The aerospace industry’s frantic race toward higher productivity
and profits has triggered another feverish contest in the world
of Internet-based trading exchanges.
The proliferation in recent months of business-to-business (B2B)
exchanges for the aerospace industry is symptomatic, on the one
hand, of the growing interest in Web-based marketplaces that link
buyers and sellers directly, without the traditional middlemen.
On the other hand, B2B exchanges increasingly are becoming tools
to achieve specific corporate goals—such as increasing sales,
improving customer service and cutting back on excess inventory.
Many executives in the industry believe that the aerospace B2B
environment is too complex for a one-size-fits-all solution. Some
companies, for example, carry enough clout in the industry that
they may not feel pressure to join exchanges. Some industrialists
simply don’t believe that a corporation’s presence on
Web exchanges necessarily translates into higher sales.
Aerospace industry giants, meanwhile, have been rushing to launch
independently owned exchanges—which allow them to join forces
with their competitors and combine their buying power—without
having to merge outright with each other.
There is broad consensus, additionally, that the confidence that
aerospace executives are placing on B2B exchanges is tied to the
prospects of higher efficiency and lower costs of executing transactions.
"E-commerce eliminates non-value-added activity," said
Phil Condit, chairman and chief executive officer of the Boeing
Company. Electronic transactions, Condit told reporters, translate
into a 25 percent surge in productivity.
Boeing is one of the four founding partners of Exostar, a B2B exchange
for the aerospace and defense industries. The other three are Lockheed
Martin Corporation, The Raytheon Company and BAE Systems. The chief
executives from all four firms briefed reporters at a news conference
in Farnborough, England.
Exostar, said Condit, "will provide both external and internal
gains in efficiency for both buyers and sellers."
The exchange, whose creation was announced in March, was expected
to open for business in late September. Headquartered in the Washington,
D.C. area, it is an independent corporation. The four current participants
are the industry’s most powerful firms. They collectively
have more than 37,000 suppliers and $71 billion in commercial and
government sales. The annual sales volume for the entire aerospace
and defense industry is about $400 billion. "We have critical
mass," said John Weston, CEO of BAE Systems.
Exostar’s interim CEO is Kent Swanson, who is a partner at
"We invite companies of all sizes from around the world to
participate," said Vance Coffman, chairman and CEO of Lockheed
Martin. "We have 100 people setting up and staffing Exostar
in the Washington, D.C. area. ... We are bringing supply-chain management
into the digital age and doing so on a global basis."
The supply chain is an industry buzzword that represents the various
buyers and sellers involved in the aerospace market. It includes:
During the past several years, B2B Web-based operations have evolved
from simple sources of supplier information to online marketplaces,
with many buyers and many sellers, all focused on the industry’s
offerings. Exchanges, in theory, were designed to match those buyers
and sellers more efficiently and to lower their overhead costs via
paperless commerce. They also claim to offer small companies opportunities
to be on an equal footing with larger ones.
"We are doing this because it will snap the industry into
tighter alignment with the e-commerce priorities of our customers,"
said Coffman. "Exostar’s open supplier network will enhance
competition ... will develop opportunities for small businesses,"
The exchange, Coffman said, will support the Defense Department’s
e-commerce project, called the "integrated digital environment."
The defense industry, particularly, wants to facilitate the Pentagon’s
effort to "integrate the supply chain," meaning that customers,
prime contractors, subcontractors and suppliers would be part of
a Web-based exchange.
B2B transactions range from buying and selling products out of
electronic catalogs or via electronic auctions, to submission of
bids and proposals, and management of joint projects and documents.
Dan Burnham, chairman and CEO of Raytheon, touted Exostar’s
"common protocols and expanded horizons" as important
benefits that justified Raytheon’s participation.
Raytheon has a separate e-business site called EverythingAircraft.com,
which sells general aviation spare parts. It has not been decided
yet whether that site will be integrated into Exostar. Boeing set
up myboeingfleet.com as a portal for online maintenance, engineering
and flight operations data. Boeing’s online site for commercial
parts sales rang up more than $400 million last year, Condit said.
