CS Credit Suisse Group

Boeing Co. is ramping up its push into the parts business, as part of a broad effort to cut costs and secure a new source of revenue even more lucrative than making aircraft.

In the past, airlines could purchase parts directly from one of Boeing's largest suppliers, Spirit AeroSystems Holdings Inc., allowing it to diversify its business beyond the 80% of its sales linked to jet production at the Chicago-based plane maker.

But in late February, Boeing quietly stopped Spirit from selling parts such as engine thrust reversers and other large parts directly to airlines, according to both companies. Boeing said it also stopped granting new licenses to suppliers to sell proprietary parts to its airline customers.

It is the most aggressive move to date in Boeing's yearslong effort to assert control over distribution—and the resulting revenue—of spare parts.

The initial sale of a jetliner is a comparatively smaller portion of the revenue that aircraft will generate during their multidecade life. The greater proportion of revenue on any single plane comes from the lifetime maintenance and parts that range from fire extinguishers and seat belts to on-board computers and landing gear shared across hundreds of companies.

These parts at airlines and maintenance facilities can fetch up to 4.5 times more than what Boeing pays for the parts during initial production, according to one supply-chain official.

Spirit will continue to manufacture the spares but will have to sell them through Boeing, with the plane maker taking a cut. A Spirit spokesman said the license was a "small component" of its overall business and airlines would still need parts it manufactures.

Boeing executives say the shift is in response to customers who increasingly scrutinize deals—not only on the performance of its jets, but on the total costs of lifetime ownership. Many analysts also have long questioned why some of Boeing's suppliers earn fatter profit margins than the world's largest aerospace company.

And nothing prohibits Boeing from expanding its business model to emulate engine-makers and business-jet manufacturers, which have tightly controlled that lucrative pipeline with its customers.

Now the company wants to more than triple sales of its commercial and defense aviation parts and services business to about $50 billion by 2025 from an estimated $15 billion last year, according to an industry strategist.

As cost-conscious airlines drive down prices for jetliners, Boeing is searching for new revenue, said Kevin Michaels, vice president with ICF International's aerospace-consulting practice.

It isn't just parts. Boeing in April said it would promote economy-class seats made by new entrant Lift, giving the unit of Encore Corporate Inc. preferred access to its single-aisle jets. In return, Boeing will be able to sell the seats to airlines when carriers refresh older planes with plusher interiors.

A spokesman for Lift said Boeing approached it to collaborate on the new seat's design, which will be ready in 2017.

"The things that we're doing to change our business relationships in the supply base are directly related to how we feel we need to change to compete," said Kent Fisher, vice president of supplier management for Boeing's commercial unit. "I know it can be painful for some of the players, but that's why we're doing it."

The quest for extra revenue comes as Boeing continues a broader cost-cutting effort with suppliers, known in the industry as Partnering for Success. It sought about 15% reductions in unit costs for the parts suppliers provide for the company's jets.

Boeing's cost-cutting isn't limited to suppliers. Boeing said it would cut about 4,500 positions, in part to offer a more competitive price to airlines for its jets and deliver a promised cash windfall to investors.

But with 65% of its costs outside of its factories, the company's focus on the supply chain is getting a renewed emphasis.

In many cases, Boeing provided additional work to suppliers who quickly locked in new contracts and took work away from those that didn't secure a deal, according to suppliers. Boeing also prohibited some suppliers from being given new work or withheld regulatory approvals for parts until revised contracts were complete, they said.

Boeing executives in February said it was restarting the cost-cutting process with suppliers, emphasizing its need for lower costs would be a continuous effort.

The shift to directly claiming revenues that normally go to its suppliers is causing significant concern in the suppliers' sector.

"They're trying to cancel everybody's business model," said a business-development official at one major Boeing supplier.

Not all suppliers are upset about Boeing's moves. Rockwell Collins Inc. chief executive Kelly Ortberg said its contract negotiations with Boeing included changes to its aftermarket sales and considered it a positive for both companies.

New airplanes like the Dreamliner are so infrequently developed that suppliers sign ultra-competitive contracts that gives the lowest possible costs for systems or components to manufacturers for factory installation—with the expectation that airlines and maintenance facilities will pay premium prices for spares for decades.

"The economics of being a Boeing supplier could be facing their greatest challenge yet," wrote Robert Spingarn, aerospace analyst for Credit Suisse.

Suppliers most at risk for Boeing reclaiming aftermarket control are those that build parts originally designed by Boeing, like many of those made by Spirit, analysts say.

For those parts designed by its suppliers, Boeing in 2012 began charging suppliers a royalty for selling replacement parts to airlines or upgrades such as new in-flight entertainment systems, saying they were created using the plane-maker's intellectual property.

To be sure, suppliers have enjoyed their lucrative position selling parts direct to airlines, which have grown frustrated with increasing prices. The International Air Transportation Association on behalf of its member airlines in March filed a complaint with the European Commission alleging abuses by suppliers into pricing for spare parts.

"This is an area of deep concern for our members. There are relatively few equipment vendors and our members are frustrated that there is little flexibility in negotiations for aftermarket services," Tony Tyler, IATA's director general said last month.

Write to Jon Ostrower at jon.ostrower@wsj.com

(END) Dow Jones Newswires

April 22, 2016 08:25 ET (12:25 GMT)

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