Aerospace gi­ants keep get­ting big­ger

For sup­pli­ers, the con­sol­i­da­tion wave brings op­por­tu­ni­ties and peril

Los Angeles Times - - BUSINESS - By Sa­man­tha Ma­sunaga

With $93 bil­lion in 2017 revenue and 141,000 em­ploy­ees, Boe­ing Co. was mas­sive enough. But over the last year, the aerospace gi­ant has steadily ex­panded be­yond its tra­di­tional ex­per­tise in com­mer­cial jets, big satel­lites and fighters, gob­bling up providers of parts and ser­vices.

In Oc­to­ber, Boe­ing ac­quired aerospace parts dis­trib­u­tor KLX Inc. for $4.25 bil­lion, the com­pany’s largest ac­qui­si­tion since its block­buster merger in 1997 with ri­val McDon­nell Dou­glas Corp. Chicago-based Boe­ing had pre­vi­ously pro­posed a joint ven­ture with Brazil­ian aerospace firm Em­braer, se­cured part­ner­ships with sup­pli­ers of air­plane seats and aux­il­iary power units, and bought small-satel­lite man­u­fac­turer Mil­len­nium Space Sys­tems in El Se­gundo.

Boe­ing isn’t the only aerospace com­pany that’s bulk­ing up. L3 Tech­nolo­gies Inc. and Harris Corp. said in Oc­to­ber they planned to merge, cre­at­ing the sixth-largest U.S. de­fense com­pany.

As de­fense fund­ing in­creases and de­mand for com­mer­cial avi­a­tion and space grows, aerospace firms are look­ing to­ward ac­qui­si­tions and other part­ner­ships to add heft and diver­sity. For the hun­dreds of smaller com­pa­nies in South­ern Cal­i­for­nia and else­where

that sup­ply the gi­ants, the wave of con­sol­i­da­tion presents op­por­tu­ni­ties and chal­lenges.

“In some cases, for the [orig­i­nal equip­ment man­u­fac­tur­ers], their largest cus­tomer may also be their largest com­peti­tor,” said Daniel Adamski, ex­ec­u­tive vice pres­i­dent of dis­tri­bu­tion at Kell­strom Aerospace, an air­craft parts sup­plier based in Mi­ami Lakes, Fla.

Global aerospace merg­ers and ac­qui­si­tions to­taled $30.3 bil­lion through Septem­ber, the lat­est data avail­able through con­sult­ing firm PwC. That fig­ure doesn’t in­clude the Harris and L3 deal and other re­cent big ones, and it was down 49% com­pared with the same pe­riod last year, when United Tech­nolo­gies Corp. paid $23 bil­lion, ex­clud­ing debt, for Rock­well Collins and Northrop Grum­man Corp. bought Or­bital ATK Inc. for $7.8 bil­lion.

The gi­ants have been so ac­tive they’re run­ning low on tar­gets. “The op­por­tu­ni­ties to con­sol­i­date com­pa­nies of this size are di­min­ish­ing,” said Scott Thomp­son, U.S. aerospace and de­fense prac­tice leader at PwC. “I do see the trends con­tin­u­ing, but I don’t fore­see it con­tin­u­ing at the val­ues we’ve seen.”

In­dus­try ex­perts point out that these tie-ups are dif­fer­ent from those that fol­lowed the col­lapse of the Cold War in the 1990s, when a down­turn in de­fense spend­ing pushed Lock­heed to com­bine with Martin Marietta and Boe­ing to ac­quire McDon­nell Dou­glas.

“Rather than try­ing to con­sol­i­date in a shrink­ing mar­ket and cut­ting costs, com­pa­nies are po­si­tion­ing them­selves for growth,” said An­drew Hunter, di­rec­tor of the de­fense in­dus­trial ini­tia­tives group at the Cen­ter for Strate­gic and In­ter­na­tional Stud­ies think tank in Wash­ing­ton.

In Oc­to­ber, L3 and Harris of­fi­cials de­scribed their $33.5-bil­lion merger, not cap­tured in the PwC re­port, as a way to com­pete for big­ger gov­ern­ment con­tracts.

