One of the two biggest names in airline interiors is under new ownership – and the other could be shortly – as part of the largest burst of consolidation the sector has seen. In April, Rockwell Collins completed its acquisition of fellow US company B/E Aerospace – the 36th biggest aerospace business by revenue in the FlightGlobal Top 100.
This time last year, Cedar Rapids-headquartered Rockwell Collins, previously ranked 25 in the Top 100, had about $5 billion in revenue and a portfolio composed largely of avionics and other cockpit systems. Thanks to a $2.9 billion contribution from its new acquisition, Rockwell arrives in Paris with $8.1 billion in revenue, a product line that reaches from cockpit to cabin, and a significantly larger stream of aftermarket revenue.
Meanwhile, Safran – the eighth largest aerospace company, with a lineup comprising engines, landing gear, and defence and security equipment – is closing in on its pursuit of Zodiac Aerospace, ranked 23, an all-French marriage Safran says will create “a global leader in aerospace” and should take its turnover towards the $25 billion mark.
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That, however, has been a more controversial nuptial, with Zodiac’s chief executive offering in April to step down from the troubled company and some key Safran shareholders doubting the wisdom of the merger, despite claims by Safran’s management that it can turn around the fortunes of a company beset by quality and supply issues and customer criticism in the past few years. On 24 May, Safran and Zodiac announced "new terms" for the merger.
For Rockwell Collins, the merger with B/E reduces its reliance on new aircraft programmes and positions it to benefit from expected strong demand for cabin overhauls, says chief executive Kelly Ortberg. “Rockwell Collins has been very strong in the front of the airplane, [and] the interiors segment is very strong in the back,” Ortberg says. “Interiors get retrofitted three, four times in the life of a widebody aircraft. We don’t enjoy that in avionics.”
The B/E acquisition has thrust Rockwell into an interiors business that is booming amid a global trend by airlines to outfit existing aircraft – particularly widebodies – with new cabins. Airlines are adding more business class and premium economy seats to older aircraft – making those cabins comparable to new Boeing 787s and Airbus A350s. Indeed, the interiors modification business is forecast to grow at a compounded annual rate of 5.6% for 10 years, climbing from $2.8 billion in 2016 to $4.8 billion by 2026, according to a forecast from consultancy ICF International.
B/E, now known as Rockwell Collins’ interior systems business, has about 11,000 employees and facilities throughout the USA and in Canada, Germany, the Philippines, the United Kingdom, the Netherlands and Mexico. The unit’s largest presence is in Winston-Salem, where it designs, manufactures and tests a range of seats, including its line of Meridian economy seats and business class products such as its Super Diamond lie-flat seats. The site delivered 65,000 seats last year.
Customers include American Airlines, Delta Air Lines, United Airlines, Air Canada, Air China, Lufthansa, British Airways, Emirates Airline, Qatar Airways, Japan Airlines and Lion Air. The company makes a host of other cabin products, including lavatories, lighting, galley appliances, crew rest areas, oxygen systems, power management systems, and water and waste systems.
Although the company makes seats for business jets and helicopters, 80% of 2016 revenue came from commercial aircraft products. Likewise, about two thirds derived from so-called line-fit products – those installed on aircraft at the factory – and about one third from aftermarket sales. Executives also stress that B/E has strong relationships with airlines, noting that 78% of sales come from contracts directly with airlines under so-called “buyer-furnished equipment”, or BFE, deals.
Aside from the B/E products, Rockwell’s offering consists largely of cockpit systems, such as integrated avionics, head-up displays, fly-by-wire systems and communication, navigation and surveillance systems. In 2016, it derived 42% of its revenue from military systems and 27% from sales of air transport electronics, with the balance composed of sales of business aircraft and information systems products.
Aftermarket air transport products generated just 10% of Rockwell’s pre-merger revenue, reports show. In other words, Rockwell has traditionally relied more heavily on new aircraft manufacturing trends than on the rapidly expanding commercial aircraft aftermarket business.
