Exclusive: Boeing confirms new policy of charging royalties from suppliers

December 7, 2012

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Boeing 787 main 150x150 Exclusive: Boeing confirms new policy of charging royalties from suppliersBoeing has implemented a new policy that will see many of its suppliers pay recurring royalty fees in exchange for interfacing with the airframer’s intellectual property (IP), the APEX editor’s blog can exclusively reveal.

The practice appears to be unprecedented in the aviation industry, representing a fundamental shift in the revenue model, though Boeing notes: “It is not uncommon for technology industries to achieve royalties in the use of their IP.”

Speaking to the APEX editor’s blog on the condition of anonymity multiple suppliers say they have been asked to pay 10% of the revenues they receive when aircraft are sold with their kit. Some suppliers have tried to fight the measure, whilst others are grappling with passing costs to their own suppliers, and down along the supply chain.

Last week, I sent an email to Bret Jensen of Boeing Commercial Airplanes’ engineering communications unit, stating and asking the following:

Boeing last year informed cabin/systems suppliers that they must provide 10% of revenues if they are to use Boeing’s IP (and tribal knowledge). The Boeing letter told suppliers not to discuss the 10% stipulation (but, obviously, that’s not stopping them from doing so). Questions: Many people at Boeing help to drive Arinc standards. By demanding 10%, is there not a conflict of interest occurring? Has Boeing tied this increase to linefit offerability?

Jensen responded by saying: “This policy change was not limited to cabin/systems suppliers, but applied in many cases across the supply chain. It is not uncommon for technology industries to achieve royalties in the use of their IP.”

Note, however, that Boeing did not say that the new policy has been applied to all suppliers.

Aircraft owners/operators and third-party service providers are already well accustomed to paying recurring fees for licensing Boeing IP. Every time they modify a Boeing aircraft with a new product or system and use Boeing data, they pay the airframer.

Suppliers that enjoy linefit status on Boeing aircraft, however, have already spent millions of dollars to ensure their systems meet the airframers’ stringent qualifications. Now they’ll need to add royalties to the equation.

Depending on whom you talk to in the aviation industry, Boeing’s decision is epic in audaciousness, falls just short of extortion, or simply makes good business sense.

Noted aerospace analyst Richard Aboulafia, who works as VP, analysis at the Teal Group, suggests that Boeing might be fed up of hearing a “giant sucking sound” as the tribal knowledge gleaned from its aircraft programmes finds its way to would-be competitors in China and Russia.

Aircraft interiors and IFEC consultant Michael Planey suggests, like many, that Boeing’s policy will ultimately trickle down. “That 10% number will end up raising the cost of business for the airlines and ultimately the cost of air fares for the passengers,” he suggests.

Meanwhile, myriad questions remain unanswered. Is Boeing trying to extract as much as it possibly can from suppliers because it is so pressured on profitability with the 787? Is the airframer’s decision simply part of a broarder plan to reduce the cost to build the 787 from a recurring cost perspective? As Boeing tries to drive further productivity out of its suppliers, as it is doing now, will its efforts be undermined by this new policy change? Will the measure hit a certain class of suppliers – across the board – in the same way?

I requested a telephone interview with Boeing to understand the underlying drivers behind its decision. Mary Kelly of Boeing Commercial Airplanes communications – supplier management says, “Your request for an interview on Boeing’s Intellectual Property was referred to me. While we appreciate your interest in Boeing, we are not interviewing on this topic.”

Asked by the APEX editor’s blog whether Boeing is setting a precedent that Airbus might follow, Clay McConnell, VP – communications at Airbus Americas, says, “Airbus has no plans.”

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About Mary Kirby

Editor in Chief - APEX Media Platform | Previously Senior Editor at Flight International where she led the magazine's coverage of in-flight entertainment and connectivity (IFEC) and aircraft interiors | Former proprietor of the highly-regarded Runway Girl blog, which focused on the passenger experience | Regularly speaks at industry conferences about airborne communications, ancillary revenue opportunities for airlines and social media | You can connect with Mary on Twitter, LinkedIn

View all posts by Mary Kirby
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4 Responses to “Exclusive: Boeing confirms new policy of charging royalties from suppliers”

  1. Paulo M Says:

    Certainly opens the door for them to more vigorously protect their IP. If the fast paced smartphone market is any indicator, this IP move may open the door to quite a bit of litigation, and, in time, royalty payments from rival manufacturers. Longer-term, likely a bigger deal than the Boeing-Airbus, Embraer-Bombardier WTO subsidies sagas.

    Reply

  2. Aero Ninja Says:

    Mary, do you think this could come back to haunt Boeing?

    Reply

  3. Shaul Bloom Says:

    Isn’t this likely to encourage suppliers to respond in kind? Suppliers can start charging Boeing royalties for allowing their equipment to be attached to the suppliers.

    Reply

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