United Technology merges with Rockwell Collins

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WHEN passengers board an aircraft, only a few care whether it was built by Airbus or Boeing, two giants that make all the world’s big airliners. Fewer still would recognise the names of the thousands of suppliers that produce the 2m or so parts that go into a modern jet. Surprisingly little of the work is done by Boeing and Airbus. Boeing has outsourced 70% of the parts for its 787 aircraft. The job of assembling Airbus’s A380 superjumbo in its Toulouse factory accounts for only 4% of the work required to make it. The balance of power between aerospace firms and their suppliers is causing ructions.

Near hostilities have broken out due to a run of big mergers among parts-makers. On September 4th, United Technologies (UTC), an American conglomerate that makes Pratt & Whitney engines and other aerospace parts, announced that it had agreed to buy Rockwell Collins, an avionics firm, for $30bn. Although it is one of the biggest-ever mergers in the aerospace business, the deal is just the latest in a series of supplier tie-ups this year. In April, Rockwell Collins itself bought B/E Aerospace, a cabin-interiors specialist, for $8.6bn. Two months later Safran, a French maker of engines and landing gear, agreed to buy Zodiac, a specialist in aircraft seats, for $7.7bn.

As usual, the firms’ bosses pledge that synergies between the businesses will help fund the deals. UTC wants its merger with Rockwell to produce $500m in savings, according to its chief executive, Greg Hayes. But the imperative behind these supplier tie-ups lies elsewhere, in the oodles of profit they make from planemakers. In the past two years, suppliers made profit margins of between 14% and 17%, compared with 9% for planemakers. The main reason for the divergence is that the huge development costs associated with jetliner programmes are borne by planemakers, not their suppliers. And assembling parts is a relatively low value-added activity.

Confronted with a shrinking number of new orders, as well as pressure from investors, both Airbus and Boeing are adopting a more aggressive stance towards the suppliers. This means trying to push them into offering much lower prices today, in return for future contracts. But that is not all. By outsourcing the most complex parts of their aircraft, Airbus and Boeing lost control of what turned out to be a highly lucrative market for servicing aircraft, with airlines as customers. Rolls-Royce, a British engine-maker, makes half its sales and all its profits from servicing engines. The pair want this market back if possible. They are trying to make more parts in-house. In July, Boeing set up an avionics subsidiary to make more of its electrical systems itself. Airbus is cutting back its list of suppliers and doing more of its own work.

It is in response to this assault that the supply chain is consolidating, says Jim Harris of Bain & Company, a consultancy. Gaining scale gives suppliers clout with their customers and with their own supply chains. The merged UTC and Rockwell will have annual revenues of $62bn, not far off Airbus at $80bn and Boeing at $96bn.

Unsurprisingly, Boeing has hit the roof about UTC’s acquisition of Rockwell, and has threatened to lobby regulators to stop the deal on competition grounds. Nor is Airbus happy, particularly as problems with Pratt & Whitney’s engines are holding up the delivery of dozens of its jets. It worries that a merger will distract UTC from resolving the problem. It is rare to see two firms that have long battled each other team up on the same side, but there is little doubt, according to an adviser to Boeing and Airbus, that they both “have the knives out for their suppliers”.

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Julio Marchi ©

Publisher / Editor at BS News & Media Services
A free thinker, not labelled as anything, not associated with any party, not part of any group or engaged with any religion... A simple guy tired of the nowadays bullshit who decided to promote more serious debates about what is really happening hoping to bring back intelligence to the superficial and shallow news & headlines that unfortunately took over the existing media scene.
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