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 The demand for austerity echoes rival Boeing's <BA.N> cost-cutting
Partner for Success initiative, which has redrawn the relationship
between suppliers and the world's biggest planemaker as the industry
gears up for record output.
Airbus' cuts are just one part of an internal efficiency program
called SCOPe+ that also seeks savings through a close look at
procurement and the way planes are developed and sold, according to
suppliers and an Airbus document seen by Reuters.
Airbus has told suppliers that the prospect of increased volumes and
a longer lifespan for its best-selling jet, which has enjoyed a
surge in sales due to an important makeover, means it is time to
"review all options" in its supply chain.
This includes a fresh look at the company's procurement strategy
that could include extra use of dual sourcing for crucial parts: a
strategy designed both to reduce costs and to reduce the risks of
shortfalls as production increases.
Airbus is also looking at further shifting its business model to
allow airlines less choice over accessories that they previously
ordered direct, known as Buyer Furnished Equipment.
Also involved is a longer-term effort to weave manufacturing costs
into the design process to prevent unintended overruns in costs on
the factory floor, a tool known as "Redesign to Cost."
Though Airbus has confirmed the existence of the SCOPe+ initiative,
its details have not been publicly disclosed.
The initiative "is part of Airbus’ long-term commitment towards
boosting competitiveness through operational efficiency and
continuous improvement," a spokeswoman said.
TUG OF WAR
In 2014, Airbus spent about 13 billion euros on parts for its A320
family of jets, which compete with Boeing's 737 in the busiest part
of the $120 billion-a-year aircraft market.
Each plane contains three million parts.
Mounting pressure on suppliers for price cuts comes as Airbus and
Boeing are raising production of their single-aisle models to around
50 aircraft a month each, up from 42 a month, and pondering a
further step-up to 60 a month.
Such increases in volume are traditionally the aerospace industry's
most valuable lever for driving down unit costs.
But the SCOPe+ and Partner for Success programs aim to complement
this with direct contributions from suppliers, driving profit
margins further up industry's food chain. Boeing has told suppliers
to cut prices by 15 percent or lose business.
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While planemakers lead the industry in terms of revenues and
operating profits, the top 20 companies in the aerospace sector by
operating margin are all suppliers, according to Deloitte.
That rankles with manufacturers who argue their willingness to
gamble on hugely popular upgrades of the A320 and Boeing 737 jets is
driving record sales and creating wealth across the industry that
ought to be shared through lower parts prices.
But many small suppliers argue the efficiency campaigns mask a grab
for part of their profit margins. They say they face their own
challenges in investing in equipment to support higher production,
with no guarantee how long the boom will last.
Some are pushing for higher, not lower, prices.
The increased tension is the latest evidence of a shift in industry
focus. After a decade of bold developments, Airbus and Boeing are
putting their energy into upgrading existing models.
With fewer new projects in the pipeline, they have less leverage to
demand better terms from suppliers in return for a place on the next
new plane and observers say this has led to a growing cost battle
over existing programs.
"There is a balance of power between prime contractors and the
supply chain. Those who supply things that can be dual-sourced like
aerostructures feel price pressure. But a lot of the supply chain is
single-sourced and it is harder for those suppliers to see why they
should give anything up," said Nick Cunningham, aerospace analyst at
UK-based Agency Partners.
(Editing by James Regan and Elaine Hardcastle)
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