Read the full interview HERE
We recently interviewed a Former VP who spent over 26 years at Esterline Technologies selling components to both OEM's and in the aftermarket.
- Esterline's pricing strategy pre-TransDigm acquisition
- Why Esterline was focused on moving up to sell bigger systems to OEM's
- How the OEM looks to capture margin and control the aftermarket pricing
- Structure of aftermarket pricing with distributors versus direct from supplier
- How airlines look at the pricing of spares and parts
- The risk of the TransDigm model and potential backlash from OEM's
The TransDigm model and argument is that they claw back that ownership of the aftermarket and they maybe sell at the same price, at cost, to Boeing or Airbus, for the hardware OE sale. But then they really ramp up and earn the margins on the aftermarket, to airlines. What’s your view around that?
As far as Korry and Boeing were concerned, Korry actually made a push-button switch and Korry was the only supplier of that switch, in the world. You could not buy it anywhere else. The barriers to entry for making that switch are very high. It takes a lot of tooling; it takes a lot of engineering. It sounds strange, but it does. It takes a lot of that type of stuff, in order to get that switch certified, in a flight deck. If they want, Boeing can come in and say, okay, you can only have certain customers in the aftermarket, to buy your switches and we’re only going to let you raise it up to three times the normal cost. TransDigm could turn around and say, no; we’re not going to do that and we’re the only people on the face of the earth that actually make these things and we’re going to charge whatever we want. So they are probably doing that. I’m not privy to what it is that they are actually doing but they could possibly do that and, maybe get away with it, at least in the short term.
Why didn’t Korry and Esterline do this before?
Because we wanted to have a position with Boeing, that allowed us to get bigger pieces of aircraft. In other words, if I were TransDigm and I’m not trying to sell complete systems to Boeing or Airbus or these other OEMs, then I don’t care. I can raise it as much as I want and you have to pay the price and that’s it.
Korry and Esterline, on the other hand, didn’t want to do that. We wanted to get a fair price, we wanted to stay in business, of course; we wanted to be able to sell into the aftermarket. But we also wanted to work with Boeing and Airbus and these other companies, in order to make bigger systems on board the aircraft. I’ll put it this way, a 737 aircraft has switches in the overhead and that’s what we sell to Boeing and we sell spare switches to airlines. For the 787 and 777X, Esterline/Korry sells the entire overhead, with all of the control panels and all of the certification aspects associated with that. I’m not just selling switches; I’m selling a complete system to Boeing. That’s the position that we want to be in.
So you’re working with Boeing, to upsell the bigger systems of the platform?
That’s exactly right.
You think that if TransDigm or Korry were previously to take that position of actually, no, I’m going to charge whatever I want in the aftermarket, Boeing would backlash against that and not be willing to work with you to sell the larger systems?
That’s right. That would be the case, for sure. They would not want to work with us and they would cut us out of some much larger business.
But Korry is the only company on the face of the earth, to supply those.
Yes, but it still goes back to the same thing. Yes, we could raise our prices as high as we wanted, some of the bigger airlines would have to pay the price. They would come back, they would complain to Boeing about it. Boeing would try to apply pressure, to drive our spare prices down and we could say, no, it doesn’t matter; we’re going to charge whatever we want. But that’s a short-term strategy and it’s not one, in my mind, that puts you in good standing with your customer, as you go forward.
Let’s face it, as far as Korry and Esterline were concerned, at that level, you had to have Boeing. They were probably the largest customer inside of the four walls; they weren’t the only ones, but you had to have Boeing. You had to have a decent relationship with them. It wasn’t always great but we worked with them on a daily basis and they were a large customer. If I’m trying to look at this from a short-term standpoint, sure, I can just raise my prices all I want and if that’s really what I’m trying to do, fine, because it will take one to two years, maybe longer, to get somebody else out there who could develop and sell the switches themselves; it would be very difficult.
That’s only if your strategy is to upsell to bigger systems?
Yes. Like I said, if you wanted to be TransDigm and you could do this and you could just raise the price to wherever you want, go ahead. Short-term system. We even pressed Boeing to the point of them threatening to get rid of us, because we wanted to get as much out of our spares as we possibly could. We wanted the initial sale of the hardware to be as high as we could make it and there were other parts of Esterline, not necessarily Korry, that were doing the same thing and they got replaced. If the barrier to entry is low enough, it will happen. If it’s high enough, they’ll take a little longer but they can possibly pull it off. We just never wanted to go down that road.
Read the full interview HERE