Sitting ringside at the transatlantic Airbus-Boeing tussle over orders for the A380 superjumbo was the world aerospace supply chain.
While Airbus has piled on the punches during the past 18 months, winning order after order for the double-deck 555-seater A380 superjumbo, suppliers sought to strengthen their market position in a series of mergers and acquisitions.
In the end, after Airbus had notched up 67 firm orders for the A380, Boeing threw in the towel. Without a single order from the world’s airlines for its stretched 747, the US giant said it was in fact planning to build a much smaller but faster alternative, the Sonic Cruiser. Suddenly, for the first time in years, there was clear blue sky between the philosophies of Boeing and Airbus: speed versus capacity.
At the moment it looks as though Airbus has won the argument and, as it presses on with the A380 project, the supply chain industry will flock to its doors to get a piece of the action. This, coupled with Airbus’s recent transformation from consortium into a single entity with centralised purchasing, is likely to fuel the consolidation of the supply industry still further.
Purchased parts account for 75% of the cost of building the plane, and as companies like Airbus rationalise the number of people they deal with, suppliers have been forced to get bigger so they can offer whole aircraft systems and service support. At the moment more than 300 UK companies supply materials, aero-structures, equipment and systems to Airbus’s passenger jet production. That number looks set to fall.
At the top end of the scale are the risk-sharing partners who supply the larger components such as wings and fuselage. These firms will take one-off costs of development and design. In the case of the superjumbo, where the number of planes built could be relatively small, the tier-one suppliers might be driven to seek partnerships and mergers to spread risk and cost.
Already parts of the global industry are moving to get as close to Airbus as possible. Aero-engine makers Hurel Dubois and Snecma have merged and forged links with other firms in the US and Italy to share development costs. Another reaction has been to move production abroad to low-cost facilities in countries like Mexico, the Czech Republic and other parts of eastern Europe. In the UK the move towards consolidation has been under way for years, and it only looks set to intensify with the developments at Airbus.
There is no doubt that the trend will create winners and losers. Many of the latter will be among the lower end of the supply chain – companies that are not sucked up by the larger, tier-one suppliers in a bid to broaden their range of expertise.
Overall, though, the view from the Society of British Aerospace Companies is that consolidation is not necessarily bad. ‘What we are dealing with here is a large-scale industry trend that has stemmed from other industries with similarly complex supply chains,’ says Keith Hayward, SBAC head of economic and political affairs. ‘Most of the prime contractors are taking advantage of this to institute and confirm the policy that they advertised a few years ago.
‘This does not mean there will be fewer companies in the supply chain, just fewer with which the customer wants to deal. The positive side is that those suppliers at the top end will be rewarded for being partners,’ he adds.
Airbus began rationalising its supply base five years ago, and at present is still in the early stages of deciding which parts of the A380 project will be put out to tender. This will continue for the next 18 months. But of the few A380 contracts already let by Airbus, most have gone to big US companies, and as such are perhaps indicators of the changes afoot.
Goodrich in the US, in alliance with Doncasters engineering group in the UK, has been awarded a $400m deal to provide the aircraft evacuation system. The US firm has also been selected for the main landing gear work ($3bn over 20 years), leaving Airbus’s usual supplier, Messier Dowty, with just the nosewheel.
Meanwhile, Parker Aerospace, also of the US, has won a $200m contract for the superjumbo’s fuel management and measurement system over UK specialists Cobham. Roger Smart, marketing director at Cobham, says the company has supplied Airbus from almost day one. Although he believes it is early days for the A380 contract, Cobham has positioned itself to offer the major aircraft firms a one-stop shop for systems and components. ‘Cobham has more than 40 companies within it. We are always increasing in size through natural growth and acquisitions so that we can offer complete systems within specific areas,’ he says.
While some smaller companies in the supply chain have yet to start creating their own alliances, they are instead being bought up by top-tier businesses such as Cobham, Gardner Aerospace and Senior. Senior’s chief executive Graham Menzies says it has been participating in the consolidation of the supply chain for four or five years. The aerospace division now has a turnover of about £200m and the next stage has been a period of investment to integrate its various capabilities.
