Sun, Mar 09, 2014 - Page 14 News List

Boeing, Airbus suppliers struggle to keep pace

As sales of aircraft boom, the two giant plane makers are squeezing their parts suppliers for better prices and deals

By Alwyn Scott  /  Reuters, NEW YORK

“I don’t care if I bankrupt you,” Bender recalls the auto executive saying.

Many suppliers did go out of business, he said.

GDX was eventually acquired by a bigger company.

A decade later, he saw something similar from plane makers as president of Crane Aerospace & Electronics, a Crane Co unit based in the Seattle area with about 2,300 employees.

Bender said his team could sometimes resist price cuts on products Crane designed, since the plane maker would have trouble finding other suppliers. And if Crane cut prices, it asked to bid for other work as a quid pro quo. Boeing allowed it.

“That puts pricing pressure on the current guy and allows us an opportunity to get in,” Bender said.

However, when its own contracts came up, Boeing and Airbus would make Crane compete against other companies on price.

“They’re pretty sharp about this,” said Bender, who left Crane last year. “They may give you the business in the end, but they’re going to get your price to come down.”

Boeing also asked Crane to pay royalties on replacement parts it sold.

“They know that some suppliers make very good margins on their aftermarket business, so they’re trying to get their piece of it,” Bender said.

Boeing said charging royalties on products that use its intellectual property help it “recover a portion of the value of our research and development.”

Increasingly, Boeing is asking suppliers to do design work, requiring a significant investment in engineers and time.

Under this new model, often called “pay to play,” suppliers might have to wait months to see revenue from their investment. If an aircraft is delayed, like the Boeing 787 and the Airbus A380, that could drag out years.

Some have struggled to make those contracts pay off. Spirit Aerosystems Holdings Inc, which makes 737 fuselages and numerous other parts for Boeing and Airbus, recently said it lost US$385 million on charges related to the 787.


Others cannot make the leap. Paul Van Metre and his partners in a Bellingham, Washington, machine shop said they could not stomach borrowing more money to expand and bid on more complex jobs for Boeing.

So a few weeks ago they sold their firm, Pro CNC, to an Irish company, TruLife, which makes prosthetics and wanted to diversify.

“We didn’t have the resources, and we didn’t want to put our personal guarantees on even more machines,” Van Metre said.

The Pro CNC sale is one of a rising number of acquisitions of aerospace suppliers. The huge demand for jets has made the suppliers attractive targets for bigger firms that want to lock in capacity and skilled workers.

Many owners, particularly in Washington, are near retirement and do not have the cash, or the personal desire, to invest and grow, Schiller said.

He just signed two companies that are looking to sell for that reason. Companies are selling for 8 to 10 times pre-expense earnings, he said, nearly double the levels two years ago.

In that environment, the price and investment pressure from Boeing and Airbus, he said, “is a catalyst for them to say: ‘We’re going to check out.’”

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