Boeing Rethinks Their Business Model

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Boeing Co. is taking an interesting approach to help increase revenue and cut costs while providing more for their customers. A yearlong initiative is underway to push into the airplane parts business instead of directing airlines to Boeing part suppliers. In the past, airlines would be able to purchase parts from Boeing’s largest supplier, Spirit AeroSystems Holding Inc. but this is all about to change.

In late February, Boeing stopped Spirit from selling aircraft parts including engine thrust reversers and other large parts directly to airlines. This has been confirmed by both companies but this move was kept quiet. Boeing has announced that they will also stop granting any new licenses to suppliers to sell Boeing parts to airline customers.

The behemoth aerospace manufacturer has been working on becoming the primary source for new airplane parts for over a year but this is by far their most aggressive move. The main goal they wish to accomplish is to open up a continuous revenue stream that goes beyond manufacturing and selling completed aircraft. Once an aircraft is sold, that is essentially the end of the road in regard to revenue for Boeing. However, these aircraft will constantly need maintenance which means new parts. This is a market Boeing has largely been missing out on and one that has the potential to dramatically increase the total revenue generated.

When airlines and maintenance facilities purchase new parts for repairing or upgrading aircraft, they pay nearly 4.5 times more than Boeing pays for the parts. This is a huge market Boeing is leaving in the hands of their suppliers.

Spirit will still be manufacturing the spare parts but will have to sell them through Boeing. The aerospace manufacturer will take a cut on any spare parts sold but Spirit doesn’t seem to distraught over the news. Apparently the license was only a small component of its overall business and the manufacturing of spare aircraft parts is still a huge business even if Boeing will be taking their cut.

This new direction is in response to customers who continue to scrutinize deals on the performance of its jets as well as the total costs of lifetime ownership. Another important driver that prompted Boeing to rethink their business model was that analysts questioned why some Boeing suppliers earn larger profit margins than the aircraft manufacturer themselves. When compared to the upfront purchase of an aircraft, the total cost of lifetime ownership is a much more substantial revenue source. Even if airplane sales dip, those aircraft in service will still need to maintained regularly and spare parts will always be needed.

It is important to state that there is nothing prohibiting Boeing from expanding their business model. They have the legal right to work their way into this lucrative revenue pipeline. Boeing expects to increase revenue of their aviation parts and services business to about $50 billion by 2025, up from an estimated $15 billion in 2015. No telling what this revenue loss will mean for Boeing suppliers but from Spirits statement it seems as though they aren’t too concerned with the news. This is a huge step forward for Boeing and could potentially secure their spot as the top aerospace manufacturer in the world.

Source:

http://www.wsj.com/articles/boeing-ramps-up-push-into-the-airplane-parts-business-1461317403