Airlines and Aircraft Oems - Strategic Partnerships

Cutting Costs

Airlines and Aircraft OEMs often find themselves in a footrace to capture market share, given the seemingly low profit margins they are left with due to immense competition faced within the aviation industry. Every company is part of a collection of firms that influence one another within the industry, which is why a firm strengthening itself as an individual entity will not lead to the most optimum outcome.

Increasing revenue and profitability can be achieved from within the company itself and often includes measures such as:

o Lowering cost of goods/materials

o Reducing labor cost, over-stretching remaining resources

o Outsourcing (support/information services)

o Cutting back on financial expenses (travel/energy usage/communication costs)

o Identifying Inefficiencies and adopting LEAN principles

Organic growth alone is no longer the most efficient way of cutting costs in an industry where firms are caught in such a tight race that virtually each and every contender has recognized and adopted the above strategies into their long run operation strategies.

In 2015, Boeing delivered a record of 762 aircrafts (Boeing, 2015), while Airbus ramps up its production to meet its backlog of commercial aircraft demand. With consumers’ expectation of low fares, airlines are faced with pressure like never before to procure new planes at much cheaper costs. The same expectation of low costs is then passed down from the OEM through the supply chain to maintain profit margins. On top of these pressures from airlines, OEMs and tier ones had to bear the brunt of the financial investment risk, a burden that further challenges operating profits and the bottom line.

Facing budget cuts from the OEMs and other tier one suppliers, many firms are turning to strategic partnerships and alliances to find new, more-permanent ways to cut costs. Expertise in strategic alliances will be a major source of competitive differentiation in the coming decade and beyond. It is therefore vital that companies understand the enormous long-term opportunities that can be created by developing competence in forming alliances.

Strategic Partnerships

A strategic alliance is a partnership between two or more firms that unite to pursue a set of agreed upon goals but remain independent subsequent to the formation of the alliance to contribute and to share benefits on a continuing basis in one or more key strategic areas, e.g. technology, manufacturing, products (Yoshino & Rangan, 1995). There are five potential benefits that international business may realize from strategic alliances:

Innovation has always been the keystone of the aerospace industry, and like any industry, aerospace faces its share of challenges. The aerospace industry encompasses a broad spectrum of business sectors such as defense, space flight and exploration, propulsion systems, and passenger aviation. Given the thirst for technological innovation, there should never be a shortage of new technologies to keep the industry thriving.

This report provides examples of how firms within the aviation industry have entered strategic alliances to achieve product differentiation through shared knowledge and expertise, minimize risk in penetrating new markets, and create brand awareness while reaching out to a broader audience around the world.

Risks Sharing

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upply chains have traditionally relied heavily on transactions relating to cost and efficiency to improve their bottom line profits. This approach of relying on organic growth and improvements within the company might favor small businesses, but not on a larger scale which involves megaprojects – like development of a jet turbine engine.

The development of the Rolls Royce Trent XWB engine which powers the newest wide body jet from Airbus - the A350, has set new standards of efficiency, life cycle costs and environmental impact, crowning it the world’s most efficient large aero engine (Rolls Royce, 2015).

The time taken to develop a jet engine is typically 3 to 5 years. An engine which has entered the market has a service life of up to 30 years, in which the engine requires repair and overhaul to maintain its operational efficiency. Given the potential benefits for these manufacturing organizations, it seems logical that Rolls Royce, the OEM of the Trent Engine, should enter a Revenue and Risk Sharing Partnership (RRSP) together with partner investors so that expenses can be shared, risks can be diversified and investors could also qualify for the profits and rewards.

Rolls Royce has identified 3 major partners in development of its jet engines, which are Industria de Turbo Propulsores, S.A. (ITP) of Spain which are responsible for the design, assembly, and manufacturing of the Low Pressure Turbine module, Japan’s Kawasaki Heavy Industries Ltd (KHI) which supplies the Intermediate Pressure Compressor, and Mitsubishi Heavy Industries Aero Engines, Ltd (MHIAEL) which supplies combustion and turbine components (Rolls Royce, 2015).

These RRSPs between Rolls Royce and its suppliers allow all partners to focus upon the link between investment and profit, pool best management practice, while encouraging the integration of cultures and skills in achieving a common goal of supplying a world class product. The principle behind profit and risk sharing was simply to incentivize its partners to make the largest investment possible which would entitle them to a proportional amount of the revenue as the project realized its goals.

Synergy and Sustainability

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n today’s environment, an effective alliances should strive to generate sustainable values for customers and shareholders in 3 radical aspects – Economic, social, and environmental. Alliances are critical to current operations as well as future strategy for companies to achieve stronger and more effective market presence. With increasing demand for information, technology, resource and competencies, companies are forming alliances with their rivals, suppliers,