A Collaborative Industry
Aerospace supplier consolidation had particularly piqued my interest during my time as a Program Manager in the industry. I had quickly come to appreciate how complex designing, building, and sustaining an aircraft fleet was. You are probably already aware that OEMs like Airbus and Boeing do not manufacture all of their aircraft’s components. They contract with different suppliers to procure engines, flight control systems, electrical systems, landing gear and so on. Of course, the OEMs design their aircraft such that they require components with certain specifications. Thus, engines are not necessarily interchangeable across aircraft of different types but may fit two or more airframes.
The design of an aircraft is often a collaborative process where a supplier may introduce a new component to meet the OEM’s requirements. Inability of suppliers to match exact requirements may cause adjustments to the overall design of the aircraft itself. Now imagine this same process being pursued for hundreds of components and you quickly comprehend the attention to detail required. It is a demanding, iterative process and it is one of the factors for the slow development of new aircraft.
The relationship between OEM and supplier does not end when the aircraft leaves the assembly line. The relationship continues after entry-into-service with a customer and throughout the lifecycle of the aircraft. Maintenance and parts replacements of supplier components are often a responsibility of the supplier but in many cases, the OEM and supplier jointly address specific issues. However, the OEM is ultimately considered responsible for ensuring aircraft airworthiness. This means that if a supplier shuts down or stops producing a component, the OEM must step in to find a solution.
This results in a heap of contractual paperwork between OEMs and suppliers (and customers) that spells out obligations and entitlements. The greater the number of suppliers, the greater the number of such contractual considerations. One may be forgiven for thinking this is cumbersome. Indeed, some often wondered whether it would be easier if there were fewer suppliers to contend with.
Consolidation
The aerospace industry has seen a spate of mergers and acquisitions in recent decades that have resulted in a few large entities that offer many different aircraft components and that cater to multiple OEMs. Let’s observe one of the most prominent examples of this phenomenon: RTX Corporation, informally known as Raytheon.
In 2023, Raytheon Technologies changed its name to RTX. Raytheon Technologies was formed by the merger of Raytheon and United Technologies in 2020. Today, this entity consists of three main business units:
- Raytheon: weapons and defense systems
- Collins Aerospace: navigation, communications, structural components
- Pratt & Whitney: aircraft engines and auxiliary power units
As of this article’s publication date, RTX had a market cap of approximately USD 140 billion. For comparison, Airbus‘ market cap was approximately USD 125 billion and Boeing‘s was approximately USD 105 billion.
Prior to this merger, Collins Aerospace and Pratt & Whitney were subsidiaries of United Technologies. United Technologies had acquired Rockwell Collins in 2018 and immediately after, merged it with UTC Aerospace Systems to form Collins Aerospace. At the time, these entities offered the following products:
- UTC Aerospace Systems: electric power, flight control, landing gear, wheels & brakes, sensors, warning systems and others as reported by Rotor & Wing
- Rockwell Collins: avionics, flight controls, aircraft interior, data connectivity as recorded by the Securities & Exchange Commission
UTC Aerospace Systems was in turn formed when United Technologies acquired Goodrich in 2012 and immediately merged it with Hamilton Sundstrand (which was itself formed by the merger of Hamilton and Sundstrand). At the time, these entities offered the following products:
- Hamilton Sundstrand: power generation, management and distribution systems, flight control, engine control, environment control, auxiliary power units, propeller systems and others as reported by this entity to the Securities & Exchange Commission for the 2010 fiscal year
- Goodrich: take off and landing systems, flight control, engine components, nacelles, interior components and maintenance services, flight performance & management, electrical systems and others as reported by this entity to the Securities & Exchange Commission for the 2007 fiscal year
It is worth noting that through this sequence of mergers and acquisitions, RTX has become a behemoth of a supplier that offers engines, structural components, avionics, and more. These products aren’t limited to one aircraft type or even one aircraft OEM. This makes the company an industry supply chain heavyweight.
Such consolidation is not unique to RTX. Safran, a French supplier, also manufactures engines, landing gear, avionics, electrical systems, and offers a wide variety of other products and services. GE Aerospace is another giant that offers engines, avionics, electrical power solutions and more. Aerospace supply chain appears to be trending towards fewer but larger companies that compete across many aircraft components.
Competitiveness vs Stability
How can aerospace supplier consolidation impact the industry? The immediate inference is that these large suppliers have more negotiating power on:
- Pricing of components
- Design of new aircraft
- Sustenance of existing fleets
Let’s examine each in more detail.
Pricing of Components
With fewer competitors, a company can more comfortably dictate prices. While this article has mostly referred to the relationship between OEMs and Tier 1 suppliers, the same dynamic is also true further down the tier list. However, the Tier 1 suppliers are notable for being somewhat comparable or greater in size to their clients themselves. This parity gives the supplier the footing to dictate terms.
Design of New Aircraft
As mentioned earlier, aircraft design is a collaborative process whereby the OEMs asks suppliers to match their specifications. In a world where the OEMs dwarfed their Tier 1 suppliers and had many of them to choose from, the suppliers would have to scramble to meet specifications. However, in a world where there is somewhat of a parity between OEM and Tier 1, the supplier has more freedom to streamline its products for maximum efficiency. This means that OEMs may have to work around what specifications the suppliers are offering when designing new aircraft.
Sustenance of Existing Fleets
Most aircraft are covered by warranty during their first few years in operation. Aging fleets, however, are vulnerable to changes in price and availability of supplier components. Suppose a supplier of a specific component shuts down. Or, alternatively, it is acquired by one of these mega Tier 1 suppliers that no longer considers it efficient to produce that particular obsolete component unless it receives an order for a large quantity. What could the OEM, and the customer, do? Lack of inventory would cause grounding of the aircraft. Servicing the part to keep it operational could be prohibitively expensive. A similar part of newer design can typically only be installed after a thorough engineering analysis by the OEM and certification by the aviation authorities. Such conversations are happening throughout the industry today.
Future Outlook
OEMs like Airbus and Boeing are large and powerful enough to contend with aerospace supplier consolidation. They have a large customer base, an enormous number of aircraft in service, and a healthy order book lining up future aircraft deliveries. In essence, they have the volume to negotiate with these suppliers. Smaller OEMs like Bombardier and Embraer often work with these same Tier 1 suppliers that now dwarf them in size. These OEMs may find it increasingly more difficult to maintain their margins as larger suppliers demand more volume. Rising costs and lead time will affect airlines and ultimately the flying public.
Commercial aviation is price sensitive. Military aviation is more concerned with capabilities and lead times. The merging of defense and commercial suppliers and the impact on those sub-industries should make for interesting study as time goes on.
What do you think of aerospace supplier consolidation in the industry? Will it lead to faster aircraft development? Or does it indicate an industrial slowdown? Please let me know your thoughts through the contact page.
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