Boeing Co. (BA) is sparring with suppliers such as United Technologies Corp. (UTX) as the world’s largest planemaker demands that parts vendors cut prices or risk losing work on new jets such as the 777X and 787 Dreamliner.
“The tension between the supply chain and Boeing is as high as it has been in a long time,” Ken Herbert, a Canaccord Genuity Inc. analyst, said yesterday in a note to clients. “Boeing has been using the threat of a ‘no-fly list’ for suppliers that it does not believe are stepping up.”
United Technologies balked at concessions sought by Chicago-based Boeing and saw another contractor asked to make landing gear for the 777X. Spirit AeroSystems Holdings Inc. (SPR) last week recorded a $385 million loss because it will be paid less for Dreamliner components during the next two years.
Boeing is targeting supplier profits it considers excessive as it redesigns the 737 and 777 jets, two of its most-lucrative programs, and develops stretched versions of the 787. Discounts of 15 percent to 20 percent are “the starting point” for contract talks, according to Herbert, who is based in San Francisco and rates Boeing as buy.
The squeeze is so pronounced that it was cited by the U.S. Federal Reserve in a report on the economy in the northeastern U.S. “Boeing has been putting exceptional pressure on its suppliers to lower prices,” the Fed said last month, citing comments gathered from suppliers.
About one-third of Boeing contractors are willing participants in the Partnering for Success program, another third are in talks “and then there’s a third that in some cases hopes this all goes away,” Boeing Chief Executive Officer Jim McNerney said Feb. 5 at a conference hosted by Cowen & Co.
“My deal with a lot of these folks is, listen, you can lock in volume with us that’s greater than you have today,” McNerney said. “Or we can sit here at loggerheads and someone else may have that opportunity.”
Boeing’s willingness to shift work from longtime partners like Hartford, Connecticut-based United Technologies introduces risks that may come back to hurt the planemaker, said Nick Heymann, a William Blair & Co. analyst in New York.
“When you start turning toward less resourced suppliers, you increase your risk of disruption in the supply chain,” Heymann said in a telephone interview. “You could end up that Boeing makes more, but has to put more back in the supplier base.”
Boeing awarded the 777X landing-gear work in 2013 to Longueuil, Quebec-based Heroux-Devtek Inc. (HRX) The company hasn’t made those systems for commercial planes and posted 2013 sales of C$257 million ($233 million). United Technologies, which makes the gear for the current 777, had sales of $63 billion.
“Boeing had asked us for a significant price reduction to be selected,” United Technologies Chief Financial Officer Officer Greg Hayes told analysts at a conference on Feb. 6. “We offered what we thought was a significant step there and they said no and they selected Heroux-Devtek.”
After Heroux-Devtek won the 777X landing gear contract, United Technologies took the company to arbitration over a non-compete clause, Hayes said. The Canadian company is a supplier to United Technologies, including for parts on the current 777’s landing-gear systems, he said.
Heroux-Devtek agreed to the contract with Boeing in December and has included some 777X orders in its backlog, said Martin Goulet, a spokesman with MaisonBrison Communications in Montreal, which provides investor relations services for the partsmaker. He declined to comment on the arbitration case.
Boeing’s savings program seeks to keep costs in check on the millions of parts that go into the company’s jets, while encouraging suppliers to adopt more efficient manufacturing techniques honed at the planemaker’s Seattle-area plants.
The effort has “generated several billion dollars in committed savings across the Boeing enterprise,” Doug Alder, a company spokesman, said in an e-mail.
Contractors that agree to discount work and meet quality targets can earn greater participation in planes in Boeing’s development pipeline, from the 737 Max to 777X, the company’s largest-ever twin-engine jet. Rockwell Collins Inc., Spirit, Hexcel Corp., B/E Aerospace Inc. and Esterline Technologies Corp. (ESL) are among those poised to gain 777X work, according to Herbert, the Canaccord Genuity analyst.
The transition isn’t easy for some. When Wichita, Kansas-based Spirit reported results last week, it blamed the quarterly charge on so-called step-down pricing on Dreamliner parts that it will be shipping the next two years. Spirit is a former unit of Boeing and was sold in 2005, and still depends on its former parent for the majority of its sales, according to data compiled by Bloomberg.
Negotiations are under way with Boeing to resolve pricing issues on the stretched 787s, Spirit CEO Larry Lawson said on a conference call with analysts.
Boeing’s message to suppliers is “Don’t bet against us,” McNerney said. “We have by far, in my opinion, the biggest volume opportunity in the aerospace business over the next 10 or 15 years.”
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