As aerospace Internet exchanges proliferate, manufacturers and suppliers are positioning to ensure market survival

Emma Kelly/LONDON

The e-commerce revolution has arrived and few aerospace and defence companies can afford to spurn its promises of cost reductions and improved efficiency. But global aerospace and defence was not the first industry to embrace business to business (B2B) e-commerce solutions: the automotive, chemical and computer industries were quicker to recognise their benefits.

The aerospace and defence industry is considered by many to be fertile ground for e-business solutions. "There is perhaps no industry better suited for, or more in need of, the benefits of an on-line B2B hub than commercial aviation," says aviationX, which aims to provide the industry with a neutral, global electronic marketplace. Now the aerospace/defence industry is aggressively adopting online solutions to resolve the inefficiencies associated with its fragmented supply chain, which is driven by manual processes, rigid pricing structure and high inventory requirements.

Investment banker and financial advisor Goldman Sachs believes aerospace/defence is one of the "more inclined" B2B industries - with computing, electronics, energy, agriculture, chemicals and construction - and it expects that aerospace/defence will win a 5% share of the total Internet B2B economy by 2004. Around 8%, or $15 billion, of the industry's $187 billion sales will be Internet-based this year, Goldman Sachs says, rising to 15% ($29.2 billion) next year and 35%, or $76.6 billion, out of $218.8 billion total sales, by 2004.

On the promise of 5-35% cost savings for an industry that embraces B2B, it is no surprise that new aerospace e-commerce initiatives are emerging weekly. These ventures make great claims for B2B, with aviationX, for example, saying that its service will save the industry at least $300 million a year, based on an average 10% saving per transaction. "The advent of the B2B e-marketplace stands to reshape the global aviation industry on the cost and operations sides the same way the hub-and-spoke system revolutionised the industry's network and revenue models - by creating unprecedented operational efficiencies," it says.

Other exchange providers are less willing to talk about cost savings, but point to the overall benefits that Internet-based processes are likely to provide. The largest venture announced to date, the unnamed initiative combining Boeing, Lockheed Martin, BAE Systems and Raytheon, believes that e-commerce will "transform the way we do business". The "global e-marketplace is essential to drive new levels of efficiency", says Phil Condit, Boeing chairman and chief executive. Boeing et al say the overall cost saving is a "complex calculation" to make, declining to value it, but adding: "There is no question that these systems will save you a lot of money." Boeing and its partners are looking to put $71billion in annual procurement outlays through the exchange. "This trading exchange can deliver enormous buy and sell-side efficiencies to our industry," says Condit. "By using a single e-marketplace, all of us - manufacturers, suppliers, airline and government customers and service providers - can significantly lower transaction costs and deliver more value," he adds.

A global aerospace and defence exchange will improve cost efficiencies on the buying and selling sides. Procurement will gain from direct and indirect efficiencies, sales benefits and channel efficiencies. Sales advantages include reduced transaction costs, lower customer acquisition costs and enhanced transparency of the supply chain, says Boeing. The exchange's owners will benefit in revenues from user and transaction fees, advertising, and content subscriptions, with more revenue once the ventures float, as a fiscal plan.

But that's not all, B2B advocates believe. "There's going to be a lot of value added from collaboration," says Nils Herzberg of software solutions provider SAP. He predicts that the first wave of e-commerce development won't bring many price reductions, but benefits will instead come from reduced transaction times and advantages from suppliers and buyers working together. On the procurement side, SAP believes aerospace companies could eventually achieve transaction reductions of 30-70% and see 10-30% cycle time reductions through bidding and collaborative engineering.

"Web technology means getting there faster," says Dr Linda Capuano, vice-president business integration at Honeywell, which will launch its exchange this quarter in conjunction with United Technologies and i2 Technologies this quarter.

Competitor, to be launched mid-year by airline communication specialist SITA and aviation supply chain management company AAR, also sees wider benefits than cost savings. "We are not trying to quantify in dollars what an airline will be able to save. We're focusing on improved pricing, utilisation, lower procurement prices and reducing the supply chain side," says Timothy Romenesko, AAR chief financial officer and director.

