As aerospace e-business matures, the major players are recognising the road is a long one
Emma Kelly/LOS ANGELES
When aerospace e-business arrived in force early last year it promised to revolutionise the industry and wipe out its inefficiencies.
A year on and e-business advocates in the aerospace industry now point to evolution rather than revolution and long-term gradual elimination of inefficiencies rather than transformation overnight.
Large industry exchanges - such as BAE Systems, Boeing, Lockheed Martin and Raytheon's Exostar; SITA's Aerospan; and United Technologies, Honeywell and BFGoodrich's MyAircraft - are coming to terms with the fact that e-business impact and development in aerospace have not occurred exactly as predicted. "A year ago everyone was pumped up regarding what business-to-business [B2B] can do. Now there's some buyers' remorse. We gave birth to B2B and now we've got a teenager that's running wild full of hormones and we don't know what to do with it," says Andy Plyler, recently appointed president and chief executive of Exostar and an aerospace e-business 'veteran' having previously been chief operating officer of independent aerospace exchange PartsBase.
"A lot of people were speaking out of school - talking about the internet when they didn't really know about it. Now domain expertise is important. It's just all about maturity," Plyler said at last month's First Conferences Eye for Aerospace e-business conference in Los Angeles, which brought together many of the aerospace e-business players.
Online communities
Mark Walsh, chairman and chief strategy officer of VerticalNet, which owns and operates 57 industry-specific websites designed as online B2B communities, believes that "we got the maths wrong on the internet". It was underestimated how quickly internet use would be taken up - with over half of adults in the USA now using it on a regular basis, for example - but overestimated how companies would adopt the internet and "see it as the Holy Grail".
Some large industry exchanges have developed more slowly than many had hoped. Exostar, for example, initially had governance issues to resolve, at the same time as looking for additional equity partners. While it has sorted out its governance issues, additional aerospace companies have not flocked to join the marketplace as predicted by its founders when it was launched in March 2000. Then, BAE Systems CEO John Weston said the partners expected "a flood of requests to join".
Exostar is in discussions with a potential fifth aerospace equity participant, with a result expected in April/May, says Plyler (Flight International, 6-12 March). In the meantime, the exchange has enough funding for the next 24 to 36 months, he adds.
Despite its governance and ownership issues, Exostar launched its exchange last September. The platform for the procurement of indirect goods and services - those not used for aerospace products - is up and running, while the direct platform, which is "coming along nicely", is due to be operational by April or May. "A few hundred suppliers" are involved, but only the four founders are trading so far.
"The next step is addressing operators," concedes Plyler. A partnership with an airline grouping would provide Exostar with much-needed airline participation, and Plyler confirms that Exostar has had talks with the airline- led marketplaces - AirNewco (now partnered with MyAircraft in Cordiem) and Aeroxchange (which remains alone) - as has SITA's Aerospan. "The airline exchanges are definitely focused on the aftermarket. We are going to have to build an aftermarket strategy so it would be nice to work together," concedes Plyler.
Exostar competitor MyAircraft already has its operator element in place thanks to its merger with airline-led AirNewco. The combined venture, branded Cordiem, brings together a global group of airlines - American Airlines, Air France, British Airways, Continental Airlines, Delta Air Lines, Iberia, SAirGroup, United Airlines and UPS. Their $45 billion in annual purchasing is now linked with MyAircraft's $13 billion in annual aftermarket parts and services.
Total solution
Cordiem is designed to provide a total aerospace e-business solution, says Pat Wildenburg, vice president of e-business at Delta and co-chair of Cordiem's steering committee. "We [AirNewco] spent a lot of time figuring out the value to the customer and it became readily apparent that for us to be ultimately successful we needed to provide more of an end-to-end solution and work closer with the original equipment manufacturers [OEMs]," he says. "This combination ensures that it will be a roaring success and minimises risk," he adds.
Although it provides a total supplier-buyer solution, the merger has delayed the partners bringing services to the market. Cordiem will start to roll out its services in April/May in a phased approach, starting small - with catalogue purchases and inventory listing - and eventually growing to a full suite of services 12 to 18 months later. It will then offer supply chain management and e-procurement tools covering five areas - maintenance and engineering, fuel and fuel services, catering and cabin services, airport services and general procurement.
While Exostar has been sorting out its ownership issues and seeking new partners, and the AirNewco and MyAircraft partners have been merging, Aerospan has been reducing the involvement of its original partner and collecting customers for its exchange, which went live in the third quarter of last year.
When Aerospan was launched early last year it was a joint venture by SITA and aviation supply chain management company AAR. Last October, however, SITA bought AAR's share to boost its appeal as a neutral exchange, which it sees as essential to its success.
