Why Are Airplane Manufacturers Threatened By The UTC-COL Merger?

by Trefis Team
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Only last week, United Technologies (NYSE: UTX) announced its plans to acquire Rockwell Collins for a whopping $30 billion, making it the biggest acquisition in aerospace history. The company has agreed to pay out $140 per share in the merger, while taking on over $7 billion in pre-existing debt. Despite the seemingly clear advantages, UTC has come under immense fire from industry experts and existing customers alike. While experts deem the deal to be too expensive, Boeing (NYSE:BA) and Airbus have raised concerns that are far less obvious.

The commercial airplane market has been hurt immensely over the last two years. New orders have fallen in the past few quarters as airlines slow purchases after years of record buying. Historically, orders from airlines have been cyclical in nature and it appears that the market is going through a continued slump at the moment. The weak economy has forced air carriers and governments to delay or cancel orders for new aircraft. Furthermore, airliners built more than 20 to 30 years ago are still flying regular routes having been refurbished multiple times.

Additionally, airplane makers have had to incur significant development costs in the same period, putting immense pressure on Boeing and Airbus’ profits. While plane manufacturers have struggled to maintain a low 9% profit margin, suppliers like UTC and Rockwell have made profit margins between 14-17%.

Because of the dismal commercial market and rising pressure from investors, both Airbus and Boeing tried to adopt a more aggressive stance towards suppliers. In essence, this means, trying to bully the suppliers into offering much lower prices today, in return for future contracts. However, that is not all. By allowing other ancillary companies to produce some of the more complex parts in their aircraft, both companies have given away their right to capitalize on a highly lucrative market – the servicing airplanes for airlines globally. To put this into perspective, Rolls Royce, the British engine supplier, makes close to one-half of its sales and all of its profits from servicing engines.

Hence, it comes as no surprise that both Boeing and their French counterpart are ready to take this market back by making more parts in-house. In this respect, in July, Boeing announced its plans to open up a facility which manufactures various kinds of avionics and other electrical systems, while Airbus continues to cut short its list of suppliers and doing more of its own work.

The combined company, Collins Aviation, is expected to have annual revenues of close to $62 billion, which is not too far off Airbus at $80 billion and Boeing at $96 billion. Therefore, it seems only logical that the airplane manufacturers would feel threatened by the acquisition, which forms a monopoly at the supplier end, consequently giving the combined company a much higher bargaining power.

 

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