By Dan Catchpole
August 15, 2018, © Leeham News: If Boeing launches its New Midsize Airplane (NMA or 797), it is expected to use the cleansheet program to force new contract terms on suppliers. And that has some suppliers wondering if it is worth participating in the program at all.
Speaking on background, executives from several suppliers told LNC in recent months that they might not bid on NMA work if it means greater price concessions up front, as well as surrendering lucrative aftermarket sales to Boeing.
Bidding will depend, in part, on whether suppliers can pass cost cuts down to their own suppliers, and if Boeing takes on more risk and development costs to offset lost aftermarket revenue. One exec wondered what it could mean for the company’s engineering capabilities if they have to bid for essentially procurement orders with Boeing holding onto the IP.
The aerospace giant is still struggling to close the business case for the NMA, which would serve midrange routes often flown with aging Boeinig 757s and 767s and Airbus’ oldest A330-200s. Boeing says there is demand for between 4,000 and 5,000 aircraft; however, some analysts and suppliers, including engine companies, think the market is closer to 2,500.
The NMA business case is far more complex than any previous Boeing jetliner program. The NMA would be the first Boeing jetliner designed to make money for Boeing throughout the plane’s lifetime. Indeed, revenue from aftermarket sales and services appears critical to Boeing being able to offer the airplane at a low enough price to compete with Airbus’ A321. Potential customers want the purchase price tag down to about $70 million—or less, figures that skeptics think are impossible for Boeing to achieve.
High margins on aftermarket sales and services have helped many suppliers weather Airbus’ and Boeing’s efforts to cut production costs.
It would not be the first time Boeing’s aggressive supply chain strategy prompted a major supplier to sit on the sidelines rather than bid on a Boeing program. UTC Aerospace Systems (UTAS) decided to not bid on making landing gear assemblies for Boeing’s 777X, even though the company makes the components for the 777-300ER. Instead, Boeing in December 2013 picked a small Quebec-based firm, Heroux-Devtek, to provide the assemblies.
“The landing gear was a particularly difficult discussion,” UTAS CEO Greg Hayes said during an earnings call in October 2017. “Boeing asked for a large price reduction, which we could not accommodate, which would have ended up us losing money on a product with no aftermarket.”
Follow-on revenue is critical for UTAS, Hayes said.
“The problem at UTAS today, of course, is, we don’t make any money on any product that we sell to the Boeing Company. None. In fact, we lose money.”
The situation has improved since then for UTAS. In March, UTAS President David Gitlin told investment analysts that the supplier had reached new agreements with Boeing around the airframer’s Partnership for Success (PFS) 2.0.
Gitlin said the two companies had reached a “win-win” solution that opened the door to serious talks about the NMA program.
“On the NMA, I think now that we’ve been able to come to an agreement with Boeing that works for both of us, I’m excited to engage in those discussions and see where it goes,” Gitlin said.
Like many Tier 1 suppliers, UTAS has launched its own cost-cutting initiative, called PACE, with its suppliers.
Like Boeing, Airbus has pushed for price concessions from its supply chain. Boeing’s behavior is in no way unique. While cost control makes complete common sense, done poorly, it can have disastrous results, as GM learned in the 1990s.
Some suppliers are more insulated from Boeing’s efforts to reshape its relationships with suppliers. These tend to be supply chain segments that have greater control over IP, such as engines, and that have more direct relationships with airlines, such as cabin interiors.
Other suppliers might not have a choice about participating on the NMA.
“While contract terms on (the NMA program) will likely be a challenge for (Spirit Aerosystems), and other suppliers, we view this as a necessary program for some level of involvement for Spirit considering its capacity, and the potential for some cannibalization on the 737,” Cannacord Genuity analyst Ken Herbert noted in a July 30 research note.
The problem is compounded for some by the fact that if authorized, the NMA will be the only new commercial airplane development program among the major players for several years. That means some suppliers, reluctant or not, might just have to find a way to make participating on the program pencil out.