Farnborough Air Show

Boeing Global Services Unveils New Strategy

 - July 13, 2018, 11:00 AM

Stan Deal, head of Boeing Global Services (BGS, Chalet B6), has been through more airports and had more meetings than he can recall, since operations started at the aerospace giant’s newest revenue division in June 2017. But Deal told AIN he doesn’t plan to slacken the pace—for himself or for BGS—anytime soon. “Processes are speeding up, and bureaucracy is going down,” Deal said.

Starting last year, Boeing reorganized its sales teams, integrating services with commercial airplanes and defense sales teams. Now, sales teams, which are organized by regional market, can pitch airplanes and services to airlines, lessors, and governments. That even includes services provided by Boeing’s subsidiary companies.

“We have an integrated sales team that is selling both airplanes and services,” Deal said. The company’s leadership “thinks that was very important,” he added.

That coordinated approach makes for a much stronger pitch, said Gene Cunningham, head of global sales for Boeing Defense. “We can show customers how we can get them better [operational] availability at a lower cost.”

Spares Coverage

The new approach includes better integration of Boeing’s spares distribution. In May, the company announced its plan to pay $3.25 billion for KLX’s aerospace segment, which claims to be the biggest independent distributor of fasteners, consumables, and chemicals to aerospace OEMs and aftermarkets. Boeing also agreed to take on $1 billion in debt as part of the sale.

The purchase gives Boeing control over four of the biggest spare part suppliers in the market: KLX, Aviall, and Boeing’s proprietary spare parts services for commercial and for defense.

“With the KLX acquisition, they are the undisputed gorilla in the spares market,” said Kevin Michaels, managing director of the AeroDynamic Advisory consultancy.

And it is a big market—with annual revenue estimated at $19 billion for the commercial side.

Success in the spares market depends on scale and service. But there is tension between the two, Deal acknowledged. If a supplier gets too big, it risks losing focus on customer service. Too much focus on service and a supplier risks not being able to grow. “Right now, I think the tension’s right,” Deal said.

BGS’s capability center “is worried about driving efficiency and execution” for spares distribution, while its market profit center focuses on sales and customer satisfaction, he said.

While Boeing has not announced plans to merge its spares businesses under one roof, it is spending money to streamline and better align operations.

“We are driving to the most efficient delivery and management system for any part we handle,” he said.

To that end, the company is in the midst of IT and system upgrades. Enterprise software by German business-computing giant SAP is the backbone of the upgrades.

New Opportunities

Deal said he is working closely with the heads of Boeing’s other two revenue divisions—commercial and defense—to find new efficiencies and opportunities. That includes the APU joint venture announced in early June by Boeing and French engine manufacturer Safran.

The agreement, which is expected to close in the fourth quarter of the year, is the latest in Boeing’s move down the supply chain. Deal said decisions to vertically integrate are made together by Boeing’s leadership, which includes him, Boeing CEO Dennis Muilenburg, CFO Greg Smith, Commercial Airplanes CEO Kevin McAllister, and Boeing Defense CEO Leanne Caret.

“We make all those decisions together on forward-looking vertical integration,” Deal said.

The new entity will make parts for the assembly line as well as the aftermarket, but it will be part of BGS once it clears regulatory review. “Don’t over-interpret where it sits organizationally,” Deal said. Boeing’s vertical integration is focused on activity that commercial, defense, and services can benefit from. So, where a unit sits matters less now than if the company’s activities were strictly siloed.

The Safran joint venture likely ended up under BGS because “I had a more dominant team working on it,” Deal said.

Placing the new entity under BGS could help the new division’s revenue, which grew by 5.5 percent in 2017 to total more than $14.5 billion. The pace is expected to be even greater this year, he added.

BGS began with a big goal. When Muilenburg announced the new division in 2016, he said the company planned to more than triple services revenue to $50 billion in less than a decade.

“They have this ‘BHAG’ [Big Hairy Audacious Goal] of getting to $50 billion. They can’t get there without turning wrenches at some point,” Michaels said.

“If they’re serious about getting to [$50 billion], it has to be through acquisition” of some key MRO providers, he said.

But Deal said that is not a major target for expansion.

So far, Boeing has largely eschewed providing commercial MRO services. Its biggest operation is a JV in Shanghai. Boeing has a far greater presence on the defense side, and has room for expansion at its major defense MRO facility in San Antonio, Texas, Deal said.

On the commercial side, “we are much lighter,” he said. The company often subcontracts for work on heavy checks, he added. “We are going to continue to be a smart buyer [of contract services] in that area versus a large aggregator buying MROs.”

Boeing sees other pathways to expanding services revenue. BGS organizes its offerings into four service capability areas: parts, engineering and modifications, training, and digital. The company is expanding its presence in all four areas, Deal said. “Every two weeks I’m looking at investments we can make organically to grow those capabilities, while I also keep an eye and equal focus on the [diverse] inorganic opportunities.”

For example, in April, Boeing delivered the first converted 737-800 freighter to operator West Atlantic Group in Sweden. The owner is GECAS.

Meanwhile, Boeing subsidiary Jeppesen is beta testing an upgrade to its FliteDeck Pro. If it proceeds smoothly, it will be finalized this month, Deal said. 

BGS already has contracts for digital services worth more than $1 billion over several years, and it expects to be able to expand revenue ten-fold.

Even so, the entire digital market is too small to make a huge difference in Boeing’s bottom line, Michaels said.

The $50 billion target “is not realistic,” and likely was meant more for internal consumption, to push employees to be creative as they got Boeing Global Services off the ground, he said.

Investors likely see the number as aspirational, said Ken Herbert, Cannacord Genuity’s lead aerospace analyst. “I don’t think anyone is holding them to the actual number.”