Aerospace and defence companies have been dabbling with Internet-based solutions for some time and gaining early benefits. Many already offer parts ordering services and technical assistance online. Boeing, for example, launched its Part Page web-based ordering system for commercial aircraft parts in 1996. In 1999, Boeing generated more than $400 million in online sales, says Condit. In December 1998, 59% of Boeing parts were sold on the web, rising to 77% by August last year, says Carl Jones, Boeing's director, enterprise communication services.

Reaping the benefits

Companies in other industries have already reaped benefits from Internet-based solutions. "E-business has some pretty powerful paybacks," says Phil Hanson, consulting principal at IBM Consulting Group. Since 1993, IBM's e-business initiatives have saved it $3.6 billion in materials acquisition costs, cut overall logistics costs by 24%, reduced annual IT costs by 45%, shortened the delivery cycle time by 55% and improved inventory turnover by 44%, he says.

The opportunity for e-procurement is significant for the aerospace/defence industry, says Hanson, with sourcing of products at the original equipment manufacturer (OEM) level normally making up over 60% of the bill of material, purchasing controlling 30-70% of revenue, a purchase order costing $75-175 and 80% of purchasing agents' time being spenton only 20% of the spend.

The new Internet-based way of business will provide the aerospace/defence industry with much more than web-based parts ordering services. The types of aerospace and defence products, services and technical data provided over the new exchanges will be limitless, believes Boeing. "We're creating something that we don't fully understand ourselves," says Harry Stonecipher, president and chief operating officer.

The first offerings by the Boeing-led venture, which is aiming for a mid-year launch, will be an online auction, procurement services whereby supply chains are managed electronically and a supplier catalogue, while further value-added services will include technical publications, financial services and logistics. "The scope of what we could offer is absolutely remarkable," says John Weston, BAE chief executive. partners SITA and AAR are also looking at a phased approach to its summer launch. Phase one will include an electronic marketplace focusing on spares, including a listing service and auction function, and a capability listing for overhauls. Phase two, at the end of the year, will add archive, market intelligence and data mining capabilities, says Romenesko. Developments will be guided by the recently established advisory board, primarily comprising airlines, which Romenesko hopes will be the early adopters of services.

Honeywell/UTC's, meanwhile, splits its product offerings into four major categories - supply chain management, including forecasting tools, inventory planning tools and customer/supplier collaboration; trading/e-procurement through catalogue listings, order placement and tracking, auction (offer to sell), reverse auction (offer to buy) and electronic billing; technical publications, including manuals, service bulletins and access to OEM technical experts; and community interest - bulletins, discussion forums and job postings.

Four distinct types of e-business solutions are emerging, says Ludo van Vooren, vice-president business development at, which has already signed up more than 3,000 subscribers for its marketplace. It offers part searches and auction capability and is due to add an online transaction capability this quarter. According to van Vooren, there are the manufacturer-led ventures, including the Boeing/Lockheed Martin/BAE Systems/Raytheon exchange and Honeywell/UTC's; the parts brokers, including SITA/AARs'; the "super portals" such as, established by companies "who have heard that us guys buy and sell expensive stuff"; and the "independents", such as, and aviationX, which have " blood in an aerospace body".

These companies are targeting the "27% market inefficiencies" which exist in the $100-$700 billion aerospace market, says van Vooren. These inefficiencies come from a fragmented industry comprising 37,000-plus companies, a complex supply chain, excess inventory, a large number of intermediaries and monopolistic prices. "If we didn't have these inefficiencies there would be no need for B2B exchanges," he says. "This [27%] is a very attractive number, so everyone wants to play," he adds.

Although everyone wants to play, not all the exchanges are likely to survive long-term, with many in the industry estimating that the 15-plus aerospace portals in operation or at the planning stage could end up as two or three "mega-portals", plus a handful of niche operators. "We won't be able to support 15 or so sites, and it's hard to see a differentiating factor in these portals," says Honeywell's Capuano.

But for the year ahead at least, large numbers of aerospace exchanges are likely to remain. "I expect these initiatives may come together, it makes perfect sense, but in the first couple of years there is room in the market for these groups to co-exist," says Simon Jeacock, i2's vice-president aerospace and defence.

