Boeing hives off post-sales support business into new firm
23 November 2016
America's biggest exporter Boeing Co disclosed a bold reorganization Monday aimed at tripling its services revenues over ten years and imparting greater predictability to what historically has been a highly cyclical business.
Boeing chairman and chief executive Dennis Muilenburg announced that the company would combine its commercial and military support lines into a third major business unit called Boeing Global Services.
And in an implicit nod to the huge growth potential of the company's new services unit, Muilenburg also announced that the next head of its sprawling commercial-airplane company would come from General Electric's engine business - an operation that generates most of its returns from aftermarket services.
The unprecedented decision to seek a successor for commercial-airplane head Ray Conner from outside the company signals that Muilenburg is thinking big about how Boeing must transform itself to remain an aerospace leader as it begins its second century, says Forbes magazine.
Although Boeing has a long history of producing disruptive products that change the way customers and competitors operate, its hardware lines are subject to cyclical swings in demand that can impede profitability. Boeing has coped with that problem by operating in both commercial and military segments of the aerospace market, since demand in one segment tends to be rising as it is falling in the other - thereby smoothing out revenues and returns.
For instance, demand for jetliners tanked after the 9-11 attacks while demand for military aircraft surged. During the current decade, those trends have reversed. However, there was always a danger that down-cycles in demand for both commercial and military hardware would coincide - although Donald Trump's election as president would seem to signal rising demand for the company's military products just as jetliner demand is beginning to cool.
Nonetheless, expanding the company's current 7 per cent share of the addressable services market will mitigate cyclicality in both hardware segments, providing greater predictability to revenues and returns while opening up vast new opportunities for growth, says Forbes.
Boeing's 777 is the world's biggest twin-jet and the most popular wide body jetliner ever built. However, simply to keep up with rivals the company must invest continuously in improvements to the 777, so it only makes sense to generate as much aftermarket revenue as possible from each plane.
Boeing certainly isn't walking away from manufacturing. It remains one of the very few first-tier manufacturers in the US that assembles virtually all of its products domestically, even though most of those products are sold overseas.
However, staying ahead of government-subsidized rivals like Airbus in the commercial sector is an expensive proposition, requiring heavy R&D spending that can cut into operating margins. Competing on the military side with the likes of Lockheed Martin is also a continuing challenge. So it only makes sense to leverage Boeing's huge installed base of commercial and military aircraft to generate aftermarket revenues that can diversify the company's already robust business mix.