Machiavelli would be proud. The A380 wingtips used to be made by an Australian supplier which was fully owned by Boeing.  Things are about to get much more complicated and even worse. Welcome to the domino effect.

The aerospace business has gone from being fully integrated to being focused on “core business.” Which for Boeing and Airbus, until recently, meant design, final assembly, and sales. Leaving the actual making of parts to suppliers.

Who would have thought that Boeing would, in 2017, decide to cobble together, piece by piece, Airbus’ supply chain? It is a brilliant flanking maneuver and one that has caught Airbus flatfooted. What do you do when your key suppliers are being bought by your competitor? The KLX acquisition last week by Aviall directly threatens Airbus’ supply of parts for their own aircraft. The KLX deal is another domino.

Airbus reacts to Boeing.  And this reaction is going to be even more interesting when we consider that while Boeing’s new management has a vision for how to resist commoditization, competition from new entrants (tying up Embraer), adding value in the aftermarket (growing BGS/Aviall). And eating Airbus’ lunch by controlling their suppliers. Airbus’ legendary management (Enders, Leahy, et al) are all retired or on the way out. Boeing’s timing is exquisite.

Companies do not make strategic decisions on autopilot; they are run by people, and, it is an open question whether Airbus has the necessary strategic leadership now. What Airbus does well, they continue to do well (and their aircraft frequently win direct sales battles). But that does not mean they have the necessary leadership now.

So, what does a company that lacks leadership do? For starters, they are not proactive – they do not start brave and bold new ventures. Rather, they are reactive – when Boeing does something, Airbus will respond, one way or another. But they won’t – can’t – sit tight while Boeing grows the aftermarket business, buys Airbus suppliers and seeks to control Airbus’ own distribution network. A single airplane is comprised of a million different part numbers – and Boeing’s distribution network now probably offers 30-60% of those parts in the aftermarket world.

Maintenance costs are a significant percentage of the cost of owning/leasing an airplane. So, you ignore that business at your peril. Here is a fascinating thread on what spare parts cost. Replacement parts are priced at 2-10 times of what they cost the OEM.

Boeing is flanking Airbus on the commodity front, doing the classic maneuver within a commodity business of cornering the market by locking up the critical supply junctions.  If Airbus is not careful, Boeing may end up making more money on Airbus products than Airbus does – because Boeing will control the new and aftermarket supply chain for the Airbus fleet.

It is a brilliant strategy. While UTAS, Safran and GE and others have failed to extract pricing power in supplying Boeing and Airbus, a Boeing-owned Airbus supplier can be expected to be ruthless in extracting maximum profit from Airbus directly, and from Airbus-owning airlines indirectly. Boeing can continue to strangle their own supply chain and start strangling their competitor as well.

What is Airbus doing in response to Boeing? Either by default or by design, Airbus is seeking to make a better product. They are resisting commoditization, not embracing it.  And they do that, for example, by picking up Bombardier’s CSeries, a superb aircraft. Boeing, by contrast, locks up the company that makes products that are in the market: Embraer’s E-jets. True, Airbus is paying a lot less than Boeing for their deal.

Boeing and Airbus are thus, amidst the standoff in new aircraft sales, working to outflank the other guy.  But one difference is that Airbus really wants to execute on their core business, and they are very risk-averse. Still, they need to respond.

They need to be seen responding, by their own people, their customers, and the stakeholders. Because the status quo now is going to lead to heap big trouble in a few years’ time. Boeing’s failed legal attack on Bombardier is just a warmup for when Boeing decides they hold enough key pieces to start to raise prices on Airbus and their customers, and then Airbus must resort to desperate nationalistic and legal arguments to try to stay Boeing’s hand.

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