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FARNBOROUGH, England — Airbus and Boeing 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.
One of the first suppliers to be sold over the next two or three years is likely Spirit AeroSystems, said Bill Alderman of Alderman & Co. Capital, a broker specializing in the aerospace industry.
The market still has too many small players, Alderman said. He said he thinks the segment will consolidate down to two or three companies each having $5 billion to $10 billion in annual revenue.
Onex has controlling interest in Spirit and will want to exit it at some point, Alderman said.
"It's not like I think Spirit's for sale today," he said. "I don't know anything. But there's too many structures players."
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 and defense investment banking at Jefferies International. GKN, Senior 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 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. Senior Aerospace Composites is at 2700 S. Custer in Wichita. "We have the equity to make purchases."
The aerostructures suppliers need to model themselves after the enginemakers, Alderman said.
There are three main engine manufacturers: GE, Pratt & Whitney and Rolls Royce.
"Eventually Airbus and Boeing and Embraer would like to have structures companies at that level of sophistication, professionalism and financial stability and engineering prowess," Alderman said.
Someday, he said, "Spirit will be part of a company as powerful and successful as Rolls Royce."
It's not that Airbus and Boeing want it — they're starting to demand it, Alderman said.
"There will continue to be some consolidation," Spirit CEO Jeff Turner said while declining to comment on his company's plans. He cautioned that "bigger doesn't mean better value if someone's very good at what they do."
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, which is owned by British buyout firm Candover Investments.
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.
GKN embraced Airbus' drive to reduce investment costs when it bought the company's wing plant in Filton, England, for $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."
Gallois, CEO of European Aeronautic Defence and 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 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 commercial airplane unit, said his biggest concern is that suppliers must be able to meet production increases as the company and Airbus lift build rates, new planes such as Bombardier's C-Series are brought to market, and Lockheed Martin begins to work through about 3,000 orders for the F-35 Joint Strike Fighter.
"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.
