“We Need Growth” …why major systems suppliers SAFRAN and Rockwell Collins would move into the interiors business Jeff Johnston CEO Desser Holdings, LLC The Aerospace & Defense Forum Orange County Chapter 3 August 2017
Introduction • Major Systems suppliers Rockwell Collins and SAFRAN are both moving into the Aircraft Interiors markets through the acquisition of B/E Aerospace and Zodiac Aerospace respectively. • How do these acquisitions fit into their respective portfolios? • What are the underlying sources of value creation in these businesses and how will they fit within their existing portfolios? • What synergy opportunities do these acquisitions bring? • What are the primary challenges that each will face with respect to creating value from these acquisitions?
Revenue and Technical Synergies are very limited…. Cost synergies limited to HQ functions and possibly supplies….
Typical Systems Supplier Delivery Skyline Schedule Boeing 737 (42/mo) • Rates are set and well known in 1 2 3 advance 4 5 6 • 7 Typically no variation from shipset 8 9 10 to shipset 11 12 13 • 14 One competition and award lasting 15 16 17 many years, or even decades 18 19 20 • 21 Very few Moments of Truth 22 23 24 • Relatively predictable 25 26 27 28 aftermarket revenue stream 29 30 31 post delivery 32 33 34 • 35 Very few opportunities to 36 37 38 grow 39 40 41 42 1 2 3 4 5 6 7 8 9 10 11 12 Boeing 787 (12/mo) 1 2 Predicable 3 4 Stable 5 6 Limiting 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Interior Competitive Opportunities / Fleet (Moments of Truth) 1 2 • Supplier rates can vary significantly 3 4 5 6 month to month 7 8 9 • Awards are on end-customer fleet 10 11 12 13 basis 14 15 16 • Many competitions and awards 17 18 19 20 lasting only a few years 21 22 23 • MANY Moments of Truth 24 25 26 • 27 Predictability on 18-48 28 29 30 months out 31 32 33 • 34 High variation even within the 35 36 37 38 month for customer product 39 40 41 configuration/supply chain 42 1 2 3 4 5 6 7 8 9 10 11 12 1 2 Complex 3 4 Dynamic 5 6 Opportunities 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Interior Competitive Opportunities / Fleet (Moments of Truth) 2 1 3 • Seat awards can often be split by class between suppliers • Typically common IFE supplier due to systems architecture • Galleys, Lavs, Monuments and other interior packages may follow different business models • Significant shipset value potential
Typical Interior Shipset Value (Amortized per AC typical fleet) (Low End) Source: IATA Maintenance Cost Conference Miami 2015
How does it fit… AW&ST: How does the acquisition of B/E remake Rockwell Collins? Ortberg (Rockwell Collins CEO): “…Interiors get retrofitted several times in the life of an airplane. We do not see that in avionics. So it gives us the ability to pivot a little bit to the aftermarket when we see soft patches in OEM production rates.” “…We can see where we will be leading in the next generation of smart cabin technology. We’ve got all the parts…” Credit Suisse (Regarding SAFRAN / Zodiac): “ We think the group may be attracted by cabin interiors, as it is a critical element of the aircraft for the airline operators. It also operates along a slightly different cycle versus other equipment businesses , thanks to the retrofit business (particularly helpful in an environment where OE is slowing down). We believe that it is a fundamentally attractive growing market where airlines are likely to continue to invest their discretionary dollars. It is a less technology intensive business than engines, for instance, but many parts are critical for the proper functioning of the aircraft and for the airlines brand differentiation efforts .”
Can they realize value? “ Safran says it is confident of resolving Zodiac's industrial problems after visiting its plants, including a British factory blamed for the latest profit downgrade in April.” (Reuters June 15, 2017) 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 Each block is one shipset …. • Each shipset may involve multiple cabin classes of product • Each cabin class has variation by position • Each customer has a unique configuration • Products require high aesthetic quality ….neither OEM has any experience with this type of production and associated supply chain complexity
Summary • The expansion by both SAFRAN and Rockwell Collins into the interiors space provides them with significantly greater growth opportunities than their legacy systems businesses. • There are relatively few revenue synergy opportunies between the two legacy businesses and these new bolt-on acquisitions • Cost synergies are limited to HQ functions and possibly some site rationalization • Value creation will likely come from two different areas • New solutions for smart cabins for Rockwall Collins - B/E Aerospace • Significantly better execution by SAFRAN / Zodiac, addressing root causes of industrial difficulties
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