Opinion: OEMS Increase Production, Squeeze Suppliers

By Kevin Michaels
Source: Aviation Week & Space Technology

The implications of the aircraft OEM drive to double-digit profitability, and the aforementioned tactics, are profound. Continual OEM increases in production rates without corresponding growth in air travel demand will lead to shorter aircraft economic lives, escalating retirements and reduced aftermarket growth rates as maintenance-intensive aircraft are retired sooner.

The squeeze means Tier 1 system suppliers will embark on cost-reduction initiatives to share the pain with their own employees and suppliers. This could usher in a new wave of sub-tier supplier mergers and investments in low-cost regions. And the aircraft OEM drive to expand service revenue means aircraft OEMs are likely to pursue major services acquisitions and could become the next gorillas in the air transport MRO market.

The Drive for Double Digits will yield winners and losers, and the supplier groups with the most to lose will likely be engine and component OEMs. Both are investing heavily in supporting new-generation aircraft, and depend on aftermarket profits to fund these investments and satisfy shareholder return requirements. Boeing and Airbus are changing the rules on their most vital suppliers, and must navigate carefully in the years ahead as they raise the bar for their own acceptable financial returns.

Contributing Columnist Kevin Michaels is a vice president at ICF SH&E and lead's the firm's Aerospace & MRO practice. He is based in Ann Arbor, Mich.

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