By Tim Hepher
PARIS (Reuters) - European planemaker Airbus (PA:AIR) is pressing suppliers on its A320 jet program to slash prices by at least 10 percent by 2019 in order to make the company's main cash cow more competitive, three people familiar with the matter said.
The demand for austerity echoes rival Boeing's (N:BA) cost-cutting Partner for Success initiative, which has redrawn the relationship between suppliers and the world's biggest planemaker as the industry gears up for record output.
Airbus' cuts are just one part of an internal efficiency program called SCOPe+ that also seeks savings through a close look at procurement and the way planes are developed and sold, according to suppliers and an Airbus document seen by Reuters.
Airbus has told suppliers that the prospect of increased volumes and a longer lifespan for its best-selling jet, which has enjoyed a surge in sales due to an important makeover, means it is time to "review all options" in its supply chain.
This includes a fresh look at the company's procurement strategy that could include extra use of dual sourcing for crucial parts: a strategy designed both to reduce costs and to reduce the risks of shortfalls as production increases.
Airbus is also looking at further shifting its business model to allow airlines less choice over accessories that they previously ordered direct, known as Buyer Furnished Equipment.
Also involved is a longer-term effort to weave manufacturing costs into the design process to prevent unintended overruns in costs on the factory floor, a tool known as "Redesign to Cost."
Though Airbus has confirmed the existence of the SCOPe+ initiative, its details have not been publicly disclosed.
The initiative "is part of Airbus' long-term commitment towards boosting competitiveness through operational efficiency and continuous improvement," a spokeswoman said.
TUG OF WAR
In 2014, Airbus spent about 13 billion euros on parts for its A320 family of jets, which compete with Boeing's 737 in the busiest part of the $120 billion-a-year aircraft market.
Each plane contains three million parts.
Mounting pressure on suppliers for price cuts comes as Airbus and Boeing are raising production of their single-aisle models to around 50 aircraft a month each, up from 42 a month, and pondering a further step-up to 60 a month.
Such increases in volume are traditionally the aerospace industry's most valuable lever for driving down unit costs.
But the SCOPe+ and Partner for Success programs aim to complement this with direct contributions from suppliers, driving profit margins further up industry's food chain. Boeing has told suppliers to cut prices by 15 percent or lose business.
While planemakers lead the industry in terms of revenues and operating profits, the top 20 companies in the aerospace sector by operating margin are all suppliers, according to Deloitte.
That rankles with manufacturers who argue their willingness to gamble on hugely popular upgrades of the A320 and Boeing 737 jets is driving record sales and creating wealth across the industry that ought to be shared through lower parts prices.
But many small suppliers argue the efficiency campaigns mask a grab for part of their profit margins. They say they face their own challenges in investing in equipment to support higher production, with no guarantee how long the boom will last.
Some are pushing for higher, not lower, prices.
The increased tension is the latest evidence of a shift in industry focus. After a decade of bold developments, Airbus and Boeing are putting their energy into upgrading existing models.
With fewer new projects in the pipeline, they have less leverage to demand better terms from suppliers in return for a place on the next new plane and observers say this has led to a growing cost battle over existing programs.
"There is a balance of power between prime contractors and the supply chain. Those who supply things that can be dual-sourced like aerostructures feel price pressure. But a lot of the supply chain is single-sourced and it is harder for those suppliers to see why they should give anything up," said Nick Cunningham, aerospace analyst at UK-based Agency Partners.