(Corrects 17th paragraph to show operating profit margins, not
profit, for Boeing's jetliner business and Airbus' Airbus'
By Alwyn Scott
NEW YORK, March 3 The world's largest plane
makers are soaring these days, fueled by historic demand for new
jets that has cranked up their factories to record speeds.
But booming sales of aircraft, far from being a bonanza for
suppliers, are spurring brutal competition between Airbus Group
NV and Boeing Co, which are demanding better
deals from the companies that make billions of parts the
GM Nameplate is one such company. The 400-employee Seattle
firm makes the signs and placards posted on everything from
overhead bins to emergency exits: about 1,500 signs per plane,
or 1.6 million a year to Boeing alone.
As Boeing sped up jet output by 40 percent over the last
three years, it not only asked GM Nameplate to turn out more
signs. It also wanted a 15 to 20 percent price cut, said Paul
Michaels, director of GMN Aerospace, the aircraft division.
"That's huge," Michaels said.
Boeing also wanted GMN to show it was able to meet faster
production speeds, and that it had the financial health to stay
in business. The company spent a week with two Boeing coaches
going over its factory. Michaels says he now expects to hit the
price target in 2016 and ultimately to be better off. But "it
was very nerve-racking at first."
The price pressure has left many small-tier suppliers
grappling with whether to invest and grow, sell to big players
or simply fold.
"It's forcing suppliers to say either I'm in the game or out
of the game," said Christian Schiller, managing director at
Cascadia Capital, a Seattle investment bank. "They can't just
He and others predict buyouts in the sector will rise this
year as pressure grows, even though prices for small companies
already are relatively high.
Since suppliers provide more than two-thirds of a jetliner's
content by value, they are obvious places for Boeing and Airbus
to find cost savings. But squeezing too hard could cause
production snarls and hurt an industry that is struggling to
keep up with rising demand.
RISING OUTPUT, FALLING PRICES
Airbus last week said it will notch up production of its
single-aisle A320 planes by nearly 10 percent, matching a
similar move by Boeing. Both companies also are building many of
their double-aisle plans at faster rates.
By 2017, Boeing and Airbus will be churning out a staggering
138 new jetliners a month. Smaller plane makers Embraer SA
and Bombardier Inc also are raising output
and bringing new jets to market.
As thousands of suppliers gear up, Boeing and Airbus are
pitting them against each other in price competitions to drive
down supplier prices more than in the past, suppliers say.
Boeing says it will put companies that don't cut prices on a
"no fly" list that bars them from future work, while rewarding
those do with the chance to bid on more work.
Both plane makers also are vying for a piece of the spare
parts market, demanding royalties on parts that are sold
directly to airlines and never enter their factories.
Demanding lower prices in exchange for sales is a well-known
tactic in other industries. Big retailers like Wal-Mart Stores
Inc and Costco Wholesale Corp are famous for it. But the large
price cuts now hitting suppliers are new, and are landing hard
in an industry where sales volumes are relatively low.
Boeing and Airbus also make far less money selling finished
planes than suppliers earn from selling parts. Boeing's jetliner
business, for example, had an operating profit margin of 10.8
percent last year, compared with an average of about 16 percent
for suppliers. Airbus' commercial aircraft profit margin was 4
"Plane makers have a legitimate gripe," said Tom Captain,
head of the global aerospace and defense consulting practice at
To some extent, aircraft makers are victims of their
customers, the airlines. Planes are technical marvels that
operate with great precision and safety, but the flying public
still demands fares that cost less than a good hotel room, and
jet fuel costs are likely to remain high. So airlines are
driving hard bargains to pay as little as possible for jets.
Boeing is selling some jets more aggressively, since Airbus
has gained 60 percent of the market for new single-aisle planes,
a market that represents more than half of the new planes to be
delivered over the next 20 years.
Boeing recently launched an internal campaign to fight for
market share, opening itself to more negotiations over price.
But that requires driving down the cost of building planes.
Boeing and Airbus also are making their own operations more
efficient, as they press suppliers to do the same, and are
offering to help.
"It's not going away," Boeing supply chain vice president
Stan Deal said of its cost-cutting program, Partnering for
Success. What's most important to Boeing, he said, "is
maintaining or gaining our long-term competitive advantage."
FEAR OF BANKRUPTCY
Of course, many suppliers also are benefiting from the boom.
