Competition in the aviation industry is increasing immensely. Demand for retrofitting and avionics components has decreased as of Q4 2016, forcing companies to stay competitive in other ways. Economic pressure on aircraft manufacturers can cause them to offer incentives, such as warranty against future Airworthiness Directives (AD), in exchange for aircraft manufacturers using their products.
The long-term nature of many of contracts makes the process of estimating costs and revenues on fixed-price contracts inherently risky. Fixed-price contracts often contain price incentives and penalties tied to performance that can be difficult to estimate and have significant impacts on margins. In addition, some contracts have specific provisions relating to cost, schedule and performance. Incentives may also backfire on the offering companies. In FY 2015, aircraft manufacturer Honeywell lost $184 million in revenue, thanks to its heavy use of price incentives combined with declining sales.
Meanwhile, large-scale manufacturing companies such as Boeing and Airbus may adopt similar incentive packages in the wake of global competition. Chinese competitor Comac and Russian competitor Irkut are both entering the market within the next three years, and the high costs associated with Boeing and Airbus vehicles mean that they must compete either with lowered prices or incentives. Boeing has taken a different route, and is expanding in the profitable after-sales market.
- Delays in implementing a recommended mitigation (Service Bulletin)
- Manufacturer belief that all mitigations enhancing safety will become an AD, usually at a later date and then be covered by the warranty
- This phenomenon may be mitigated to some extent by implementation of SMS.
Corroborating sources and comments
https://www.forbes.com/sites/greatspeculations/2014/03/06/new-entrants-pose-a-challenge-to-boeings-share-of-the-global-commercial-airplane-market/#652162f34475 (State of aircraft manufacturer competition as of 2014. Since the time of this article, Chinese and Russian joint ventures have only increased the competitive pressure on airplane manufacturers. The Chinese government-chartered company, Comac, is putting pressure on foreign markets, while Bombardier and Embraer are taking on shorter-haul flights.)
http://www.reuters.com/article/us-russia-airplane-idUSKBN18O0DL (Article on the Russian competitor, Irkut. So far, it’s only managed a 30-minute flight at an altitude of 1,000 feet, but more tests are incoming. 175 aircraft have been ordered thus far. Hot off the press!)
https://www.forbes.com/sites/greatspeculations/2015/01/27/honeywell-earnings-oem-incentives-friction-materials-divestiture-dampen-an-otherwise-strong-performance/#315c1cc23a7b (More directly related to the idea of price incentives. Thanks to its OEM incentives, aircraft manufacturer Honeywell lost $184 million in revenue in the third quarter of FY 2015, and its sales still declined by 14%.)
http://www.aviationtoday.com/2016/11/08/aerospace-companies-report-latest-earnings-give-glimpse-of-2017/ (Multiple avionics companies report on their earnings for the last quarter of 2016 and plans going forward. The big takeaway is that demand for retrofitting and avionics components decreased in this quarter, meaning companies have to make bigger incentive pushes to stay competitive.)