To loosely paraphrase a saying attributed to Sir Winston Churchill, never waste a good crisis – or a new aircraft development programme.
Boeing has proposed a new midsize airplane family to enter service in the mid-2020s for commercial reasons. It perceives a gap emerging in the middle of the market, and believes that airlines may potentially be more profitably served by new technology than by an adaptation of existing products.
The commercial imperative may drive Boeing’s pending launch decision, but a new aircraft programme provides a platform on which to pursue other corporate priorities, such as reshaping the economics of the commercial aviation supply chain.
Boeing’s suppliers on average earn nearly twice its profit margin, despite exposure to less risk on new product development and execution. The forces creating this lopsided dynamic are complex, but the consolidation of suppliers at the Tier 1 and Tier 2 level has certainly helped. Airframers now have fewer options than ever at the subassembly and assembly level, making the aircraft supply chain a classic sellers’ market.
Boeing, loudly, and Airbus, more quietly, have been fighting these market forces for several years. Since 2012, Airbus’s single-aisle cost optimisation programme and Boeing’s partnership for success have each sought to reset supplier profitability by trading lower costs for higher volumes.
In some areas where suppliers have not responded, Boeing has moved to insource the work.
Boeing
But the partnership for success – albeit still an infant in the long-cycle aerospace industry – has yet to change raw economics. According to a recent analysis, profitability for suppliers and original equipment manufacturers is increasing at roughly the same rate.
That helps to explain why Boeing is to form a new avionics organisation. If trading volume for price increases is not moving the needle, perhaps expanding the scope of the insourcing effort can change the game.
But the opportunity in the avionics business seems limited. The increasing vertical integration strategy of Tier 1s such as Honeywell, Rockwell Collins and United Technologies Aerospace Systems will make it expensive for Boeing to mount a competitive challenge.
The supply chain will not easily yield its hard-won profit margins. Airbus and Boeing will continue trying to improve their relative profitability, but it will take a long time to develop competitive alternatives.
Source: Flight International
