Trends from the Paris Air Show

12 July 2017

Seattle, Washington | July 12, 2017 – Meridian Capital’s President and Aerospace Team Lead, Brian Murphy, recently attended the 52nd International Paris Air Show at the Exhibition Center of Le Bourget, a few kilometers North of Paris. The show is organized by the SIAE, a subsidiary of GIFAS, the French Aerospace Industries Association and brings together key industry participants from around the world to discuss industry trends and the latest technological innovations.  The weeklong event included multiple keynote presentations, order announcements as well as discussions around the opportunities and challenges facing OEMs and suppliers in today’s market.

Paris Air Show Commercial Order Activity Exceeds Expectations

Boeing and Airbus each experienced strong order activity at the Paris Air Show, despite tepid expectations headed into the event.  Capturing agreements on a total of 571 aircrafts, Boeing’s order activity far exceeded that of its chief European rival.  The U.S. manufacturer’s success was driven by the instant order traction achieved on the newly announced 737 Max 10 (361 orders from 16 different customers).  The 737 Max 10 represents Boeing’s response to Airbus’ successful A321 neo platform. In comparison, Airbus secured 326 new orders, primarily on its A320 narrow-body program.

The robust commercial order activity provided the industry with a welcomed shot of momentum after multiple quarters of muted sales, reminding investors of the strong long-term growth prospects and traffic projections for the commercial aerospace market.

OEM Build Rate Increases Continue to Stress Supply Chain

Both Boeing and Airbus continue to look for ways to aggressively cut costs and increase build rates on key platforms.  The price and order competition on comparable platforms such as the 737 vs. A320 and 787 vs. A350 remains fierce.  After several years of embracing an expanded supplier base, both OEMs are driving their respective supply chains to consolidate so they can regain control over technological capabilities, cost, and capacity.

As a result, suppliers are faced with the challenge of substantially building production capacity while simultaneously providing near-term price reductions.  This is driving key suppliers to make significant investments in equipment, systems, and acquisitions to expand capabilities and/or enhance automation.

While large Tier I suppliers such as Spirit, Safran, and Triumph have the resources to support these demands, the competitive dynamic presents a challenge for small to mid-sized Tier I and Tier II suppliers.

M&A Interest Focused on Proprietary Content and Cross Border Activity

Key strategic investors and industry focused private equity firms continued to communicate a strong M&A appetite throughout discussions at the Show.  In particular, as the commercial build-to-print market has become increasingly competitive, investors are aggressively seeking opportunities that offer proprietary content, an MRO offering, or unique manufacturing capabilities.

Additionally, several well-established, Tier I Airbus suppliers based in Europe and Asia are seeking U.S. acquisitions with direct relationships with North American OEMs.

These investment rationales, coupled with the pricing and build-rate pressures outlined above, are likely to lead to continued industry consolidation over the next 12 months.

F-35 Program Finding Its Stride / Military Outlook Positive

After multiple years of slow order volume and uncertainty, the Paris Air Show featured a rebound in optimism and order activity for military aircraft programs.

Notably, after years of cost overruns and production delays, Lockheed’s F-35 program is rumored to be close to a 440 jet, 11 nation order worth $37 billion.  This would represent the largest sale ever for the warplane, substantially bolstering the programs backlog.  Furthermore, the Show marked the F-35’s debut in a full acrobatic demonstration for prospective buyers.

The last 12 months have also seen an uptick in Boeing Military orders via the F-15 and F/A-18 programs.  The Air Show represented another positive step forward for military aircrafts as many countries look to upgrade and/or bolster technology.

Boeing’s Impact on the MRO Market

Boeing used the Paris Air Show to further set the stage for the planned launch of its new Global Services business that aims to capture a much larger share of the global maintenance, repair, and overhaul (“MRO”) market. Specifically, Boeing is aggressively targeting to reach $50 billion in MRO revenue within the next 10 years.

Historically, the MRO market has been highly fragmented with airlines valuing characteristics such as flexibility, responsiveness, and competitive pricing often associated with smaller, independent companies.  Boeing intends to address these customer needs through an internal reorganization as well as through selective acquisitions.

Boeing’s rejuvenated commitment to the MRO market will likely drive consolidation at all levels as companies look to position themselves to protect market share and expand differentiated capabilities.