A $30 billion aviation mega-merger
Hello again, aviation consolidation. United Technologies, parent of jet engine maker Pratt & Whitney, is buying Rockwell Collins for $140/share. The transaction values Rockwell at $30 billion including assumed debt.
Rockwell Collins makes many of the components that are included in aircraft, from sensors to displays. It also recently closed on the $8.6 billion acquisition of B/E Aerospace, manufacturer of seats, lavatories and galley equipment. The combined operation, to be named Collins Aerospace Systems (sorry, Rockwell!) is in a position to deliver nearly every part of a commercial aircraft except for the body.
That scope is important when it comes to dealing with airframe manufacturers such as Boeing and Airbus. Those companies, like nearly everyone else in the industry, is wrestling with slower delivery rates, particularly on twin-aisle aircraft. As part of the effort to address those challenges the larger companies are working to squeeze margins even tighter on suppliers. By aggregating its supply power the new Collins Aerospace maintains some (though likely not a ton) of pricing power in those negotiations. Additionally, the combined company expects to see annualized savings of half a billion dollars in the fourth year after the transaction closes.
In some ways the quick sale of Rockwell Collins after the B/E Aerospace acquisition is good news for that integration. With so much in flux it is arguably reasonable to just keep things crazy a little longer and make sure that the various pieces end up where they should be in the end, without necessarily pausing along the way. Then again, B/E Aerospace is responsible for delivering a ton of seats to both Boeing and Airbus for airline customers and anything that sees those delivery schedules slip is bad news. Just ask Zodiac about its troubles delivering seats and lavs for Qatar Airways, United Airlines (Polaris), Cathay Pacific and others.
The new company will reach nearly every touch point of the passenger experience on board, at least related to hard product. The main piece the combined company doesn’t deliver directly is inflight connectivity, but it works as a reseller in that space, particularly of the Inmarsat GX solution. Among others, Rockwell Collins is understood to have a contract with Norwegian to implement connectivity on the next tranche of aircraft for that carrier, including its 787 longhaul fleet.
For seats, passenger service consoles, entertainment systems, interior lighting, galleys, lavatories and more the new Collins Aerospace is a potential one-stop shop. Other vendors in the IFE/C space already faced some new pressure from the Rockwell-B/E Aerospace merger. This probably doesn’t change that a ton, but it does raise the chance that an airline chooses a single vendor where possible.
Also worth noting is the potential the deal has to help shield United Technologies and the Pratt &Whitney division from challenges related to its GTF engine introduction. The PW1000G geared turbofan is the exclusive engine for the Bombardier C Series, Embraer E2 generation and is also an option on the A320neo. The engines suffer from a low dispatch rate, particularly on the A320neo fleets. IndiGo, GO Air, Spirit Airlines, ANA and Hong Kong Express all saw aircraft grounded at various times as a result of issues with the power plant. The new LEAP engine from GE/Safran/CFM International is outpacing the PW1000G 10-to-1 on new A320neo orders in 2017 and at least one airline converted A320neo orders back to the less efficient “ceo” classic engine option as a mitigation step. That’s bad news for the $10bn project.
A larger overall aerospace operation could help soften that blow.