“When I sit back, I look at the power that this en­ter­prise will cre­ate,” Wil­liam Brown, chief ex­ec­u­tive of Harris, said dur­ing an Oc­to­ber con­fer­ence call with an­a­lysts. “Our po­si­tions in elec­tronic war­fare re­ally makes the com­bined com­pany a much stronger com­peti­tor in spec­trum war­fare, net­worked bat­tle­field.”

On the com­mer­cial air­craft side, Boe­ing’s ac­qui­si­tion of KLX and its joint ven­tures with sup­pli­ers such as au­to­mo­tive seat firm Adi­ent and French en­gine man­u­fac­turer Safran are part of the aerospace gi­ant’s plans to of­fer more ser­vices, in­clud­ing re­pair and over­haul ca­pa­bil­i­ties. Com­mer­cial ri­val Air­bus is mak­ing sim­i­lar moves.

Sup­pli­ers tra­di­tion­ally pro­vided those ser­vices, which can be more prof­itable than pro­vid­ing parts to air­craft man­u­fac­tur­ers, said Adamski of Kell­strom Aerospace.

Boe­ing’s move into the so-called af­ter­mar­ket gained trac­tion in 2006 when it ac­quired Aviall Inc., which pro­vides new avi­a­tion parts and af­ter­mar­ket ser­vices. Last year, Boe­ing es­tab­lished a new busi­ness unit called Boe­ing Global Ser­vices to pro­vide ser­vices to com­mer­cial and gov­ern­ment cus­tomers. A com­pany state­ment at the time es­ti­mated the worth of that com­bined mar­ket at $2.6 tril­lion over the next 10 years.

Be­fore the cre­ation of the unit, the com­pany had air­craft sup­port op­er­a­tions em­bed­ded sep­a­rately in its com­mer­cial avi­a­tion and de­fense busi­nesses, said Stan Deal, chief ex­ec­u­tive of Boe­ing Global Ser­vices.

“It was all about bet­ter serv­ing our cus­tomers, cre­at­ing an en­vi­ron­ment that matched how our cus­tomers tended to op­er­ate, which is a fast-paced dy­namic,” he said.

Ken Shaw, se­nior vice pres­i­dent of sup­ply chain solutions, said the com­pany heard “quite a bit” from cus­tomers that they wanted Boe­ing to have a “wider ser­vice prod­ucts of­fer­ing.”

Ver­ti­cal in­te­gra­tion al­lows air­craft man­u­fac­tur­ers to ex­ert more control over their sup­ply chains and bet­ter pre­dict and deal with po­ten­tial problems that arise, said Jim Adams, leader of the aerospace and de­fense prac­tice at KPMG.

Boe­ing’s share price climbed through much of its deal­mak­ing but has been slammed re­cently over fears of a trade war with China, its big­gest over­seas cus­tomer. The stock is down 17% since the begin­ning of Oc­to­ber, but still up 10% for the year.

Deal said Boe­ing’s ser­vice unit looks to de­velop ca­pa­bil­i­ties in-house be­fore eyeing the land­scape for ac­qui­si­tions. Much of its at­ten­tion has been fo­cused on de­vel­op­ing its own air­craft avion­ics and aux­il­iary-power en­gines, which are used to start an air­plane’s main en­gines in the case of an emer­gency and to power sys­tems such as a plane’s light­ing.

In those ar­eas, the com­pany plans to make “very de­lib­er­ate in­vest­ment into those ar­eas and de­pend more on Boe­ing ca­pa­bil­ity over our sup­ply chain,” Deal said. But in other ar­eas, he said, “we’ll con­tinue to buy” from sup­pli­ers.

Boe­ing’s moves have cre­ated “a kind of ner­vous ex­cite­ment” among sup­pli­ers, an in­dus­try ex­ec­u­tive said.

“There’s a lot of un­knowns,” said Collin Jager, pres­i­dent of Aerofied, a Tor­rance com­pany that con­nects aerospace and de­fense com­pa­nies with sup­pli­ers. “But at the same time … they just opened their mar­ket tremen­dously.”

