Airbus SAS and Boeing Co. may force mergers among component suppliers in the next 12 months as they seek to slash production and research expenses, according to aerospace executives and analysts at the Farnborough Air Show.
Consolidation will focus on producers of fuselage, tail and engine parts that are too small to bear the development costs Airbus and Boeing want to pass on, according to Paul Edwards, international head of aerospace & defense investment banking at Jefferies International. GKN Plc, Senior Plc and Fokker Aerospace say they’re on the lookout for opportunities.
Aerostructure companies typically build to designs from planemakers, resulting in lower margins than for gear such as fuel systems. Mergers in the sector, worth about $40 billion in sales according to Deloitte LLP, would help make bigger assemblies, paring costs and raising production quality, said Louis Gallois, chief executive at Airbus parent company.
“Boeing, Airbus and the other airframers are looking to consolidate their supply chain, and we’re getting back into acquisition mode now, doing some research,” said Jerry Goodwin, CEO for aerostructures at Senior, which makes parts for planes including Boeing’s 787 Dreamliner. “We have the equity to make purchases.”
Many companies that produce composite parts are former planemakers seeking to adapt to new realities, Edwards said. Because the fabric of an aircraft isn’t replaced in its lifetime, they miss out on maintenance and spares orders and should use mergers to expand into higher-value work, he said.
Dutch manufacturer Fokker, once the world’s biggest aircraft builder, has already made that transition after filing for bankruptcy in 1996 and being taken over by Stork NV, which is owned by U.K. buyout firm Candover Investments Plc.
Now focused on specialist products including a glass- reinforced laminate used in the fuselage of the Airbus A380, Fokker has been “in communication” with a number of parties and would be a good fit for bigger suppliers and aerospace companies in emerging markets such as India, China and Russia, executive vice president Henk Valk said in an interview.
GKN embraced Airbus’s drive to reduce investment costs when it bought the company’s wing plant in Filton, England, for 136 million pounds ($207 million) in 2009, and is seeking purchases to add new technology, aerospace unit CEO Marcus Bryson said.
“Airbus and Boeing want fewer suppliers that are bigger, well-funded and can take on risk,” he said. “We are doing research in terms of what could be a strategic fit.”
Purchases must be of a significant size because of the high fixed costs involved, but smaller than GKN itself, which has a market value of 2.2 billion pounds, Bryson said in an interview.
GKN makes composites for planes including the Airbus A380 and A350, a model in which it has invested 170 million pounds in research and tooling, and is also a supplier on Boeing’s 787.
Senior is already producing larger sub-assemblies such as the box that connects a plane’s wings to its fuselage, divisional CEO Goodwin said, and is looking at acquisitions that would add new customers such as Empresa Brasileira de Aeronautica SA, the world’s fourth-biggest planemaker.
Gallois, CEO of European Aeronautic, Defence & Space Co., said Airbus needs to transform more of the supplier base to rein in its development budget and also to lift production standards.
“With the supply chain, price is certainly important, but it’s not just about cutting costs,” the executive said in an interview at the Farnborough show, 30 miles southwest of London. “It’s about quality, responsiveness and reliability. We want to establish a relation of partnership with our suppliers.”
Jim Albaugh, president of Boeing’s jetliner unit, said his biggest concern is that suppliers must be able to meet production increases as the U.S. company and Airbus lift build rates, new planes such as Bombardier Inc.’s CSeries are brought to market, and Lockheed Martin Corp. begins to work through about 3,000 orders for the F-35 Joint Strike Fighter from 2015.
“There hasn’t been a real surge like this for a number of years, so this will be a challenge,” Albaugh said, adding that consolidation shouldn’t come at the expense of competition.
Other merger candidates are U.S. companies Spirit AeroSystems Holdings Inc., spun off from Boeing in 2006, and Triumph Group Inc., which purchased Vought Aircraft Industries Inc. for $984 million on June 15, said Bill Alderman of Alderman & Co. Capital, a broker specializing in the aerospace industry.
‘Going to Happen’
“There will continue to be some consolidation,” Spirit CEO Jeff Turner said in an interview, while declining to comment on his own company’s plans. He cautioned that “bigger doesn’t mean better value if someone’s very good at what they do.”
Triumph declined to give an interview at the air show.
The Alenia Aeronautica division of Italy’s Finmeccanica SpA may also be involved in the shakeout, Alderman said. Alenia is making 14 percent of the structure for the 787, and has been blamed by Boeing for quality-control issues with the horizontal stabilizer that may push first delivery to January. Giuseppe Giordo, the unit’s CEO, said at the Farnborough show that there’s “no major issue” with the project.
Bill Ellis, CEO of Derby, England-based precision metals specialist Doncasters Plc, said consolidation is also likely to extend to companies that supply the three main engine makers.
To meet customer requirements and boost margins, Doncasters is taking the “first steps” toward transforming from a component producer into an engine-ready product supplier, and eventually aims to make full fan-blade modules, he said.
“It’s hard to talk about acquisitions coming out of a recession, but I think it’s going to happen from what we’re hearing from the airframers,” Ellis said. “They’re looking to outsource more and go to fewer suppliers.”
Cobham Plc said aerostructures companies shouldn’t shy away from consolidation. The company made 40 purchases in 10 years, according to data compiled by Bloomberg, and is the biggest supplier of wing-mounted airborne-refueling gear.
“It’s not about forgetting your heritage,” Chief of Staff Julian Hellebrand said in an interview, “just about putting those products together into a full system.”