- Overview of the United Technologies Corporation’s spin-off
- Dominance of the United Technologies in the aircraft supplies space with the new acquisition
- Road ahead for the aerospace industry
United Technologies Corporation (UTC), the global leader in providing high-technology products and services to the aerospace and commercial building industries worldwide is undergoing a massive restructuring, where it is going to spin-off and separate the company into three parts. On 25th Nov. 2018, it announced a plan to spin off its non-aero businesses, Otis; its elevator division as well as its building systems business; Carrier. The remaining aerospace business including its Pratt & Whitney and its new $30 billion acquisition of the aviation equipment manufacturer Rockwell Collins will operate as the other separate entities. UTC’s acquisition of one of the world’s largest aerospace equipment manufacturers was expected to send ripple effects throughout the aviation industry as per industry experts. The industry’s giant aeroplane makers Airbus and Boeing have raised concerns on the merger even before it culminated. These firms stated that the deal could raise the cost of parts along with the cost of service and repairs and will also slow down the production of planes. This is due to fact that both the Airbus and the Boeing buy equipment and avail services from UTC and Rockwell Collins.
UTC’s acquisition of Rockwell Collins is a perfect synergy for the two companies since they combine Rockwell Collins strengths in interiors and avionics for UTC’s airline component line and its Pratt & Whitney engine business, thereby creating a company which provides a product line that covers almost everything needed to produce an aeroplane, except the wings and fuselage.
Aircraft suppliers such as the likes of United Technologies and Rockwell, generally register higher margins on their total sales than the aircraft manufacturers like Airbus and Boeing (an analysis of the margins for aircraft manufacturers and part suppliers is provided in the below table). Hence, with such a merger; UTC and Rockwell Collins, which are both major aircraft part manufacturers, these could leverage this advantage against aircraft manufacturers such as Airbus and Boeing, which, in turn, could see a rise in their cost. This is not all, the cost of service and repairs (which is a major cost for aircraft manufacturers) could also increase. The merger could put United Technologies in a very favourable position, considering that repairs and services have been the most profitable segment for quite some time in the overall aircraft industry despite the pressures from the aircraft market’s ‘super duopoly’ in form of Airbus and Boeing. Moreover, with an order backlog of combined aircraft for approximately $1 trillion from Airbus and Boeing, this merger could prove very costly for the two giants. In addition, the fact that parts represent more than half of the value for each aircraft and which are mostly made and supplied by dozens of suppliers. Boeing and Airbus are quite worried about the merger, considering that the UTC’s newly formed product portfolio includes major parts for an aircraft.
The merger announcement resulted in the initiation of building more aircraft parts in-house by Airbus and Boeing. Furthermore, Boeing plans to start the development of motors for its wing flap and build wings for its new Boeing 777X aircraft instead of purchasing it from suppliers. On the other hand, Airbus is planning to build its own nacelle (a metal casing that house engines) in-house, a move directly aimed at the United Technologies, which is one of the largest nacelle suppliers. Although these aspects are likely to take some time before the aircraft manufacturers can fulfil their parts requirement in-house, wherein, on a macro perspective their dependency on outside parties and mainly on players like the United Technologies would still continue.
According to the Teal Group, which is an aerospace and defence consulting company, the merger of UTC and Rockwell Collins might even act as a response to the pricing pressure from Airbus and Boeing as their increasing dominance has enabled them to command huge cost reductions from suppliers. This merger could even foster a new airline maker in the future known as United Technologies.
Considering the magnitude of the merger, it is clear that there will be a continuing and visible impact across the aerospace industry. Firstly, more consolidation is inevitable, even looking at the current state and the actions of all the players mentioned in this blog. While scaling-up will become a necessity for cost-effectiveness. Additionally, as supply contracts in this high barrier to entry industry become lengthier with many more obligatory requirements, it will be a test even in the supply chain and particularly for small players as they might have to make very difficult strategic decisions for their sustenance.
Often the best-case scenario is thought upon when considering an acquisition, but the success of this merger would depend on how United Technologies strategically integrates itself with Rockwell Collins. The integration will not be the easiest of transition, considering Rockwell Collins is also still integrating its recently acquired B/E Aerospace. The changes expected in the industry as a whole will also be dependent on how amicably the potential cost efficiencies expected out of the merger are achieved and how UTC is finally able to take advantage and leverage on its merger with Rockwell Collins.