“If an OEM rate goes down… there is no aftermarket for us to pivot to, because they are not doing mods and upgrades [on avionics] like they do in interiors,” Ortberg says. Indeed, although production of narrowbody aircraft has remained strong, airframers have slowed production of earlier-generation widebodies such as 747-8s, 777s and A380s, Ortberg notes. “We are seeing weakness on legacy widebodies,” he says. “We are going to be in a soft patch on widebody demand.”
Rockwell bought B/E on 13 April for $6.4 billion in cash and stock, plus an additional $1.9 billion in debt.
“Rockwell is the leader in the cockpit. We consider ourselves the leader in the cabin. So the two of them – it’s a perfect combination,” says Werner Lieberherr, executive vice-president and chief operating officer of Rockwell’s interior systems business.
Ortberg says Rockwell has worked hard to minimise any impact on customers, noting that former B/E chief executive Lieberherr and his team continue to manage the unit. “The number one feedback we got from customers is, ‘We like the combined entity, but don’t screw it up through the integration'," Ortberg says. "We structured our integration plan to be extremely low risk."
Ortberg also stresses that the B/E deal will enable Rockwell to develop systems that link cabin products to larger aircraft networks, bringing to the cabin what has been the called the “big data” revolution. For instance, Ortberg envisions technology that can alert airline staff when a seat actuator is near failure. Sensors could likewise detect when a passenger awakens from a nap and alert cabin crew to bring a hot towel, he says. “We are just on the cusp of a connected airplane,” Ortberg says. “Every device on an aircraft is going to have sensors.”
For Safran, any synergies from the merger have been overshadowed by a spate of bad news stories surrounding Zodiac. In April, it reported first-half results with seats revenues down by 5.3% and cabin revenues declining 2.2%. The company has been a victim of its success in winning positions on new programmes, with the ramp-up of the Airbus A350 and Bombardier CSeries generating “production variances” and “excess” costs, Zodiac admitted.
An early win in the cabin for Collins are these seats for A321s on order with Hawaiian Airlines, which unveiled its new interior in April as the B/E merger was being finalised
BillyPix
At the same time, Zodiac chief executive Olivier Zarrouati offered his resignation although the board turned it down, asking him to remain at the helm to concentrate on finalising the merger with Safran. United Airlines, American Airlines, Cathay Pacific and Airbus itself are among the organisations that have expressed displeasure with the quality or service offered by Zodiac in the past two years.
In February, Airbus chief executive Tom Enders said the A350 had been “plagued” by problems relating to cabin quality and that this had been “one of the recurring complaints” from customers. He urged Zodiac management not to be “distracted” by merger talks with Safran in their efforts to put production back on track.
However, Safran remains convinced of the wisdom of the merger, which it values at €9.7 billion ($10.9 billion), because it will raise the proportion of its revenues from aircraft equipment from 32% to a more balanced 48%, while its reliance on propulsion revenues will fall from 61% to 46%.
Safran’s logic is not dissimilar to that of Rockwell Collins. In January, Safran chief executive Philippe Petitcolin said Zodiac’s large BFE business would bring benefits to Safran. While Safran was “very well-positioned” in the short- and medium-haul aircraft sector, Zodiac had a “much better position” on large aircraft, Petitcolin said. This would provide additional buyer-furnished equipment business to Safran, he said, through the typical eight-year cabin refurbishment cycle on long-haul types.
He also said Safran – in which the French government holds a 14% stake – would be able to contribute specialist knowledge to advance developments such as the transition to more-electric aircraft, and use its composites experience to assist Zodiac with overcoming its recent production difficulties. He stated: “I believe we can bring a lot of expertise to get the problems they’ve seen in composites, in manufacturing of seats, behind them – a lot faster than they’ve been able to do so far.”
Additional reporting by David Kaminski-Morrow and Murdo Morrison
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Source: Flight Daily News