‘The acquisitions have given us a platform. But then we have had to invest in organic growth and integrate those firms so that we can provide our customers with some of the bigger-ticket items, as opposed to each individual company continuing to provide its original service,’ says Menzies.
Senior, which supplies Airbus and is discussing possible contracts for the superjumbo, specialises in fabricating aero-engine components from rare metals such as titanium. It also manufactures low-temperature items such as cabin ducting. Although Senior is a UK company with factories in Lancashire and Cheshire, 75% of its activities are in the US. To improve its competitive position the firm has moved some production to a low-cost plant in Mexico, and plans to open another factory in the Czech Republic.
This is a typical story, according to Old Mutual aerospace analyst Tony Lancelot, who says the supply chain is still fragmented so there is plenty of room for further consolidation. ‘There has been a whole string of acquisitions among fabrication and engine component firms. While some have changed hands in management buyouts, other small businesses have been bought by North American firms.’
Notable acquisitions in the UK over the past couple of years include Doncasters (which bought Triplex Lloyd for £200m), Gardner Aerospace (Sirqual for £100m) and Firth Rixson (Aurora for £80m). ‘There have been numerous other deals under the £100m total in the past two years. This is a trend that has been running for some years, and it will probably get bigger,’ says Lancelot.
Many companies are planning multimillion-pound development and tendering budgets with the A380 in mind. The amount of money to be made from large aircraft supply contracts is also attracting venture capitalists, who are themselves driving the consolidation of the supply chain.
The precision engineering group Doncasters was merged earlier this month with Ross Catherall in a deal worth £260 and funded by Royal Bank Private Equity, a division of the Royal Bank of Scotland. Doncasters supplies Boeing and Airbus and has an alliance with Goodrich, one of the few superjumbo contract holders.
The Ross Catherall group, formerly Vickers Turbine Components, was acquired by RBPE from Rolls-Royce in December. The new company, which will employ more than 5,000 people worldwide, will operate from 30 sites in the UK, US, Mexico, Germany and Belgium. This distribution means it can offer a broader range of products and services, according to Doncasters marketing director Tony Andrews.
It also has the capability to undertake most stages of production from casting and machining through to assembly. Consequently, companies like this have less reliance on the remaining firms lower in the supply chain. (Doncasters, as it will continue to be known, generally buys only raw materials from sub-contractors.)
Andrews says those lower-tier companies that do not ally themselves with a larger group are likely to become more isolated. ‘They will have a decision to make,’ he says. ‘Have they got the critical mass to sustain development and enter the long-term agreements that customers require, or will they get shaken out in the continuing consolidation of the market?’
Mike McBraida, chairman of McBraida plc, an independent supplier in Bristol, agrees the climate is tough for smaller companies. But he says it is possible to continue without merging: ‘It has all looked pretty ruthless as the big customers reduce the number of suppliers they deal with – many that have worked steadily in the industry for many years, and have now been left out in the cold.’
McBraida’s workforce of 90 designs and produces high-specification components for the aerospace industry. An investment of about £1.5m in training and new machining technology during the past seven to 10 years has allowed McBraida to maintain its independence and so far keep its direct trading relationship with the prime movers such as Rolls-Royce and AgustaWestland.
In the meantime, it has had to battle against a constant loss of staff to larger companies and what Mike McBraida describes as the ‘abysmal’ level of training available at the moment. To solve the problem the company has trained younger members of staff itself, and has also made a point of employing more experienced engineers who have been released by other firms.
Small is beautiful as far as the employees are concerned, says McBraida, and the company can perhaps offer customers more flexibility compared to a larger supplier. ‘We have a good team here which we have always tried to keep below the 100 mark. Anyone who has a problem can come straight to the top.’
As the process of consolidation continues in advance of the Airbus contract bonanza McBraida is confident he will remain independent. ‘We feel we are big enough to look after ourselves – that is we can take on a big enough workload to be taken seriously by our customers.’