Industry consolidation has many useful purposes. Combining two organisations enlarges the economic and intellectual pool of resources, allowing the merged company to accept more risk to compete and innovate. It reduces overlapping back-office functions, making the entire industry more efficient and focused on the most essential tasks: developing, making and supporting products and services.
That’s the textbook, happy-face side of the argument. But there is sometimes a darker, real-world reason for the combination of once independent businesses: to mask structural weaknesses by assuming near-monopolistic power over a portion of the supply chain.
Where Honeywell’s aborted attempt to merge with United Technologies (UTC) ranges on that spectrum is difficult to gauge. Both are already large conglomerates with significant and complimentary businesses outside the aerospace industry. Within it, however, the picture is more muddled, with overlapping interests in small turbofan engines, plus electrical and air management systems. The complimentary pieces of a joined product portfolio also raised larger concerns.
For Embraer, a merged Honeywell-UTC would own more than 70% of its E190-E2 regional jet by value, counting the engines, nacelles, avionics, auxiliary power unit, and electrical and air management systems. Little surprise then, that the chief executives of Embraer and Airbus publicly criticised this attempt to consolidate market power.
But the manufacturers may be partly to blame for the market environment that prompted Honeywell’s offer. Although commercial backlogs and delivery rates are at record highs and climbing, Airbus and Boeing have struggled to consistently translate volume into pricing power, and are putting more pressure than ever on their supply chains to reduce costs and innovate.
While that is a positive development for airlines and the travelling public, it means suppliers are increasingly struggling to keep up with the volume and advanced technology requirements of the OEMs.
That creates pressure for further consolidation. The trend has been developing quickly at lower levels, but until now, the Tier 1 systems and engine suppliers have stood immune from the trend. All the while, they face only growing cost and innovation demands.
Manufacturers such as Airbus and Embraer can breathe a sigh of relief that Honeywell has publicly backed away from the merger proposal with UTC – for now, at least. But the trend is not going away.
Source: Flight International