Conference : “aeronautical consolidation: inevitable movement” – Ms. Yannick Assouad, CEO Latécoère – Toulouse, Nov. 30, 2017

In the frame of “Les Rencontres d’Occitanie”, a conference took place this morning at the headquarter of the regional daily newspaper “La Dépêche” (Toulouse, France). In her insightful and eye-opening speech, Ms Yannick Assouad, CEO of Latécoère analyzed the aeronautical consolidation trends. Actually it has to be first highlighted that the aeronautical industry has always been affected by consolidation.It’s not that new. However, the principal change is in the volume and financial significance of these business combinations. Why these trends?

According to Ms Yannick Assouad, four main drivers might be outlined:

1. The tough competition on the duopolistic market (Boeing & Airbus) which impacts other aircraft manufacturers as well. As a consequence, prices are under pressure and cost reduction is crucial. It should be noted that OEMs contribute to cost optimization by striving to reduce structural and operating costs. But obviously, equipment and systems manufacturers, tier 1, and tier 2 are at the heart of the cost reduction policy. 70% of the value of an aircraft is made by equipment manufacturers. Various plans have successively launched by both Airbus (Power8…) and Boeing (PFS-Partnering for Success) impacting the whole supply chain. In addition, the A320 platform is 30 years old can be improved, especially compared to the latest standards implemented for instance in Bombardier facilities. In a nutshell, price competition, cost reduction, supply chain and manufacturing optimization are shaping the aerospace environment. While France is the only country in Europe mastering the whole technologies and expertise to completely design and manufacture an entire aircraft, it is now not sufficient. It is required for all players to expand their industrial footprint at a worldwide scale. It’s possible to consider the various ATA chapters as market segments. Several aeronautical markets are already facing very limited competition owing to previous or ongoing consolidation. Two main players are dominating the nacelles business segment: Goodrich/UTC (including Rockwell Collins & B/E Aerospace) whose weight is similar as the one of Airbus or Boeing; Safran/Zodiac (to be confirmed though) which will be the first European player (excluding aircraft manufacturers). In such cases, aircraft manufacturers are reincorporating this competence internally. It enables them to deepen and document their assessment of suppliers and their performance. Tier 2 are suddenly becoming of interest back again and benefitted from aircraft manufacturer support to become new competitive Tier 1. Same trend might be observed in landing gear (Goodrich versus Safran). Boeing is reincorporating the design and entrust some companies such as Héroux-Devtek or Liebherr. Some ATA chapters are on the other hand facing too many competitors. On these market segments, consolidation will continue and probably even speed up because of the costs indeed. But this is not the only reason…

2. Investments and capital intensity required are another big driver. On the aerostructure segment which weight 60Bn$ worldwide, over 100 players are competing. Spirit Aerosystems is leading this market (7 Bn$), while other major players GKN and Stelia are weighting around 2 Bn$ each. The market is fragmented. Aerostructures require heavy investment: 100M$ to get a 1M$ chipset in an aircraft! Cash-flow are crucial. Alestis Aerospace, one of the three Spanish Tier1 in the A350 XWB program, faced a cash crunch. Airbus took the control of the group. Similar situation did occur in the 787 program where suppliers were unable to develop the expected workpackages. Capital intensity favors hence group mergers.

3. Another reason, more strategic, should be pointed out: the intrinsic limitation of risks, the diversification of the customer portfolio in aerospace and outside the industry. LISI is for instance in automotive and aeronautic sectors: as the business life cycle are different, this makes it possible to mitigate the risks. Diversification in the aerospace sector has exactly been the strategy implemented by ZodiacAerospace (no real commonalities between the activities).

4. Last reason: the consolidation is probably encouraged by the specific momentum of the industry. All programs have effectively been launched, new ones are not likely to be launched. These current programs are cash generators for many players and investment funds.

In this consolidation and mergers landscape, SMEs remain important as source of innovation and agility providers. They are definitely considered as asset to big players. However, they need:
– To get a sufficient financial surface to finance new developments (it depends on the market segment though)
– To become global (US, Europe and Asia: India/China)
– To develop a global footprint (sourcing and customers in other countries)
– To reindustrialize some of their activities in high cost countries
– To innovate in order to differentiate themselves and get a competitive advantage
– To develop a more balanced model (aircraft manufacturers / airlines) in developing new services to airlines

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