Ambitious plans by Airbus and Boeing to dramatically ramp up their airliner build rates to fill record order backlogs are risk of being derailed by supply chains that are unwilling or unable to invest adequately in production capacity.
A special report released today by industry analyst and consultant PwC found that fully a fifth of the aerospace supply chain might not be able to deliver the needed ramp-up. And, said PwC, the situation looks set to be a key driver in a new industry-consolidating wave of mergers and acquisitions - including moves by the big airframers to buy critical but financially struggling suppliers. PwC studied the supply chains for Airbus A320, A330, A350 and A380, Boeing 737, 777 and 787, Bombardier CSeries, Comac C919, Gulfstream G280 and G650 business jets, and the Lockheed Martin F-35 fighter.
Airbus chief salesman John Leahy flagged up the danger in January at the company's New Year press briefing in Hamburg. Asked what was his biggest concern about plans to boost monthly A320 output to 44 units in the near-term and as many as 60 by the second half of the decade, Leahy answered immediately: "the supply chain".
According to PwC's global head of aerospace and defence Neil Hampson, suppliers tend to have a "sanguine view" of calls by Airbus and Boeing for capacity investment, as historically they have tended to make that investment only to see the cycle turn down. But, he said, given the airframers' huge order books and projections of dramatic fleet growth in Asia and replacement demand in the West, this time is probably different, and it's a good bet that a number of suppliers won't cope with rising volume demands.
Hampson stressed that, given the interdependence of all players in any programme's supply chain, it's highly unlikely any firm will be allowed to fail. So, he said, the alternative is acquisition by another supplier or, in extreme cases, acquisition by an airframer.
Underscoring the hazards of the current financial environment, though, is a recent example cited by PwC of that least-good outcome: Airbus parent EADS's September 2011 acquisition of a majority stake in German company PFW Aerospace, which faced a liquidity crisis.
Such deals can be expected to feature in what looks set to be a busy year for aerospace M&A. Last year was a record year, with 341 deals worth $43.7 billion topping the previous highs of 332 deals in 2010 and $42.0 billion of value in 2007.
Hampson said 2012 may not see a deal as big as the $16 billion United Technologies acquisition of Goodrich which made headlines in 2011, but this will be a year when many small to medium sized firms decide to sell, leaving big investment commitments to another owner. He stressed that there is no sign of an increase in the number of distress sales, but that now, with orderbooks full and industry prospects solid, sellers can expect a good price and buyers can invest with confidence.
And, he added, the private equity and other financial investors which characterised the pre-crash acquisitions wave are well-placed to turn a profit by selling to the trade buyers who are typical of today's M&A market.