Every member of the aerospace and defense industry is trying to
decide which exchange to join, Burnham noted. "We want Exostar
to be the obvious choice."
The weight behind the four founding companies will be the key selling
point in this exchange, said Mark Hoffman, chairman and CEO of Commerce
One. The company supplies the hardware and software for Exostar’s
e-commerce infrastructure. "This exchange has the span of these
big companies. That gives this exchange a lot of power, a lot of
buying power, which is very important.
"We are making an open architecture so members can join without
extensive investments in internal technology and processes,"
he said. He also stressed that sensitive information is encrypted,
according to industry standards.
Electronic auctions will be one option available to exchange users,
Hoffman said. Small businesses, he explained, can register and make
their products available to everyone who is connected. "If
you want to send ads or information to different companies, you
can do that," he said. "You want them to participate as
an active community partner."
Hoffman predicted that aerospace industry e-business exchanges
eventually will consolidate because there are currently too many.
One of the most viable competitors emerging today is MyAircraft.com,
launched by industry powerhouses United Technologies Corp., Honeywell,
and i2 Technologies. The BFGoodrich Company recently announced it
will became a partner. These firms collectively have about $25 billion
in annual revenue.
MyAircraft.com "has the potential to dramatically improve
efficiency in a business involving $50 billion in aerospace after-market
parts and services annually," said Ari Bousbib, vice president
of United Technologies. Like Exostar, MyAircraft.com is an independent
company created to provide an electronic exchange for airlines,
manufacturers and suppliers. It is expected to begin operations
by late 2000 or early 2001, said United Technologies spokesman Peter
The prime motivation for many companies to join an exchange is
to improve inventory management, said Dalpe. The aerospace industry
has inventories worth about $50 billion, mostly in spare parts.
But the annual demand for new spares and repairs amounts to about
$30 billion. "This industry presents ripe opportunities for
substantial reduction in inventories," said a white paper published
The site will offer products from parent companies United Technologies
and Honeywell. But new capabilities will be added for supply chain
management and technical data handling, Dalpe said. The site will
earn revenues from transaction fees and technical publication subscription
Neither Exostar nor MyAircraft plans to impose any exclusivity
requirements on companies wishing to do business on the site. "It’s
best to have as many companies as possible," said Dalpe.
Lockheed Martin spokesman Hugh Burns said that "any legitimate
supplier" would be eligible to participate in Exostar, assuming
that their products meet government certification requirements imposed
by the Federal Aviation Administration and the Defense Department.
"This is an opportunity for people to get into the [aerospace]
business, but it doesn’t mean any ‘mom and pop’
hardware store can do it."
Exostar’s revenues will come from transaction fees, said
Customer Web Center
But while Exostar and MyAircraft tout the benefits of multi-company
exchanges, one of the industry’s most prominent firms has
experienced success with its own e-business site. The GE Aircraft
Engines "Customer Web Center," launched in January 2000,
is expected to have nearly 300 customers registered by December,
said James McNerney, president of GEAE. "E-commerce is a massive
productivity play, not just customer play," he told reporters.
By early 2001, he said, "$1 billion in orders will be flowing
through the site." The company has assigned 300 employees to
the Web Center.
According to McNerney, the productivity achieved via e-business
will result in a $500 million increase to operating margins during
the next three to four years.
There are more than five million pages worth of manuals on the
Web today, said John Rosenfeld, global e-commerce leader for GEAE.
To gain access to the Web Center, customers—such as airlines
or maintenance shops—must be pre-approved by GEAE. They can
buy spare parts, research technical publications and remotely diagnose
the condition of specific equipment, which means they can receive
information on the status of an engine while the engine is in flight,
Rosenfeld said in an interview.
While the Customer Web Center performs the "selling"
function, the company has a Supplier Web Center for its 1,200 suppliers.
