Recaro Aircraft Seating is shifting focus to business class to catch up with competitors that spearheaded the trend toward full-flat models and as it seeks a larger slice of the lucrative front of the airliner cabin.
Recaro, based in southern Germany, is spending about $200 million to develop two models -- a long-haul economy product that it says is lighter than any rival’s offering, and a business-class version to be presented next year, Chief Executive Officer Mark Hiller said in an interview. Recaro is lifting capacity to 120,000 seats a year by 2017, he said.
“The market for business seats is bigger than that for economy, as those seats typically cost 10 times the money,” Hiller said. “Our portfolio in economy-class is well-balanced, and we now plan to do the same in business class.”
Seats are a key distinguishing factor for airlines to attract customers, and business class is where the aircraft interior has undergone the most innovation, from berths that turn into veritable beds to in-flight entertainment boasting hundreds of movie offerings. Record order backlogs Airbus SAS and Boeing Co. (BA) mean demand for seats is set to grow for years, while high fuel costs provide an incentive for airlines to buy lighter models, an area where Recaro has made its mark.
Recaro’s business-class prototype takes cues from first-class models, with a bed separate from the actual seat to create a compartment that’s divided into working, dining and sleeping zones. Combined with generous storage space and direct aisle access, the manufacturer says the package will allow high-density configuration without compromising on comfort when it is officially introduced next year.
Recaro competes with industry leader Zodiac Aerospace SA (ZC), which is about 11 times larger by sales, and Wellington, Florida-based B/E Aerospace Inc. (BEAV), the global No. 2. The German company’s focus on light and slim seats, which are in use on many Deutsche Lufthansa AG (LHA) jets, has helped Recaro gain an edge on its larger competitors, Hiller said.
Hiller predicted the market for seats will grow to 2.8 billion euros ($3.71 billion) by 2018 from 2.2 billion this year, with business-class versions contributing the majority of growth. Seats still make up only 2 percent to 3 percent of total purchasing costs for an aircraft, the executive said. Unlike Zodiac and B/E Aerospace, Recaro only provides seats in its aircraft-interior offerings.
B/E Aerospace and Zodiac’s shares are among the best performers among the 22-member Bloomberg World Aerospace/Defense Index, having risen 69 percent and 46 percent in the past 12 months, respectively.
Zodiac and B/E also make galleys, cabin equipment, and other aircraft systems, with Zodiac generating about 530 million euros alone from seats in its fiscal first half, or 29 percent of the total. Zodiac’s ability to provide a broader offering helps airlines get maximum returns from their cabin, said Olivier Zarrouati, the CEO of Plaisir, France-based Zodiac.
Recaro has doubled its market share in economy class with about every third seat sold globally last year made by the Germans, Hiller said. Assembly time for an economy seat is 2 1/2 hours, while it takes 12 hours to put together a business-class model. Recaro plans to sell 80,000 seats this year, 10,000 more than in 2012, he said.
The company’s focus on economy class, where the weight of seats has dropped by more than 50 percent to 11 kilograms (24.2 pounds) in the last 20 years, means it may have neglected its pricier offerings, falling behind the new seats developed by rivals that offered more features and comfort, said Gary Weissel, an analyst at ICF International, who specializes in aircraft interiors.
“Alongside first class, big carriers pay the most attention to business-class seating, as that is where the airlines make the most money,” Weissel said.
Recaro started as a maker of chassis for Daimler AG (DAI)’s Mercedes cars when it was founded in 1906, and later made bodies for Porsche cars. Today, Recaro seats are flown by Qantas Airways Ltd. and Lufthansa in their flagship Airbus A380 double deckers, by Qatar Airways Ltd. on the Boeing 787 Dreamliners, and on Virgin Atlantic Airways Ltd.’s Boeing 777.
The seatmaker expanded sales an average 13 percent in the past 10 years, Hiller said. Its pretax margin was 8.5 percent in 2011, the latest year for which data from the privately owned company is available. Zodiac’s margin last year was 13 percent, the highest in at least 25 years, while B/E Aerospace has had four straight years of profitability in excess of 10 percent
This year, sales may exceed 340 million euros, and Recaro aims for 500 million euros by 2017. There are no plans to sell shares to the public, Hiller said.
“Jumping back into business class won’t be difficult” for Recaro, analyst Weissel said. “Will Recaro will be able to gain a market share similar to what they now have in economy? That’s an entirely different question. They are going up against some very big competition who will fight to maintain market share.”
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