Aircraft parts manufacturers got a rude welcome back to work Monday with the announcement that Boeing is going into business with France’s Safran to make auxiliary power units. It’s one of the more surprising developments yet in Boeing’s drive to shake up its supply chain, which has featured heavy pressure on suppliers to reduce costs, as well as moves to in-source production of such disparate elements as seats, wings and avionics components.
What could Boeing take in-house next?
“It’s bigger than what many people realize,” says Kevin Michaels, managing director of the consulting firm AeroDynamic Advisory. “They’re reinventing the supply chain, and there’s a lot more vertical integration to come.”
Michaels says the company is essentially working its way through the aircraft, assessing each component by three parameters: Is it strategic technology that Boeing should take control of? Is Boeing getting good value on it from suppliers? Would making it in-house provide an opportunity for higher-margin aftermarket service revenue?
Here are some of the leading candidates:
The airframe: Boeing pushed outsourcing to an extreme on the 787 Dreamliner, with 65% of the airframe farmed out to a medley of suppliers in the U.S., Europe and Japan. The result: years of production snafus and delays. Boeing was forced to buy out some partners, including two fuselage suppliers. With the forthcoming 777x, it brought the wings back in-house.
Next, says Michaels, could be doors and windows, the forward and nose fuselage, engine pylons, fan cowls, and the exhaust cone and nozzle.
Belying February rumors, a deal hasn’t materialized to buy Woodward for its thrust reversers (systems that redirect engine exhaust to stop a jet on the runway), but Boeing could move to build them in house.
Suppliers that could lose out: Spirit AeroSystems, Latecoere, PPG Aerospace.
Aircraft systems: There’s a fantastic amount of electricity coursing through modern jetliners—the 787 generates 1.4 MW of power, enough to power hundreds of homes. Auxiliary power units, which provide juice for the airplane on the ground and start the engines, generate about 30% of that. With hybrid propulsion seemingly just over the horizon, and Safran’s work on fuel cells, Boeing’s APU joint venture with the French company makes sense. Further development of electric power systems does too, says Richard Apps, director of Counterpoint Market Intelligence.
Boeing could also bring flight-control computers and utility controls in-house, says Michaels. The company reclaimed design responsibility for the landing gear on the 777x, and it could well bring manufacturing of some parts in-house.
Suppliers that could lose out: Honeywell, United Technologies, Safran Landing Systems.
Avionics: Boeing is setting up a unit to develop avionics technology, though it hasn’t disclosed what it will focus on. Michaels thinks Boeing may develop flight management systems, the onboard computer programmed with the airplane’s route that the pilot uses for navigation and to direct the autopilot, and the common core system, which includes cabinets housing the airplane’s avionics and utility mechanisms, as well as their networking.
Suppliers that could lose out: Rockwell Collins (whose acquisition by United Technologies is expected to close this summer), General Electric.
What is Boeing going to leave to suppliers? Michaels believes the company’s interest in avionics is limited to high-value areas. “I don’t think you’ll walk on a Boeing aircraft and see a Boeing cockpit,” he says. “Displays don’t make sense.”
Components where there are multiple competing suppliers wouldn’t yield much upside, like hydraulics, wheels and brakes.
Engines seem a bridge too far. “The investments are so huge,” says Apps. “Manufacturers need to spread the cost across multiple aircraft programs.”
With its order books and its coffers full, more in-house production should give Boeing tighter control, shorter development cycles, and the ability to produce planes more quickly and efficiently. It will also generate more revenue from selling higher-margin replacement parts as it aims to increase its annual service revenue almost threefold to $50 billion.
Among the potential downsides: more investment out of its own pockets rather than out of its suppliers, meaning Boeing is taking on more risk in the event of a downturn. It could miss out on the innovation that can result from multiple suppliers competing, and there’s a danger that it could drive suppliers out of the business and spur more consolidation.
With Airbus also applying pressure to its suppliers to cut costs, says Apps, “You’re not seeing the growth in the supply chain that you’d expect with the aircraft industry in growth. Even some of the large suppliers are having a hard time.”
Says Michaels, “The pendulum’s swinging the other way [from the 787], and hopefully they’ll find a happy medium.”