The world’s largest plane makers are soaring these days, fueled by historic demand for new jets that has cranked up their factories to record speeds.
However, 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 past 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.
“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.
However, “it was very nerve-racking at first,” he said.
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 are already 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. However, squeezing too hard could cause production snarls and hurt an industry that is struggling to keep up with rising demand.
Airbus last week said it would notch up production of its single-aisle A320 planes by nearly 10 percent, matching a similar move by Boeing. Both companies are also 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 plane makers Embraer SA and Bombardier Inc are also raising output and bringing new jets to market.
‘NO FLY’ LIST
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 do not cut prices on a “no fly” list that bars them from future work, while rewarding those that do with the chance to bid on more work.
Both plane makers are also 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. However, 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, had an operating profit margin of 10.8 percent last year, compared with an average of about 16 percent for suppliers. Airbus’ commercial aircraft profit margin was 4 percent.