By DiogenisPapiomytis / Consulting Director / Aerospace & Defence/ Frost & Sullivan
A new reality
In April 2016, as people were gathering for the World’s largest annual cabin interiors exhibition, the Aircraft Interiors Expo in Hamburg, few delegates could have been prepared for what would follow in the space of just nine months. Indeed, the competitive landscape in the global cabin interiors industry has changed dramatically, even if not unexpectedly. The two biggest players in the Cabin Interiors industry, with a combined market share of over 70%, have been snatched by two of the World’s biggest Aerospace OEMs. Although this does not constitute consolidation within the cabin interiors industry, it does create powerful Aerospace conglomerates on both sides of the Atlantic.
The Cabin Interiors growth opportunity
Three months after the announcement of Rockwell Collins’ acquisition of B/E Aerospace in October 2016, creating the sixth biggest Aerospace player worldwide, Safran announced its (second) bid for Zodiac Aerospace, creating the third largest Global player. The latter deal is worth approximately $9 billion and is by far the biggest A&D M&A deal since Lockheed Martin’s acquisition of Sikorsky in 2015.
On paper, the Safran-Zodiac and Rockwell Collins-B/E Aerospace deals make sense. The $10 billion cabin interiors industry offers huge opportunities for Aerospace OEMs, particularly since Airbus and Boeing ramp up production to satisfy record backlogs and operators engage in ambitious cabin retrofit programmes.
For both Safran and Rockwell Collins, their acquisitions offer them valuable diversification through complementary product portfolios, as well as dominant positions to capture future growth in cabin interiors. It solidifies their presence in line-fit and retro-fit markets for Airbus and Boeing airframes and offers an opportunity to cross-sell equipment from a vast product catalogue to existing and future customers.
Shielding against a challenging business environment
The cabin interiors industry has substantial challenges too. As airlines witness prolonged yield declines, a result of competitive pressures, they engage with Buyer Furnished Equipment (BFE) suppliers and form procurement partnerships with peers, to negotiate price reductions for cabin interior components. Furthermore, while a record aircraft order backlog translates into unprecedented production capacity increases at Airbus and Boeing, the integrators need reliable suppliers to deliver systems and components on time and on budget. Zodiac Aerospace has been particularly affected by this; in the past three years, it incurred substantial financial penalties from customers, due to continuous product delivery delays, resulting in consecutive profit warnings. Following a freeze in its own acquisition strategy and a major corporate restructuring to simplify operations, it now seems to be on the road of recovery.
Airbus and Boeing have not been complacent. Aside from putting production pressure on Zodiac and B/E Aerospace, they have also been keen to create a wider supplier base by encouraging smaller players to grow. In the seating segment, companies such as Geven, ZimFlugsitz, Stelia, Thompson Aero Seating and Encore Aerospace have seen support from the integrators, in their efforts to grow across retro-fit and line-fit markets. Large MRO players like ST Aerospace are also making inroads in the retrofit market; indeed ST Aerospace developed its own design and manufacturing capabilities in aircraft seating.
For both BE and Zodiac, being part of large Aerospace OEMs provides them with the necessary financial firepower to withstand pricing pressures from operators and challenging delivery timetables from Airbus and Boeing. It also boosts their R&D budgets at a time when small, but well-funded and innovative, cabin interior suppliers capture line-fit and retro-fit market share.
Acquisition Risks
Acquisitions of large OEMs do not come without risks. For Safran, the risk lies in the requirement for substantial management resources during a lengthy Zodiac integration and synergy delivery process. The company has already made a major change in its business model, by exiting the Security business (Morpho Detection), to refocus on Aerospace and Defence. At a time when its JV with GE Aviation, CFM International, raises production levels for the newly developed LEAP engine, any Zodiac integration hurdles may derail corporate strategy.
Future developments
The two deals create much larger competitors and naturally pose a threat to other Aerospace OEMs and cabin interior suppliers. Suppliers in cabin interior BFE segments, such as Seating (a $4 bn market), Galleys ($1bn) and IFEC ($3bn) may find the new developments worrying. In the long-term, these acquisitions have the potential to create efficient competitors with lower unit costs and larger R&D budgets that can bring new products faster into market and can accommodate production capacity fluctuations.
Specifically, in the Seating and Galley segments, where innovation is mainly limited to composite material applications and not perceived as disruptive, consolidation will intensify in the coming years, as suppliers struggle to reduce costs and remain competitive. Global airframe manufacturers may also decide that vertical integration is a better way to hedge against production delays and shield themselves against the emergence of dominant cabin interior suppliers. China’s AVIC has been following this strategy, having acquired FACC (2009), AIM Altitude (2015) and more recently Thompson Aero Seating (December 2016).
In the IFEC segment, IFE Hardware manufacturers have been making acquisitions of their own (for example, Thales-Live TV, Panasonic -ITC), expanding their technological capability and connectivity offerings. Connectivity is key for the long-term growth of the IFEC business, as the share of wireless IFE will increase over in-seat IFE installations. Zodiac Inflight Innovations (Zii) is already part of the Airbus High Bandwidth Connectivity (HBC) programme. For Zii there could be synergies to be explored with Safran subsidiaries, such as Safran Electronics & Defence (cockpit avionics) and Safran Engineering Services (cockpit and passenger connectivity installations), to develop and marketend-to-endconnectivity solution packages.
Diogenis is available for further comment. Should you require further information, please contact evgenia.oleynikova@frost.com