The "buying" side of GE’s Web operation has automated
many of the tasks formerly done by humans. About 200 positions in
the purchasing department were thus eliminated, said David Overbeeke,
general manager of e-business at GEAE.
"Having 1,200 suppliers on our supply chain Web Center allows
GE to do forecasting, scheduling, part shipments, drawings, quality
control documents," he said in an interview.
"We used to spend a million-and-a-half dollars shipping blueprints
to customers. Now, they pull drawings off the web and print them
out themselves," said Oberbeeke. "When there is no value
added in a task, you can automate that and eliminate people associated
"We have run over 400 electronic auctions this year alone,"
The company plans to launch a site for military customers, Rosenfeld
said. "It will leverage all of the functionality we built in
the commercial site, although we won’t be able to do it all
at once because some of it is specific for commercial customers."
Military customers will have access to spare parts, product support
and component repair status. The Defense Department’s electronic
commerce office, said Rosenfeld, "wants our data so it can
take our catalog data and availability information, and data from
other vendors, and put it in one big catalog. ... We also provide
status of component repair work at our shops."
But he explained that commercial and military customers have their
data stored separately and cannot access that data unless they are
Most of the content material on GEAE’s sites is proprietary
or sensitive, "but we don’t have any top-secret information
on the Web," said Rosenfeld. But he believes that will change,
because "security standards are getting better all the time."
GEAE considered participating in Exostar, said Overbeeke. But he
decided against it. "We were in deep discussions and chose
to not participate," he said.
"Our volume [for the entire GE company] is as big or bigger
than those companies combined. We have no antitrust risk by combining
the GE companies. They may have a concentration in aerospace, which
may cause them antitrust problems," said Overbeeke.
A more important consideration for GE, however, was the perception
that defense-oriented firms operate at a more sluggish pace than
commercial firms. "They are much slower than we are. GE is
about speed," Overbeeke said. "While they have talked
about it for the past six months, trying to get organized, we saved
$100 million" through the GE Web Center, he said. "Would
you rather have $100 million of bottom-line margin growth, or would
you rather have a lot of meetings and talk about it for six months?"
Besides financial matters, there are other reasons why it would
not make sense for GE to be part of Exostar, Overbeeke added. "We
don’t want to get tied up with four or five companies in a
big bureaucratic structure."
Because GE is a $120 billion company, he said, "We have enough
leverage, enough focus and expertise to drive the stuff on our own."
GE Aircraft Engines, meanwhile, has begun negotiations with Boeing
for participation on the "sell side" of GE’s Web
site. "But on the back end, we believe we have a competitive
advantage," said Overbeeke.
That competitive advantage would be sacrificed, he explained, if
GE shared its purchasing power with other companies. The upshot
would be that they all would be charged the same prices by vendors.
"We would all be sourcing the same stuff, getting the same
price, yet we have to compete in the marketplace. To me, that doesn’t
drive the right value proposition."
The Exostar exchange, meanwhile, "is the right thing for Boeing
and the other companies to do, because they need cost control. We
have our own cost control."
The "real issue that we have to figure out" in the aviation
and aerospace industries is "the interface between product
manufacturers and the airlines themselves," said Overbeeke,
so that the customers get more benefits and gain productivity. "That
is the real challenge and the real question," he said.
The development of standards throughout the B2B exchange universe
will be a top priority for the industry because "every company
is affected by what other exchanges are doing," said Shirley
Goodman, from the Association of Enterprise Integration, in Arlington,
Va. The organization has hosted industry forums to address these
issues, she said.
"You have all kinds of other exchanges out there being developed
but they are all tackling it from different perspectives,"
said Overbeeke. "Our view right now is to stay GE-branded,
give our customers state-of-the-art functionality and be fast to
market, building de facto standards.
