One intriguing measure of the health of the aerospace industry is the level of mergers and acquisitions activity. By that measure the indicators are good. According to consulting firm PwC's annual report on aerospace M&A, 2011 was a record year in terms of deal number, at 341, and total value, at $43.7 billion.
In value terms, such heights were last reached in 2007. But even without the $16 billion United Technologies (UTC) acquisition of Goodrich, 2011 is easily the second-biggest year by value ever.
What makes this activity encouraging is that while the number of $1 billion-plus mega-deals is rising - and the UTC-Goodrich deal is the biggest in sector history - it is small deals of less than $50 million driving the volume. For 2012, PwC expects further growth.
A buoyant M&A market points to a healthy industry, in part because M&A is a mechanism for the so-called creative destruction that drives improvement in technology, operating practices and management thinking. In aerospace, deal volume has been trending strongly upward through a decade of dramatic industry growth, in line with surging global demand for aircraft.
Fortunately, PwC observes no signs of an increase in distress sales by companies facing financial crisis. But crises, as history shows time and again, often strike with little warning. And, if there is one salient fact that prevails in 2012, it is this: aerospace is an island of growth in a global economy that is otherwise perilously fragile. Much of that fragility stems from a long-running liquidity crisis. Big companies such as Airbus and Boeing have large cash stockpiles, but their supply chains are characterised by smallish firms with little cash cushion and slender working capital margins.
As those firms are asked to invest in production capacity, many will find banks' willingness to lend does not match the big airframers' resolve to whittle down order backlogs by raising build rates. At that point, airframers and their biggest suppliers may well be forced to step in and buy troubled links in the supply chain.
Such moves are not unknown - in 2008 and 2009, Boeing purchased 787 fuselage plants from Vought and Vought/Alenia joint venture Global Aeronautica, and last year Airbus bought A350 supplier PFW Aerospace - but they should ring alarm bells. The big players may have cash, but they should think carefully before becoming angels who step in where banks fear to tread; for all their mistakes of recent years, bankers remain better at risk than manufacturers.
(This is the main leader piece from the 14 February issue of Flight International)
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