Aerospan is now forming other alliances to add functionality to the marketplace. Earlier this year, Singapore Technologies Aerospace's marketplace was integrated with Aerospan, while more recently an alliance has been formed with Xelus to add its inventory planning and forecasting solutions. A lot more partnerships are likely to follow, says Duncan Alexander, Aerospan's CEO.
Aerospan is "very proud of the product that we've built" - offering spare parts inventory listing services, online availability of spare part traceability documentation, multiple ways to buy and sell, requests for quotes, direct negotiation, buying from OEMs and seller or reverse auctions. The marketplace is providing a 320 million parts exchange 24h a day, which is doubling in size every week, says Alexander.
Attracting customers
And it's a product that has attracted customers, with 90-plus using the marketplace, comprising 50 suppliers and the rest airlines. Alexander declines to name airline customers, a number of which are "dabbling" in different exchanges.
The Aerospan website receives about 20,000 hits per day, 400 of which are actual searches. Transactions, which Aerospan classifies as consummated deals, total about four or five per week, which Alexander sees as a good result in these early e-business days.
Next on Aerospan's roadmap is further improvement to content and to regionalise its approach. An office in Dubai was opened earlier this year to provide customer services, with other offices in Asia and Europe to follow.
Despite some of the large exchanges' early challenges, e-business proponents still believe the technology can offer much to aerospace, but it might just take a little longer than previously expected. "Last year and the year before there was a lot of hype. Now we are realising it is hard work. We need to mature the model and move forward," says Exostar's Plyler.
The benefits of e-business "are huge and are critical for the industry", says Alexander.E-business solutions still have the potential to drive out the $38 billion that is wasted annually in aerospace/defence because of the inefficiencies of the supply chain, according to the large exchanges. "Our expectations are still close to what they were originally," says Kyle Quinn, director of information systems e-business at Exostar founder Boeing. "Our focus is now on execution - we want to start to see the benefits," he says, adding that Boeing is looking forward to benefits beyond procurement the "sooner the better".
E-business provides a substantial "value capture opportunity", says Wildenburg, with e-business solutions key to unlocking the value and leading to hundreds of millions of dollars annually in transaction cost savings, billions of dollars per annum in procurement cost savings and inventory reduction. But it's not just about cost-savings, he says. "Marketplaces will allow multiple collaboration points across the process. These tools will allow us to lower cycle times and to be much more efficient," he predicts. "Over time e-commerce tools, if used successfully, will improve efficiencies," he says, adding that companies must not lose sight of the fact that these are only tools and a strategy and efficient processes must be in place for them to work. "This is not Utopia. If you think that these tools are the answer to supply chain problems then you're in for a rude awakening," adds Wildenburg. VerticalNet's Walsh agrees. The internet is being seen as a "magic moment" to solve problems, but it cannot fix bad products, bad pricing and bad service, he says, although it can "accelerate the shredding of bad products and companies".
But not all large aerospace companies see the benefit of joining the mega-industry marketplaces, to the concern of these exchanges' founders. Exostar, for example, had always been keen for EADS to join its ranks as an equity founder. The formation of Exostar last year came at a bad time for EADS, however, which was still grappling with its own merger. Flight International understands that EADS was close to joining Exostar, with the exchange hoping to announce its membership at last July's Farnborough air show in return for a $20 million investment from the European giant. EADS pulled out, however, to concentrate on post-merger integration, says the manufacturer.
EADS continues to monitor the aerospacee-business landscape and intends to make a decision "soon" - this year. "We don't know what to do. We could join an exchange, carry on alone or form our own exchange," says EADS. One possibility is for EADS to form a marketplace with like-minded European companies, many of which have become increasingly concerned about the US bias of the giant exchanges. "We have talked to other European companies to see if we have common ground," says EADS, adding that there is no reason why the group could not lead a European exchange.
EADS online
Meanwhile, EADS companies are pushing their online activities. Airbus, for example, launched its Airbus Materiel website in 1997 to experiment with the technology. The site features parts information, purchase and order information, general information, excess inventory listing, order administration, a customer order status report and an aircraft number search. Today, some 130 customers have access to the site, there are 2,500 order identities and 35,000 transactions per month - of which 29,000 queries would have previously been received by telephone, says James Rutledge, director of customer materiel services at Airbus Materiel Support.
Airbus would like to see the site become a full Airbus Materiel portal, says Rutledge, from where any spares for any Airbus type can be purchased. "With the aircraft fleet to double in the next three to four years, the internet is a way to cope with the additional spares business without expanding your workforce," he says.
Airbus will remain outside of the large exchanges for now, despite part-owner BAE planning to put all of its Airbus procurement through Exostar. "We want to go the way we are today - going alone, linking up with suppliers, but not joining an exchange. We looked at it and saw a number of disadvantages in linking up with one supplier so we decided not to go that way," says Rutledge.
