The world's largest planemakers 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 factories need.
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.
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“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 stay still.”
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.
Ramping up production
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 planemakers 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 planemakers 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, made an operating profit of 10.8 percent last year, compared with an average of about 16 percent for suppliers. Airbus' commercial aircraft profit was 4 percent.
“Planemakers have a legitimate gripe,” said Tom Captain, head of the global aerospace and defense consulting practice at Deloitte.
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.”
Suppliers face risks
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 profit.
Still, concern is rising because many smaller suppliers lack the capital and access to talent to make the price concessions planemakers 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 planemakers, Thompson said. And because aerospace has relatively low volume compared with automobiles, there are many sole-supplier arrangements.
“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 bottlenecks..