Boeing’s $50 Billion MRO Play
Kevin Michaels, president, AeroDynamic Advisory, looks at Boeing's 2016 aftermarket ramp-up.
Business gurus Jim Collins and Jerry Porras coined the phrase “Big Hairy Audacious Goal” (BHAG) to describe a business objective that is highly ambitious, galvanizes the organization and is often met with skepticism from outside observers. Boeing recently created a BHAG that could transform aerospace MRO. The company’s goal is to triple its service revenue to $50 billion within the next decade, and it is taking decisive action to achieve its vision.
Last month, Boeing created a dedicated Global Services business that will combine civil and military services under the leadership of Stanley Deal. This will elevate services to a distinct business alongside Commercial Airplanes and Defense, Space & Security (DS&S). Most successful OEMs in the aftermarket tend to have a dedicated services business unit with clear goals and accountability. Rockwell Collins, for example, created the Collins Services business in the mid-1990s, which set the stage for substantial growth and innovation. Boeing’s reorganization eliminates a big impediment to growth.
Boeing also named Kevin McAllister to lead Commercial Airplanes. He is the former chief executive of GE Aviation’s $8 billion service business, the largest and arguably most successful OEM services organization. Ironically, a Jack Welch BHAG to double services revenue in the mid-1990s jolted GE Aviation to aggressively pursue growth. The leader of DS&S, Leanne Caret, also has a services background.
Boeing’s service menu continues to expand. Its GoldCare integrated maintenance offering is slowly gaining traction, and in 2015 it signed a record $3 billion, 20-year deal with budget carrier Norwegian Airlines for its 787 and 737 MAX aircraft. More than 60 airlines are GoldCare customers. Boeing also has many large and lucrative military maintenance programs such as a $2 billion C-17 sustainment program with the U.S. Air Force. The company’s infamous Partnering for Success supply chain initiative also is targeting services revenue growth by encouraging suppliers to distribute through its Aviall subsidiary.
The airframer also is investing in infrastructure: Boeing recently announced plans to build a new GoldCare facility at London Gatwick Airport, on the heels of the opening of a UK maintenance hangar earlier this year. In Asia, Boeing created an MRO joint venture with SIA Engineering Co. It also is expanding its Southern California Engineering Design Center, which handles all of its customer support activities except those for the 787. These responsibilities were transferred from Seattle in 2013-14.
There are, however, some serious challenges if Boeing is to add more than $30 billion in services revenue in a decade. Some 60% of the $60 billion spent globally on air transport maintenance is for engine and line maintenance. Aircraft OEMs bring little to the party in either activity. The same is true for military maintenance, where half of the $60 billion spent on military aircraft sustainment is for field maintenance—an activity traditionally performed by active-duty military personnel. Combined, civil and military aircraft MRO spending should reach about $150 billion by 2025. How much of this can Boeing realistically capture?
As an aircraft OEM, Boeing confronts the twin challenges of cost structure and culture as it competes with aggressive and experienced MRO suppliers such as Lufthansa Technik and AAR. This is one reason it has avoided significant “wrench-turning” activity thus far. Yet it is hard to see how it can achieve its BHAG without more hands-on activity. The company must become more agile and proactive as well—long decision cycles and bureaucracy do not mesh with the hyper-competitive world of MRO.
Another challenge is found in Boeing’s parts distribution network. Distribution is a scale-intensive activity in which bigger is generally better. Boeing‘s dilemma is that it has three major distributors—DS&S, Commercial Aircraft and Aviall—in the same company. Is it time to combine their operations? Airbus recently did this when it turned over its parts distribution operations to Satair, an independent distributor acquired in 2011.
Boeing’s BHAG has considerable implications for the aerospace MRO sector. It cannot reach $50 billion on organic growth alone, which means major acquisitions are likely. Can it acquire a big MRO without harming its agility or competitiveness? Can it make adequate margins to support its financial objectives? Boeing also will compete more directly with its own suppliers, many of which depend on aftermarket revenue to fund their businesses. The company’s expansion will challenge independent MROs but also could create new partnership opportunities.
The implications for operators are mixed. Boeing will create innovative value propositions that could improve asset productivity and aircraft reliability. At the same time, it may become more aggressive on pricing or charge for customer support activities that are currently given away.
I have no idea if Boeing can achieve its $50 billion BHAG, but it will reshape aerospace MRO in the decades ahead.
Contributing columnist Kevin Michaels is president of AeroDynamic Advisory in Ann Arbor, Michigan. The views expressed are not necessarily shared by Aviation Week.