GE’s status as one of the world’s three major engine
manufacturers means that, no matter what exchanges are out there,
GE will be a player, said Rosenfeld. "Exchanges are becoming
intermediaries, so they can’t survive without us, but we’ve
been around a long time without them," he said. "So we
are in no rush to go and let one of these folks take over our relationship
with our customers. We won’t allow that to happen."
GEAE’s top competitor, Pratt & Whitney, is affiliated
with MyAircraft.com. Pratt & Whitney is owned by United Technologies.
The third major engine maker, Rolls-Royce, announced it is launching
an e-business portal called "aeromanager," which will
provide "tailor-made fleet management solutions to the aviation
industry," said a company statement. The portal is a joint
venture with San Diego-based Science Applications International
It is unlikely that all the exchanges currently in business will
survive in the long term, Overbeeke said. One of those exchanges,
AviationX, appears already to have folded. Phone calls to AviationX
offices in Arlington, Va., were not returned.
MyAircraft’s Dalpe believes that there is room in the industry
for more than one exchange, but that there will be dropouts as time
Another exchange that was scheduled to begin operations in the
summer of 2000 is Aerospan.com, an e-business site for the aviation
transportation industry. The company predicted it would help boost
airline profitability by 26 percent.
"There is going to be a rationalization of all this effort,"
Both Exostar and MyAircraft have been actively promoting their "openness"
to other companies’ participation, seeking to avoid being
perceived as exclusive clubs. But industry observers believe that
anti-trust issues inevitably will arise if companies find that access
to certain exchanges is restricted.
Jill Posnick, spokeswoman for Andersen Consulting, said Exostar
officials have been aggressive in securing legal advice to preempt
antitrust concerns. Andersen Consulting is a partner in Exostar.
The corporate owners of MyAircraft do not plan to become a "buyers
club" and make purchases jointly, said Dalpe. "United
Technologies will not be doing bulk buying with Honeywell,"
he said, because that was not the original intent for setting up
the site. The emphasis for MyAircraft, he said, is inventory management
and automating the supplier-buyer transactions.
There still remain a few non-converts in the e-business frenzy.
Francois Roudier, director of communications at Messier-Dowty,
a French supplier of civilian and military aerospace products, said
there is much more to achieving growth in the industry than having
a "wonderful Web site."
Messier-Dowty, which is owned by the SNECMA Group, has a Web exchange
for selling parts and a larger site for electronic business transactions.
"But we are doing quite well, even without the Web site,"
said Roudier in an interview. He is not convinced that a Web exchange
can help increase sales, but he endorses the Internet as a valuable
"For us, as a global company, e-mail has been a revolution,
especially when dealing with customers who don’t know English
very well and prefer to write things out," he said. "I
am not convinced that launching a big web site increases business.
I believe in human face-to-face contact. That is the only way to
keep yourself in the business. If you don’t meet your customers
in person, you’ll be out of the market soon. E-business is
just a tool."
Large exchanges such as Exostar, said Roudier, should benefit small
parts manufacturers "who don’t have a lot of visibility,
who make unique, specialized items."
The belief that "buyers and sellers need help finding each
other" is feeding the optimism of dotcom executives, said Barry
Wightman, spokesman for TradeAir.com, based in Minnetonka, Minn.
Exchanges allow companies to set market prices more quickly, he
said in an interview. TradeAir currently is a commercial aviation
site, but is "moving into the defense market," he said.
"There are many buyers in the defense community that have the
same problems as the commercial customers."
Wightman does not see Exostar or MyAircraft as direct competitors,
because TradeAir specializes in the surplus market for spare parts,
which accounts for about $10 billion to $11 billion a year in sales.
"We are not trying to be all things to all people."
Used surplus parts are sold by airlines, manufacturers, overhaul
shops and brokers. Like other exchanges, said Wightman, "we
don’t require exclusive relationships with companies. They
usually don’t work."
The successful exchanges, said MyAircraft’s Dalpe, will be
the ones that implement the "supply chain management software"
in ways that will make participating companies more efficient.