Boeing slows payments to suppliers as it accelerates cost cutting

By Alwyn Scott and Tim Hepher

NEW YORK (Reuters) – Boeing Co is stepping up efforts to conserve cash, cut costs in its supply chain and trim inventory of parts in its factories, telling vendors it will take longer to pay bills, Boeing and aerospace industry executives said.

Under the new terms, Boeing is taking up to 120 days to pay, rather than 30 days as in the past, these people said. The new payment schedules are being rolled out this year.

Boeing also is reducing its factory inventory and is relying on suppliers to hold parts instead, these people said. The moves come at a time when investors are closely watching Boeing’s cash flow.

In a statement to Reuters, Boeing confirmed the changes in payment and inventory terms, saying they were necessary to compete when airlines want more capable planes at lower prices.

“To align with industry norms” and remain competitive, “we are in the process of adjusting the payment terms of our large suppliers,” spokeswoman Jessica Kowal said in the statement. “In most, if not all cases, our new payment terms are in line with their payment schedules to their own suppliers.”

Boeing, which is marking 100 years in business this summer, and its European rival Airbus earn lower average profit margins on the airliners they engineer and sell than many of the companies that supply components for the planes.

The company’s operating profit margin averaged 6.9 percent over the last decade. Airbus’s figure was 3.7 percent. United Technologies Aerospace Systems’ comparable margin was about 16 percent, according to Thomson Reuters data.

“It’s in Boeing’s DNA to build the best airplanes,” Kent Fisher, vice president of supplier management, said in an interview. “But what we and suppliers have to recognize is that we have to shift that dynamic and focus on reducing the cost to build the airplanes.”

Boeing Chief Executive Dennis Muilenburg has told investors he wants to lift Boeing’s profit margin to the mid-teens by 2020.

Under a program called Partnering for Success, launched in 2012, Boeing suppliers cut prices 15 percent. Now, executives at Boeing suppliers say Muilenburg is pushing a renewed round of cost cutting.

“I was in a meeting with Dennis where he was quite specific about needing to get continued cost reduction from the suppliers,” said Dave Gitlin, president of United Technologies Aerospace Systems, one of the world’s largest aircraft parts makers.

Gitlin said UTC did not agree to delayed payment terms because it was focused on its own cash flow.

But as Boeing searches for savings, he said, “it’s accurate to say that everything is part of the discussion. I think they’re looking under every rock.”

Major Boeing supplier Mitsubishi Heavy Industries <7011.T> said Boeing is seeking a new round of lower prices and changes in payment terms.

“I cannot say the number, but I would like to satisfy as much as possible the required cost reduction level from Boeing,” Shunichi Miyanaga, chief executive of MHI, said in an interview.

On the question of longer payment periods, first reported by aviation publication Leeham News, he added, “we have not decided.”

$2 BILLION IN SAVINGS

Not all of Boeing’s efforts require price reductions. Some suppliers find cost savings by re-engineering components, a process Boeing calls “value engineering.” Boeing saved $1 billion a year in 2014 and 2015 through these efforts, up from $60 million in 2012, Kowal said.

“They’re very aggressive,” Tom Gentile, chief executive of Spirit AeroSystems Holdings , said in an interview about price reductions.

“But Boeing is as hard on themselves as they are on anyone else,” he added. On a recent tour of Boeing’s factories in Washington state, he said, workers were under pressure to install new tools, reduce production time and reduce inventory.

Payment terms could be included in a long-term agreement Spirit is negotiating with Boeing, Gentile said. “There are a lot of levers to pull,” he said.

But many suppliers have already accepted the changes. At a mid-sized machining shop in Washington state that makes parts for Boeing, payment terms shifted this spring.

“We went a whole month with no receivables from Boeing,” said the owner, who asked not to be named because of concern about damaging relations with Boeing.

When payments resumed, about 10 percent of the company’s annual revenue remained unpaid, he said, adding that Boeing now pays in 60 days, not 30, and pays twice a month, not weekly.

“We’re having to change the way we manage our cash flow and change the way we pay our suppliers,” the owner said. “It is preventing us from buying equipment.”

Boeing said small suppliers in the United States are exempt from the new payment terms and that it is trying to accommodate suppliers overseas.

“Boeing did not implement any policy change or action that would have delayed or missed a contractual payment to large or small suppliers in April,” Kowal said.

Other suppliers also reported changes in Boeing’s terms, along with further price reductions, said Christian Schiller, a managing director at investment bank Cascadia Capital in Seattle who works with mid-sized suppliers. The effort has been dubbed “Partnering for Success 2.0.”

“Notwithstanding all the concessions people made on PFS,” Schiller said, “there’s a whole new wave now of all sorts of other concessions.”

(Reporting by Alwyn Scott and Tim Hepher; Editing by Bernadette Baum and Phil Berlowitz)