Aerospace e-business will go the same way as airline computer reservation systems (CRS), says Mike Whiddett, senior vice-president and chief financial officer at SITA, and formerly head of corporate finance at the Galileo reservations system. "This is similar to what happened with CRSs 10 to 12 years ago. There was a huge fuss about too many CRSs to start with," he says, with rationalisation eventually leaving two or three major players. Whiddett predicts the same will occur in e-commerce, resulting in "division one and division two players. Those with a strong strategy will be in the premier league". It is hard to predict when this will be, he says, as "we are all treading new ground".

All aim to be the industry's exchange of choice. Boeing's Condit says of its mega-exchange: "The full breadth of our initiative differentiates it. That will make it the prime site and that is the reason we all sat down together . But that doesn't mean that there can't be other sites in other areas," he adds.

e-business leader

Rather than feel threatened by the Boeing/Lockheed Martin/BAE/Raytheon launch, Honeywell believes it validates the concept of multi-company sites, which the company claims it was first to espouse. It's overall objective with is to "be the leader in making e-business work for the entire aerospace industry". It has not ruled out co-operation with the likes of Boeing et al, however. "If there are opportunities for co-operation in the future we would be pleased to do so," says Honeywell.

SITA/AAR would also consider co-operation in the future if that best serves the customer. CRSs started off as "deadly enemies", but were forced together to better serve the customer, says Whiddett.

Successful B2B exchanges will provide critical mass, offer neutrality and be well-funded - it costs between $30 million and $50 million to build an exchange - says van Vooren. "You need to connect all of the industry players - 37,000 companies - as you cannot have a unique club of aerospace; you need to eliminate the intermediaries that do not add value and you need to achieve dynamic pricing," he suggests.

A critical success factor is that B2B exchanges must involve all parts of the industry, says Jeacock. "Everyone has to be involved or it won't work," he says.

Another critical success factor, many believe, is neutrality. "It must remain neutral. Buyers will only trust information if it is neutral," says Jeacock. For this reason, aims to be an open marketplace, with joint ownership by airlines and OEMs, he says. "The ultimate idea is that equity will be diluted down to include airlines. It will be an open portal, open to all participants," Jeacock suggests.

Boeing and its partners are also keen to stress their neutrality, partly to avoid the attention of anti-trust authorities, which are beginning to take notice of the growing aerospace e-commerce industry. "It will be a free and open exchange for the entire industry, which will have significant benefits for our suppliers as well as customers," says BAE's Weston. "It's not exclusive and it doesn't shut anyone out so we don't expect anti-trust immunity problems. There are no problems today, but the authorities are looking at these initiatives," he adds.

Boeing et al want more large industry players to join their as yet unnamed marketplace. "One of our major intentions is to maximise volume so we are keen to attract other big operators," says Weston.

Neutrality is a contentious issue, however, with many questioning how some of the new ventures owned by the large manufacturers can claim neutrality. "Neutrality and equity don't go together. Equity doesn't provide credibility to a neutral exchange," says van Vooren. He adds: "Nobody believes in the neutrality. If Boeing, for example, believed is neutral, why did it have to set up its own exchange?" Van Vooren believes that the exchanges that will flourish are those that are fully neutral and allow all industry players to participate.

Three major critical success factors exist for any e-business, suggest Whiddett. Firstly, there is the security of information issue. All of the other aerospace exchanges plan to use the public Internet, while will run off the SITA communication network. The recent "I Love You" e-mail virus highlights the issue of security, he says, adding that SITA's telecommunication infrastructure will provide with a competitive advantage.

Content and functionality will also be crucial, he says.'s advisory group will "help make sure the content is right". With the new exchanges likely to offer similar pricing structures, Whiddett says: "Anyone who's out there competing on price simply won't getthe business. Content and functionality willbe the deciders."

As far as is concerned the success determinant is simple, as Romenesko says: "The site that's going to win will be the one that offers buyers and sellers the tools they need-The winner will be the one that can offer the site that is easiest to use and most neutral, offering the market exactly what it wants."

Source: Flight International