Larger companies and those with proprietary products say they
have more leverage to push back against price pressure. Even
when margins fall, larger volume can compensate and boost total
Still, concern is rising because many smaller suppliers lack
the capital and access to talent to make the price concessions
plane makers are demanding.
"Some suppliers will have trouble and may not be able to
step up to the challenge and thus go out of business, or sign
contracts they cannot deliver on," said Captain, of Deloitte.
A 2011 study by PricewaterhouseCoopers of more than 100
aerospace suppliers found that 20 percent were at high risk of
being unable to keep up with rising production and had
relatively weak financial strength.
The pressure has increased since then, said Scott Thompson,
head of PwC's U.S. aerospace and defense business. Suppliers
that make commodity products, such as GM Nameplate, are most at
risk of losing work to rivals, since they face the greatest
number of competitors.
The risk to Boeing and Airbus is biggest from
"sole-suppliers", since any slip there risks fouling up the
plane makers, Thompson said. And because aerospace has
relatively low volume compared with automobiles, there are many
"It's absolutely a risk," Thompson said. "You have one
supplier that has a problem. It can really have a significant
effect on the supply chain."
Even Boeing is having difficulty keeping pace. Its 787
factory in South Carolina has failed to finish fuselage sections
on time. It is hiring contract workers and sending unfinished
pieces to its larger factory in Washington to ease the
WHEN AUTOMAKERS SQUEEZED
Consultant Dave Bender has seen this pressure before. In the
mid-2000s he worked as a vice president at GDX Automotive, a
major supplier of rubber window seals to Detroit automakers.
Back then, one of the Big Three threatened to put GDX on a
"no-bid" list unless it cut prices. "I don't care if I bankrupt
you," Bender recalls the auto executive saying.
Many suppliers did go out of business, he said. GDX was
eventually acquired by a bigger company.
A decade later, he saw something similar from plane makers
as president of Crane Aerospace & Electronics, a Crane Co
unit based in the Seattle area with about 2,300 employees.
Bender said his team could sometimes resist price cuts on
products Crane designed, since the plane maker would have
trouble finding other suppliers. And if Crane cut prices, it
asked to bid for other work as a quid pro quo. Boeing allowed
it. "That puts pricing pressure on the current guy and allows us
an opportunity to get in," Bender said.
But when its own contracts came up, Boeing and Airbus would
make Crane compete against other companies on price.
"They're pretty sharp about this," said Bender, who left
Crane last year. "They may give you the business in the end, but
they're going to get your price to come down."
Boeing also asked Crane to pay royalties on replacement
parts it sold. "They know that some suppliers make very good
margins on their aftermarket business," Bender said, "so they're
trying to get their piece of it."
Boeing said charging royalties on products that use its
intellectual property help it "recover a portion of the value of
our research and development."
TAKING A BUYOUT
Increasingly, Boeing is asking suppliers to do design work,
requiring a significant investment in engineers and time.
Under this new model, often called "pay to play", suppliers
might have to wait months to see revenue from their investment.
If an aircraft is delayed, like the Boeing 787 and the Airbus
A380, that could drag out years.
Some have struggled to make those contracts pay off. Spirit
Aerosystems Holdings Inc, which makes 737 fuselages and
numerous other parts for Boeing and Airbus, recently said it
lost $385 million on charges related to the 787.
Others can't make the leap. Paul Van Metre and his partners
in a Bellingham, Washington, machine shop said they couldn't
stomach borrowing more money to expand and bid on more complex
jobs for Boeing.
So a few weeks ago they sold their firm, Pro CNC, to an
Irish company, TruLife, which makes prosthetics and wanted to
"We didn't have the resources, and we didn't want to put our
personal guarantees on even more machines," Van Metre said.
The Pro CNC sale is one of a rising number of acquisitions of
aerospace suppliers. The huge demand for jets has made the
suppliers attractive targets for bigger firms that want to lock
in capacity and skilled workers.
Many owners, particularly in Washington, are near retirement
and don't have the cash, or the personal desire, to invest and
grow, said Schiller of Cascadia.
He just signed two companies that are looking to sell for
that reason. Companies are selling for eight to ten times
pre-expense earnings, he said, nearly double the levels two
In that environment, the price and investment pressure from
Boeing and Airbus, he said, "is a catalyst for them to say,
'We're going to check out.'"
(Reporting by Alwyn Scott, editing by Edward Tobin, Peter
Henderson and Ross Colvin)