Premium #116 – WILL BOEING’S PARTNERING FOR SUCCESS PROGRAM BACKFIRE?

Very few company initiatives will have as dramatic an impact that the “Partnering for Success” program introduced by Boeing creates.  This new program fundamentally changes the way Boeing does business with companies that manufacture components for its aircraft, which is about 2/3rds of the content.

The new program, in a nutshell, calls for a 15-25% price reduction to Boeing, in exchange for participation in the anticipated higher volumes as the industry continues to grow and Boeing expands production rates.  As a part of the program, Boeing

also increases its control of the aftermarket, prohibiting direct sales of most spares, providing Boeing another opportunity for mark-ups to its end-user airline customers. 
Boeing plans to have all of its suppliers agree to the terms of this new partnership deal, or find alternative suppliers. Suppliers who do not agree to comply will be placed on a “no fly” list that will result in that supplier not being invited to participate on future program bids. We understand that Boeing is taking a hard line in negotiations.

The Rationale
Why is Boeing doing this?  There are several reasons. First, because they perceive their margins to be lower than those of their suppliers (about 16% to 10.8% last year), and as the OEM, they believe they deserve a larger share of the pie. Second, suppliers provide the majority of the content on an aircraft, making suppliers an obvious target for cost reduction and margin growth.  Third, Boeing is fighting intense competition from Airbus, Bombardier and Embraer in the narrow-body space, and wants to reduce costs to gain competitive advantage in what has become a dogfight for new aircraft orders. Airlines in the single aisle market are intensely focused on lowest costs as LCCs grow ever stronger.  OEMs have to accommodate this reality.