For ex­am­ple, he said, com­pa­nies that sup­plied Or­bital ATK could po­ten­tially tar­get new and ad­di­tional busi­ness op­por­tu­ni­ties with Northrop Grum­man af­ter the ac­qui­si­tion was ap­proved in June.

But ver­ti­cal in­te­gra­tion can also de­crease com­pe­ti­tion, raise prices for com­mer­cial air­lines and the Pen­tagon, and edge out the com­pa­nies that had been sell­ing those parts or ser­vices.

“It’s a way of cre­at­ing sig­nif­i­cant lever­age for ne­go­ti­a­tion with their Tier One partners to mod­er­ate pric­ing … and al­low­ing them to keep more of the mar­gin, if you will,” said Adamski of Kell­strom Aerospace of air­frame man­u­fac­tur­ers.

Af­ter Boe­ing an­nounced its joint ven­ture to pro­duce air­plane seats with Adi­ent, Safran ex­ec­u­tives tried to down­play con­cerns about how the part­ner­ship would af­fect its seat man­u­fac­tur­ing busi­ness. Most of the busi­ness comes di­rectly from air­lines and “they like com­pe­ti­tion and they like to dis­cuss di­rectly with the seat man­u­fac­tur­ers,” said Philippe Petit­colin, chief ex­ec­u­tive of Safran.

“We just have to do our job, be [an] in­no­va­tor and pro­pose good prod­ucts that we will de­liver on time,” Petit­colin said dur­ing a Fe­bru­ary call with an­a­lysts af­ter Safran com­pleted its ac­qui­si­tion of seat man­u­fac­turer Zo­diac Aerospace. “As long as we mas­ter our own qual­ity, our own de­liv­ery and our own per­for­mance, I be­lieve that there is plenty of room for Zo­diac, Safran to con­tinue to grow the busi­ness.”

“But,” he said of the joint ven­ture, “it’s a com­peti­tor.”

Boe­ing’s Deal ac­knowl­edged that the com­pany’s ac­qui­si­tion strat­egy could af­fect sup­pli­ers but said most of the sup­ply chain adapts to the cur­rent en­vi­ron­ment.

“They ei­ther trans­form [or] rein­vest some­where else, and we’re com­fort­able with that dy­namic,” he said. “It sharp­ens peo­ple’s fo­cus, which is im­por­tant for the over­all com­pet­i­tive­ness of the in­dus­try.”

An­thony Pre­vite, chief ex­ec­u­tive of Ter­ran Or­bital, an Irvine-based small-satel­lite man­u­fac­turer and data anal­y­sis firm, was look­ing at the bright side of Boe­ing snap­ping up his ri­val, Mil­len­nium Space Sys­tems.

“In my mind, a com­peti­tor is gone,” he said.

He said Mil­len­nium was known for its agility and its cul­ture may not fit with that of a tra­di­tional con­trac­tor. The gov­ern­ment “is try­ing to pro­cure from mul­ti­ple buy­ers ag­gres­sively,” Pre­vite said. “It’s harder for tra­di­tional busi­ness to adapt to that.”

Kin Che­ung As­so­ci­ated Press

BOE­ING CO. ac­quired aerospace parts dis­trib­u­tor KLX Inc. in Oc­to­ber for $4.25 bil­lion, the com­pany’s largest ac­qui­si­tion since its block­buster merger in 1997 with ri­val McDon­nell Dou­glas Corp.

Francine Orr Los An­ge­les Times

THE DEALS have cre­ated “ner­vous ex­cite­ment” among sup­pli­ers, an ex­ec­u­tive said. Above, Boe­ing’s Everett, Wash., plant.

Mar­ian Lock­hart

LARGE AEROSPACE com­pa­nies have been so ac­tive with ac­qui­si­tions that they’re run­ning low on tar­gets. “The op­por­tu­ni­ties to con­sol­i­date com­pa­nies of this size are di­min­ish­ing,” one in­dus­try an­a­lyst said.

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