Northrop Grumman is also unconvinced of the benefits in becoming a partner in a major exchange. "We think they [exchanges] will become an important part of the way the industry does business, but we don't see the value in focusing on one exchange," says Keith Glennan, director of e-business at Northrop Grumman company Logicon. "We considered getting involved in a number from an ownership perspective , but decided not to," he adds.
Although Honeywell is a founding partner in Cordiem, its new owner GE, not sharing Honeywell's e-business views, is unlikely to take a stake in the venture, though it is expected to become a user of the exchange, says Wildenburg.
Aerospace e-business consolidation has happened much faster than some imagined, aided by the dotcom stock bubble bursting last year. A further shrink of the industry is expected soon.
First to suffer was the so-called 'independent' sector. One of the aerospace e-business pioneers, Aviationx, was forced to change its business strategy in mid-2000 when it faced intensive and unforeseen competition from the giant industry exchanges. Furthermore, its plan for an initial public offering (IPO) was not viable as dotcom stock was no longer in favour. Instead of offering an e-marketplace for sourcing, procuring and exchanging information, goods and services, the company is now providingspecific web-based procurement and workflow applications for the regional market alone.
E-casualties
Next to go was Skyfish.com, which ran out of money and filed for bankruptcy last month. The exchange, funded by Back Aviation Solutions, Synchronaut and Sabre, offered procurement services, decision and support technology, information services and supply chain management.
Meanwhile, PartsBase appears to be struggling with lower-than-expected subscriber rates and turned in a $13.5 million loss last year, compared with a $5.9 million loss a year earlier. To stem its losses, the exchange has cut its workforce from 217 to 140, primarily removing sales staff. Subscriptions for 2000, averaging $1,620 a year, totalled 4,756, with a lower than expected renewal rate for the year of 51%.
Fellow independent Avolo, meanwhile, is increasingly pursuing new business opportunities for its data-streaming technology, including moves into the in-flight entertainment and military industries.
Most believe that further consolidation is inevitable and is likely to come very soon. "There are usually two or three [exchanges] controlling 60-70% of the business in most industries," according to VerticalNet's Walsh.
Many exchanges welcome the move. "The fragmentation in the industry is not healthy. I'd like to see consolidation. At the moment lots of software vendors are doing extremely well out of this, but it's about time the [aerospace] industry did the same," says Aerospan's Alexander, predicting that a further shakeout can be expected in the next quarter.
As a result, many of the exchanges are already talking to each other to see how they can work together. The AirNewco/MyAircraft link-up is unlikely to be the last, with the Aeroxchange carriers remaining very attractive to the other supplier-led exchanges. "Everyone is talking to everyone else and it's sensible that discussions do take place. There's not a lot of pie to go around and around 48-50 players are claiming to be marketplaces," says Alexander. Aerospan for one is keen to avoid "a bloodbath", he says, and instead would like to see industry margins improving and aerospace start to reap some benefits from e-business.
The future for some independents is likely to be operating in niche sectors, the larger exchanges suggest. The large exchanges are already making use of the niche operators, with AirNewco/MyAircraft, for example, investing in jet fuel marketplace JetA.com. "Rather than build functionality we'll look to partner other marketplaces to add offerings," says Delta's Wildenburg.
For some of the large industry groupings an IPO has also become less attractive. When Exostar was first announced, the founding partners said an IPO would be sought in 2001. Following last year's dotcom stock crash, however, an IPO is some time away with other issues requiring immediate attention. "Independent exchanges enjoy some luxury as they can move quickly. Exostar had a lot of governance issues which are behind us now. The governance issues were the first thing that needed to be sorted out," says Plyler. The next issue is to "build value for the owners and customers. When the time is right - when we are profitable and accepted by the industry - then we'll go down that [IPO] route," he adds.
Cordiem also intends to develop customer value first before considering any flotation. Delta's Wildenburg says: "The founding partners are not in this for an IPO, but for the value chain. If there is an upside potential down the road then we will undertake a review and if it makes sense we'll do it."
Share offer
SITA, meanwhile, is providing airline customers of its exchange a means to make money by offering shares in its US division - SITA Inc - in return for signing up for Aerospan. SITA is hoping to repeat the success of its Equant division, shares in which covered many carriers' communications costs for 10 years, says Alexander.
As with all areas of aerospace, standards are raising their head in the e-business sector, with many calls for the industry to work together on the issue. "Unless marketplaces come together in the need for standards, we're going to continue with the fragmentation that's out there today. Collectively we need to work together to help drive standards in this industry and others," says Wildenburg. SITA is also keen to play a major role in the e-business standardisation efforts - an area where the organisation is well-positioned, says Alexander.
The aerospace industry has firmly embarked on e-business now and for many companies there is no going back. There is no clear aerospace e-business roadmap, however, and as the needs of the industry change so too will the exchanges that are there to serve that industry. As Aerospan's Alexander predicts: "This is going to be a long road."
Source: Flight International
