEO Hermon Pigster stubbed his toe. The stock market reacted badly to the news.

            Yesterday the CEO of GE croaked and the market in responded went up 1000 points.

  3. Boeing has issued a press release announcing that it will acquire KLX. See excerpt and link below.

    “CHICAGO, May 1, 2018 /PRNewswire/ — Boeing [NYSE: BA] announced today it has entered a definitive agreement to acquire KLX Inc. [NASDAQ: KLXI] to enhance its growing services business. The agreement comprises an all-cash transaction for $63 per share and the assumption of approximately $1.0 billion of net debt, totaling $4.25 billion.

    Boeing’s acquisition of KLX Inc. will include KLX Inc.’s Aerospace Solutions Group, and is conditional upon the successful divestment and separation of KLX Inc.’s Energy Services Group.

    KLX Inc. is a major independent provider of aviation parts and services in the aerospace industry. Its capabilities include global parts distribution and supply chain services for aerospace and defense industries worldwide. KLX Inc. will be part of Boeing Global Services and fully integrated with Aviall.

    KLX Inc. is also a leading supplier of chemical composites, with this combination broadening the scope of what Aviall can offer to customers in this space.”

    http://boeing.mediaroom.com/2018-05-01-Boeing-to-Acquire-Leading-Aerospace-Parts-Distributor-KLX-Inc-to-Enhance-Services-Business-Growth

    • Every once in a while one of these pops up I never heard of. KLX sure is one of those.

      • KLX was a spin-off business unit of B/E Aerospace.

        • And B/E Aerospace was acquired by Rockwell Collins which is being acquired by United Technologies. Small fish gets eaten by big fish which gets eaten by bigger fish, which may or may not save it from getting eating by an even bigger fish.

          “B/E Aerospace was bought in April 2017[11] for $6.4 billion by the avionics and aircraft connectivity provider Rockwell Collins based in Cedar Rapids, Iowa, which competes with Honeywell and more recently with Garmin. B/E shareholders would own 20% of the new Rockwell which would have $8.1 billion in revenues and $1.9 billion in pre-tax earnings with nearly 30,000 employees.”

          https://en.wikipedia.org/wiki/B/E_Aerospace

          “In February 2016, UTC subsidiary Carrier Air Conditioner announced to employees at its Indianapolis plant that Carrier is moving manufacturing to Mexico: “The best way to stay competitive and protect the business for long-term is to move production from our facility in Indianapolis to Monterrey, Mexico.” [30] In December, Carrier agreed to keep the Indianapolis plant open, keeping 1,100 jobs in Indianapolis.[31]

          On September 4, 2017, proposed to acquire Rockwell Collins in cash and stock for $23 billion, $30 billion including Rockwell Collins’ net debt, for $500+ million of synergies expected by year four.[32]”

          https://en.wikipedia.org/wiki/United_Technologies

          • United Technologies and Boeing both trace their origins to the split up of United Aircraft and Transport Corporation in the 1930s. Big fish turns into several smaller fish which then, over time, turn back into bigger fish.

            “The Air Mail scandal of the early 1930s resulted in a rebuilt air mail system, under the Air Mail Act of 1934, in which carriers and their equipment manufacturers (e.g., of airframes and engines) could no longer be owned by the same company.[1] The United Aircraft and Transport Corporation was broken up as a result of this new law. The corporation’s airline interests went on to become United Airlines. Its manufacturing interests east of the Mississippi River—Pratt & Whitney, Chance Vought, and Sikorsky—remained together as the new United Aircraft Corporation, headquartered in Hartford with Frederick Rentschler, founder of Pratt & Whitney, as president. All manufacturing interests west of the Mississippi became part of a revived Boeing Aircraft.”

            https://en.wikipedia.org/wiki/United_Aircraft

          • Rockwell Collins was spun out of Rockwell International, among the other divisions were industrial automation, Rockwell Automation and North American Aviation and Rocketdyne both of which went to Boeing.

          • I know I sound old, but I do miss the days when it was a more stable world.

            Now its like some kind of Roulette wheel and you never know what is going to pop into what slot, or hop out again and go back to the original one!

    • 6 380s and 14 777s, for a month, wow! That’s a lot of revenue being lost.

      • Short on crews?

        then: what percentage of the fleet is in maintenance at any time?

        • That does not seem relevant.

          Clearly parked.

          Crew issues how much and drop off in traffic how much?

          Have to laugh, back in the 70s they got all the pilots they needed from the armed forces (US not Emirates of course)

          Now they are clamoring for someone to get them pilots.

          I see trends to go back to training them yourself and maybe even paying them while you do so (at least a survivable water)

          Huge bucks to get a license and try to pay that off at 15k a year at a regional.

          I gave it up, I could starve (or dies in bad places) or go on with other vocations.

          I did not have the resources to get to where it paid good.

          My guess was about 1 out of 20 in my rough area got somewhere, but they alwyas had something special.

          One guy was a genius and aced the test.

          Another had both a wife who supported him and a friend who got him Pilot time on moving corporate jets around.

          • Emirates does their own flight crew training.
            ( Like forex LH does.)

            That appears to be not the case in the US. right?
            IMU they leverage their crewing on military pilots and “Hunger Game Candidates”.
            apropos: increased minimum hours : was that designed to protect job prospects for mil transfers?

  4. “It is a balance and we’ve got to find that fine line because we can’t afford to completely alienate all of our suppliers. ”

    Choose which two words to put in bold to put this sentence in to perspective.

    Based on their performance so far (PFS and PFS 2.0), I am sure they will err on the side of completely and all!

    • I hate that fine line thing. Balance yes, its seldom a razors edge.

      More a “let hope we can pull this off before they dump us” approach.

      Make the stuff that no one else can, do you really want to do landing gear?

      Nacelles? Those are getting so integrated that it could be the last era that you could make your own and why?

      Lots of good Nacelle makers out there.

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