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.