Boeing takes aim at its avionics suppliers, sending stocks down

[NEW YORK] Boeing said on Monday it set up an avionics group to make aircraft controls and electronics that compete with its own suppliers such as Rockwell Collins Inc, Honeywell International Inc and United Technologies Corp, whose shares fell.

The world's largest plane maker said the unit had started work and aims to bring systems for military, civil and space vehicles into service after 2020, capturing more of an avionics market worth hundreds of millions of dollars a year.

Boeing's aim is to "further drive cost down and value up for our customers," Boeing Chief Executive Officer Dennis Muilenburg said in an internal statement to employees that was seen by Reuters. It also will capture more services revenue after a plane is sold.

Boeing shares closed up 0.5 per cent at US$242.46. The stock has surged 14 per cent amid analyst upgrades since Boeing posted second-quarter earnings last week.

Rockwell Collins stock tumbled 6.3 per cent. Honeywell and United Technologies, which are more diversified, fell less than half a percent.

Boeing said it will focus on products for its own planes, but could sell to other plane makers eventually.

Rockwell said in a statement it does not expect Boeing's move to affect its business "in the foreseeable future," adding it has a "collaborative relationship with Boeing" on current aircraft and expects to keep working together.

United Technologies declined to comment, but noted that Chief Executive Officer Greg Hayes said last week that if plane makers "demand more of the aftermarket, we're going to have to think about how we price our products." Honeywell did not have an immediate response.

Major supply contracts typically last for the life of an aircraft model or program, limiting what Boeing could absorb at first, said Richard Aboulafia, an analyst at the Teal Group.

But later, "Boeing may bring some avionics in-house, or at least use this threat to extract lower prices from suppliers,"he said.

Current contracts also likely protect aftermarket sales, said analyst Robert Stallard at Vertical Research Partners, noting Boeing spent US$550 million with Rockwell in 2016.

Boeing said the new group is absorbing its electronics products team, which include "vehicle management systems, remote data/remote interface units, secure computing systems and signal intelligence systems." It expects the group to employ about 600 people in several existing Boeing locations when fully staffed in 2019, up from 120 now.

REUTERS