A daring and controversial stretch goal to treble Boeing’s services revenue within eight years in a market already crowded with the company’s customers and suppliers came out of a 2016 brainstorm session.
In the 1950s, Boeing soared to the top of the industry after betting the company’s survival on jet-powered commercial airliners, displacing larger American rivals Douglas and Lockheed in the process.
As chief executive Dennis Muilenburg convened strategy sessions in the year of Boeing’s centenary in 2016, he sought out similarly provocative moves that could propel the company into its second century.
“We set some pretty audacious stretches [during those sessions in 2016]," said Stan Deal, now the head of Boeing Global Services (BGS), during a March interview in his new headquarters in Plano, Texas.
In the two years that followed those sessions, Boeing has made several provocative moves, including standing up an avionics business, partnering with automotive supplier Adient to develop seats for airliners and, most recently, proposing a combination with Brazilian aircraft manufacturer Embraer. But the single most controversial – and ambitious – change Boeing has made concerns a stretch goal on services.
By 2016, Boeing already had one of the largest services businesses in the market, but it was split up as a support element to two major business units, with other key pieces, including Aviall and Jeppesen, not fully integrated.
Aftermarket work forms key part of BGS strategy
Air Canada
When the discussion turned to the services market in Muilenburg’s sessions two years ago, Boeing’s executives started with setting a stretch goal for reaching $50 billion in services revenue by 2025, Deal says.
“Then we looked at, what do we think we need to do to obtain it?” he recalls.
A few months later, in November 2016, Muilenburg announced that Boeing would form BGS on 1 July 2017 by consolidating the company’s balkanised services offerings into a single business, and setting an “aspirational target” to reach $50 billion in annual revenue by 2025.
The depth of that financial challenge became apparent a year later, when Boeing revealed that the size of its various services offerings within BGS amounted to only $14 billion. To reach the aspirational target within eight years, the company would have to sustain an average compound annual growth rate (CAGR) of 16.6%.
For comparison, Boeing’s revenues have risen from $64.3 billion in 2010 to $93.4 billion last year: a 45% improvement. Measured by CAGR, however, the improvement seems more modest at 4.7%. Boeing must nearly quadruple that performance to achieve the growth targets set for BGS over a similar eight-year period.
“That’s pretty phenomenal growth,” Deal agrees, when told about the CAGR calculation.
“It is aspirational,” he adds. “This is, in general, how you see Dennis running The Boeing Company under his tenure. Let’s not be afraid to set a stretch in order to stimulate a different way of thinking to go to the market.”
The move has put Boeing in competition with some of its biggest suppliers for aftermarket services, but Deal makes no apologies.
“There’s some bad behaviour that’s taking place in the supply chain on the sustainment side – exorbitant price increases on certain parts,” Deal says. “Airlines don’t like year-over-year price increases in the double-digit range.”
As Boeing consolidates more aftermarket services under its brand, it could wield the same power to dictate prices on customers. But Deal dismisses that possibility, noting that it still has to sell airlines factory-built products before competing for aftermarket deals.
“We’re a supplier to our airlines on both sides of the situation, whereas many of those suppliers only have to sell once and that’s in the aftermarket,” Deal says.
Since standing up the business on 1 July last year, BGS has moved quickly into one new market. The unit acquired a Boeing 777 to “part-out”, or strip the useable parts to sell to airlines at a discount compared with factory-built spares, Deal says.
Boeing Commercial Airplanes' (BCA) headquarters is in Seattle, Washington, and the defence business is based in St Louis, Missouri: each with a tempo for making decisions on new investments measured in months. The newly established BGS headquarters in Plano operates on a different tempo. A leadership team meets every two weeks to make decisions about investment in new products or new markets, Deal says.
A less visible part of the business, Boeing already has one of the industry's largest service operations
Boeing
“We’re not making bets like a new [737] Max, [New Mid-market Airplane] or new T-X [trainer]. These are much smaller investment bets: a software update, a 737 converted freighter with a two-year development cycle,” he says. “As we organised we came forward with a much flatter organisation than our two businesses. It increases the velocity of decision-making. Speed in this business is very important.”
As Boeing makes bets on new investments, achieving the “aspirational target” of $50 billion in annual revenues remains part of the plan. The company has softened the timeline for achieving that target. In November 2016, Muilenburg set the date as 2025, but now the company talks about a five- to 10-year window.
The opportunities for growth over that period are significant. BGS's digital and analytics solutions business, more than any other division, represents the potential of BGS. The division has recently surpassed $1 billion in annual sales from a portfolio of data services, including analysing fleet performance and reliability, as well as supply chain and inventory optimisation. The $1 billion annual sales total is impressive for a new business, but BGS believes it can grow by an order of magnitude over time, Deal says.
Another option to drive growth is the newly consolidated Supply Chain Management group, which accounts for the largest share of the BGS unit’s overall revenues. At the heart of this is Aviall, the parts distribution company that Boeing acquired in 2006. Boeing does not disclose Aviall’s annual revenues, but confirms that overall sales have grown more than 300% over the last 12 years. In 2017 alone, Aviall revenues increased by about 20%, Boeing says.
Aviall’s recent growth has been fuelled partly by another of Muilenburg’s strategic initiatives with suppliers. In the first round of the Partnership for Success campaign that began in 2011, Boeing focused on reducing supplier pricing across the board. The second round of the campaign, which is ongoing, has taken a broader approach, including encouraging suppliers to outsource parts distribution on Boeing commercial aircraft programmes to Aviall.
“When we negotiate now as Boeing in Partnering for Success, we’re negotiating as all three businesses – not BCA or BDS [Boeing Defense, Space & Security] only,” Deal says. “We’re putting into trade with our suppliers every dimension of our business as well as they’re putting in trade every dimension of their business.”
To support further growth, Boeing plans to integrate its three separate parts distribution units – Aviall, BCA and BDS – on to the same SAP-based enterprise resource planning (ERP) platform. Aviall adopted a SAP platform four years ago, and a similar version of the platform was activated for BCA last October. As with many transitions to an ERP platform, BCA has struggled with the transition, with deliveries of spare parts to airlines getting delayed in some cases.
“There are very few cases where we have impacted customer operations," says Richard Teza, vice-president of business development and global product strategy for Aviall. "There are cases though where we’ve made it more challenging than it needed to be for our customers. We’re working hard to get that back so we make it a lot easier for our customers to operate.”
Source: Cirium Dashboard
