Plane makers squeeze suppliers as sales soar

PARIS Thu Jun 20, 2013 2:38pm EDT

The vertical stabilizer of a Boeing 787 Dreamliner is seen as an Airbus A380, the world's largest jetliner, takes off during the 49th Paris Air Show at the Le Bourget airport near Paris in this June 23, 2011, file photo. REUTERS/Gonzalo Fuentes/Files

The vertical stabilizer of a Boeing 787 Dreamliner is seen as an Airbus A380, the world's largest jetliner, takes off during the 49th Paris Air Show at the Le Bourget airport near Paris in this June 23, 2011, file photo.

Credit: Reuters/Gonzalo Fuentes/Files

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PARIS (Reuters) - It should be a bonanza for suppliers: $135 billion in new orders booked by Boeing (BA.N) and Airbus EAD.PA at the Paris Airshow this week.

Yet companies that make everything from overhead bins to cockpit controls are under mounting pressure to cut prices.

One such company is Renton Coil Spring, which has products on the biggest world's jetliner, the Airbus A380, on Boeing's jets and even fighter aircraft including the F16.

Boeing and others are asking it to make production more efficient and to share the savings in a growing "pay-to-play" system, said Charles Pepka, CEO of the company based in Renton, Washington.

Partnering for Success is what Boeing CEO Jim McNerney calls it - a way for Boeing to help suppliers to install the same lean-manufacturing techniques Boeing is using to improve quality and speed at its own factories.

From Boeing's point of view, this helps suppliers to cut costs, and Boeing simply wants to share the gains.

But the hit to profit margin leaves suppliers bristling.

"It's like a game of poker," said Pepka. "You have to figure out if they want 15 percent or will be OK with 0.1 percent."

PRICING CONUNDRUM

Aircraft manufacturers say they have no choice. Operating margins at global commercial and defense plane and finished equipment makers averaged only 6.4 percent last year, according to a forthcoming report by Deloitte

In contrast, the profit "upstream" in the supply chain was 12.8 percent - double what the plane makers earned.

The plane makers say they can't raise their prices because they must wage a brutal sales war to keep winning orders.

Airlines can't pay more for planes because they operate on very thin profit margins, too, and do not want to raise fares for fear of choking off demand for travel.

In their drive to reduce costs, aircraft manufacturers have asked suppliers to become "super suppliers" that can perform engineering and design work on plane parts, instead of simply following blueprints drawn up by plane makers, as in the past.

Suppliers are also required to contribute to the capital cost of new planes and tool up their factories, often before they are paid.

"You get paid when it flies," said Ingrid Jorg, senior vice president at Aleris International, a global aluminum supplier based in Cleveland, Ohio. In December the company opened a $350 million aluminum mill in China, which it hopes will be cleared to produce its first aerospace material next summer.

Suppliers also are expected to increase the speed of production to keep pace with the rising demand for jets.

The 500 new jetliners ordered in Paris this week add to a backlog of more than 9,600 aircraft waiting to be built by Boeing and Airbus. Suppliers must show they can ensure no hitches in output as factories speed up fill those orders.

CONSOLIDATION

Those demands are driving a parallel trend: consolidation.

As smaller suppliers approach these hurdles, some find they lack the financial strength and broader engineering ability they need and are forced to consider selling.

Large suppliers, meanwhile, are looking to buy smaller operators to gain technology and specialist skills.

Tom Captain, aerospace and defense leader at Deloitte, said that he spent much of his time at the Paris Airshow working with suppliers who want to sell their companies.

As for the rest, they just have to "step back and understand this is a new reality", he said.

At Renton Coil Spring, meanwhile, CEO Pepka sees the trend clearly, but he is less than enthused by managers who come in wanting to change how he does things and pay him less.

"You don't want them to run your business," Pepka said.

(Editing by David Goodman)

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