In 2015, Warren Buffett’s Berkshire Hathaway spent $37 billion to buy Precision Castparts, one of the largest aircraft parts suppliers. Overall, analysts liked the deal, saying that the aerospace industry will likely see nice growth over the next few decades as more and more people can afford to take to the skies.
What wasn’t really revealed was the state of that industry. The aircraft parts business is incredibly fragmented with each plane filled with parts from potentially hundreds of different suppliers. For instance, in 2005, Boeing’s Frontiers magazine revealed that it deals with some 6,500 different suppliers. That number has likely gone down over the years, but at the same time its newest Dreamliner plane still features parts from around the world.
Boeing is the 800-pound gorilla of the aviation industry. It has been able to use its clout to drive suppliers into submission. Price cuts on parts trickled down to the company’s bottom line. Boeing shares have appreciated some 206% over the last five years, thanks in parts to price cuts forced onto suppliers.
Things are going much worse for Bombardier (TSX:BBD.B). The company struggled with its CSeries line for years before eventually signing a pact with Airbus that saw it essentially acquire the troubled division.
One of the reasons for Bombardier’s struggles is it doesn’t have the same clout with manufacturers that Boeing or Airbus enjoy. Bombardier does US$16 billion per year in revenue, with the train division accounting for a big chunk of that. Boeing sells nearly US$100 billion worth of planes. If suppliers are forced to cut their prices for Boeing, many are making up for this by increasing prices to Bombardier.
There’s a solution to this problem: Bombardier can start buying up its suppliers.
Not only would this ensure the company got at least some of its parts for the lowest possible price, but it would also allow it to better participate in the global boom in air travel. Many parts suppliers enjoy much better margins than the companies putting the planes together, too. And if Bombardier focused on niche parts without any competition, the likes of Boeing would be forced to keep buying from those companies.
Making airplane parts must be a pretty decent business, too. After all, Warren Buffett doesn’t make it a habit of adding crummy businesses to his portfolio.
This isn’t an unprecedented move, either. Back in 2017, Boeing set up a new division called Boeing Avionics, which will focus on designing and producing certain avionics technology. It has also formed various joint ventures with parts makers, including one with Adient PLC to make seats.
Bombardier could start getting into the parts business from scratch, but I don’t see such a move turning out well. Firstly, the company has a poor record growing businesses from the ground up. Just look at the CSeries. And secondly, Bombardier’s management needs to show investors they can be good stewards of capital. Right now, the company has a reputation of spending shareholders money willy-nilly. It poured money into the CSeries.
The bottom line
It’s time for Bombardier to look at getting into better businesses. Parts are a great first choice because key personnel are already familiar with the industry. They know a good supplier from a bad one. Buying up parts suppliers would also allow the company to indirectly invest in the success of its competitors. Rather than trying to beat the behemoths in the industry, perhaps it’s better to join them.
The Motley Fool’s Iain Butler has just revealed an ultra rare “triple down” stock recommendation. And investors all over Canada are rushing to get in. Why? Because past “triple downs” have averaged over 100% returns, and sometimes as much as 440% returns (in just over two years’ time)...
To discover the brand-new “triple down” recommendation, simply click here. You’ll be whisked to a special investor memo prepared by The Motley Fool Canada. The only catch is you’ll have to hurry! This brand-new report could be withdrawn at any time.
Fool contributor Nelson Smith owns Berkshire Hathaway (Class B) shares.