Boeing on 25 October released the first financial results of its new aviation services business, setting a benchmark against which to measure Boeing's progress toward an ambitious aftermarket goal.
The unit's strong profits, and executives' predictions for more growth, also served as salient reminders of the massive opportunity Boeing and other airframe OEMs see in the aftermarket.
The new Global Services business, which started operations on 1 July, earned an operating profit of $506 million in the third quarter, equating to 19% of Boeing's total operating profit in the period, which was $2.7 billion, Boeing reported.
Global Services earned that half-billion dollar profit on $3.6 billion in revenue – a standout operating profit margin of 14.2%.
By comparison, Boeing's commercial airplane unit earned a $1.5 billion operating profit at a 9.9% margin in the period, and its defence, space and security business earned a $559 million operating profit at a 10.2% margin, the company reported.
Global Services revenue was split roughly even between its commercial and defence services, Boeing chief executive Dennis Muilenburg said during the earnings call.
Parts and supply chain services accounted for 40% of sales, modifications and maintenance accounted for 40% and digital products, analytics and training generated 20%, Muilenburg said.
"It's a good, solid foundation to start," he said. "By getting all of our efforts aligned under a single business unit we expect… to accelerate our growth."
Boeing chief financial officer Greg Smith predicts Global Services will close 2017 with $14.0 billion to $14.5 billion in revenue and achieve a full-year 2017 operating margin of 15% to 15.5%.
Companies like Boeing have eyed the aftermarket partly because they anticipate demand for such services will increase as the global aircraft fleet grows, observers note.
Consultancy Oliver Wyman estimates airlines worldwide will acquire some 24,400 aircraft between 2017 and 2027, pushing up the in-service fleet by 40% to 35,500 aircraft.
The company's most-recent fleet and MRO forecast estimates that the value of the commercial aircraft MRO market will increase by an average of 3.8% annually for 10 years, reaching $109 billion by 2027.
OEMs also see services as a potential means to maintain revenue and industrial production should orders and deliveries slow, says Fred Cleveland, leader in PwC's transportation and logistics practice.
"The production engine is fired up and running at speeds we have not seen before," he says. "The smart money is on those who are agile enough to pivot from a production mode to a support mode."
"Those with the biggest reach have the most to gain," Cleveland adds. "This is a green field, I think, for the OEMs."
Boeing seems to think it has the most to gain.
In November 2016, the company announced plans to fold all its aviation services into newly-created Global Services. Previously, Boeing offered those services through its commercial airplane and defence, space and security units.
In announcing the change, Boeing noted it predicts the aviation services and support markets it serves will have a combined value of $2.5 trillion over 10 years.
Boeing has since upped that figure to $2.6 trillion between 2016 and 2027, predicting the market will expand at an average annual rate of 3.5%.
Muilenburg has said the new unit would put Boeing on a path to achieve $50 billion in annual services revenue by 2027 – roughly triple the unit's current revenue.
Boeing named Stanley Deal, former head of commercial airplane services, as chief executive of Global Services.
As if to hammer home its services focus, Boeing also announced it hired Kevin McAllister, former head of GE Aviation Services, as chief executive of Boeing Commercial Airplanes, succeeding Ray Conner.
During the recent earnings call, Muilenburg said forming Global Services would reduce costs and improve efficiency, helping Boeing "accelerate" services growth.
Executives said Boeing intends to expand all service offerings, including the company's "core" parts sales and modification work, as well as upgrade, training and supply chain services.
They also highlighted Boeing's information systems and data analytics products, noting that 40 airlines signed up for digital navigation products in the third quarter.
In addition, Muilenburg says Boeing intends to make "a number of investments to help grow our portfolio".
HITTING THE TARGET
Global Services has some distance to go to reach Boeing's $50 billion goal – getting there would require revenue growth of more than 10% annually for 10 years.
"This is almost impossible. It is a long, long, long shot," says Kevin Michaels, managing director of consultancy AeroDynamic Advisory.
Michaels says Boeing faces strong competition from entrenched engine OEMs and independent MRO providers. He also questions if analytics products will generate the big revenue numbers Boeing and other airframe OEMs hope for.
Regardless of whether Boeing hits the target, the $50 billion figure makes clear that Boeing sees massive opportunity.
And Boeing is not alone.
Engine OEMs blazed the services trail in the 1990s, when airlines, facing new competitive threats, outsourced more work to cut costs, notes Michaels. Component and systems OEMs shifted toward services in the 2000s, followed more recently by airframe OEMs, Michaels says.
Demand for services increased due to expansion of low-cost carriers and global airline liberalisation, and due to improved engine reliability, which made running overhaul shops harder for airlines to justify, Michaels adds.
Embraer in December 2016 announced plans to consolidate its commercial aircraft, business aircraft and defense support and services under a new business unit.
That company also set a goal for services and support revenue to account for 25% of Embraer's total revenue in four years, up from 15%, Embraer's head of services and support Johann Bordais told FlightGlobal earlier this year.
Bombardier in 2017 opened new business aircraft service centres in the UK and Tianjin, China, while also expanding US cites.
And Airbus in 2015 consolidated its maintenance, upgrades, flight operations and training services into a new business unit called Services by Airbus.
Although OEMs have lots to gain, PwC's Cleveland predicts that there is also plenty of work for existing MRO players.
Airlines are operating older aircraft longer thanks to low fuel prices, he notes. When those airlines do finally retire, aging types like Boeing 737 classics and MD-80s, new buyers in other regions snap them up, meaning ongoing demand for MRO services, says Cleveland.
Meanwhile, demand remains strong for cargo conversions of widebodies, he adds.
"The… space is great for those that are in the marketplace today to stay… and do even better," he says.
Source: Cirium Dashboard
