M&A Trends and Aerospace Supply Chain
This article was first published on 1 April 2016 in Aerospace Manufacturing magazine.
The A320neo (‘new engine option’ or ‘NEO’) is in many ways Airbus’ new flagship program, arguably displacing the A380’s status, and represents a key revenue driver for Airbus into 2020 and beyond. As the workhorse of the Airbus stable, the A320neo platform has been incredibly successful with orders as of 31st January 2016 totaling 3,357, representing 70% of all of the 4,764 A320ceo (‘current engine option’ or ‘CEO’) orders ever made.
The success of the A320neo has been driven by its significant efficiency improvements, resulting in 14% lower cash operating costs and 20% less fuel burn compared to the CEO, as well as reduced engine noise and lower carbon emissions (more than 3,600T annually per aircraft). Furthermore, it has 95% parts & spares commonality with the existing A320ceo aircraft meaning that most of the existing supply chain manufacturers are able to service both lines, and for the purchasers of the aircrafts simplifying the replacement cycle. Therefore, Tier 1 or Tier 2 suppliers already serving the production or maintenance of the CEO benefit from a further strengthened NewGen order book pipeline.
This strength and continuity in the supply chain is reinforced by growing market dynamics. The global commercial aerospace sector is expected to maintain its significant revenue and earnings growth for years to come, underpinned by the surge in passenger travel, especially within the Middle-East and Asia-Pacific regions. Strong consumer demand supports continued investment in the aerospace industry and this is evidenced by Revenue Passenger Kilometers (RPKs1) roughly doubling in the last 15 years on a global level. Future forecasts suggest the same growth over the next cycle. The ongoing high demand for new planes and the 7 to 8-year backlog of production has further forced Airbus to increase the monthly production rate of the Single Aisle Family aircraft to rate 60 by mid-2019, from rate 46.
However, Airbus does not have a monopoly on the single aisle market and faces stiff competition from Boeing’s single-aisle B737-Max. The model shares similar characteristics as the A320neo in being fuel efficient and more environmentally friendly but is yet to match the order volume of the A320neo. Orders for the B737-Max amount to just over 2,500 to date vs 3,357 for the A320neo. This is primarily due to the faster timing and release of its aircrafts by Airbus. Airbus successfully delivered the first A320neo in January 2016, stealing a march on Boeing’s production of the B737-Max, which is only expected to have the first scheduled delivery in H1 2017. Multiple sources indicate the A320neo boasts approximately 60% market share. Whether Airbus can defend its market share once the B737-Max enters full production rate will remain to be seen but either way key suppliers for Airbus will benefit significantly through increased orders of its components and products as production ramps up to rate 60.
Whilst suppliers rightly mitigate risk by supplying across both Airbus and Boeing platforms, those that have exposure to the A320neo have been more attractive M&A candidates over the last 12 months. Moreover, we have seen that amongst one of the biggest drivers of valuation in M&A processes in the sector is the platform mix. In contrast it could be argued that those supplying relatively less successful platforms such as the A380, or having a greater exposure to legacy programs, are likely to be less attractive candidates.
Aircraft engine suppliers, fuselage and airframe components suppliers have been the most attractive acquisition targets because they play a critical role in the production cycle. Mettis Aerospace, sold at the end of February this year to mid-market private equity firm Stirling Square Capital Partners, is one such example. Aeromet International’s sale to Privet Capital is another. Both businesses supply flight components to the A320neo platform, and under new ownership are implementing ambitious growth plans. Private equity has taken an increasingly active interest in the sector, competing against more established trade acquirers. This has not only led to increased valuations in the sector, but also supported increased consolidation as independent aerospace companies become scarcer and the requirement for a more diversified platform mix strengthens.
It is worth noting that Chinese acquirers completed 46 western commercial aerospace deals in 2015 compared to 28 in 2014 with the majority of Chinese interest coming from private and state-owned corporates. While a rapidly growing domestic aerospace market has supported this trend, another major reason for their interest is the large offset incentives from Chinese or Chinese-owned suppliers. Western aircraft OEMs often agree to purchase components in China in return for aircraft orders from the region. For Chinese acquirers there are potentially significant revenue synergies to be achieved through the acquisition of European companies. Increased Chinese acquisitive activity is therefore expected to continue in 2016.
This rapid consolidation of the A320neo supply chain and other platforms signals the promise of growth in the market and speaks to the long-term potential investors and corporates see within the sector. Duff & Phelps expects the consolidation to continue, as Airbus & other OEMs demand financially stronger, integrated suppliers capable of servicing increased aircraft delivery rates.
1 product of number of paying passengers with distance travelled