The civilian aerospace industry has faced a series of event-driven inflection points over the past five decades that have spurred significant transformation, often fueled by bursts of M&A activity. The sector has now hit a particularly sharp turning point that is likely to result in a renewed cycle of M&A, as the industry’s structure evolves.
The most recent inflection point began with the grounding of Boeing’s 737 Max in late 2018, followed 18 months later by the onset of the COVID pandemic, which has resulted in a dire industrial picture. Deliveries by Boeing and Airbus in 2021 were almost two-thirds below pre-COVID forecasts. These numbers are expected to increase in 2022 but remain far below pre-pandemic levels.
As a result of the dramatic production decline, aviation executives expected the financial stress on suppliers would lead to an increase in M&A in 2021. However, Pandemic-related government financial aid packages and loans provided many suppliers with a temporary lifeline – but that assistance has ended, and production of wide-body jets is still below 2018 levels. This means that the risk is elevated for component manufacturers who might be in deeper financial distress. The remaining lifeline: being acquired. Already, there are signs of greater M&A activity. Geopolitical instability may drive prime contractors and Tier-1 suppliers to examine risks in their supply chains. This may be the catalyst for additional M&A deals that lead to more vertical integration in the industry—for instance, the uncertainty of access to titanium, of which Russia is a key supplier.
These trends suggest that the latest turning point is likely to be marked by M&A deals focused on Tier 2 and 3 suppliers.
Potential M&A targets could include:
- OEMs eyeing further vertical integration in Tier 2 and 3 space;
- OEMs mitigating single-point failure mechanisms in the supply chain;
- Stronger suppliers looking to horizontally expand, seek further vertical integration, or mitigate supply chain risks;
- Private equity entering the sector;
- Airframe makers focus on streamlining internal operations and mitigating risk;
- U.S. airlines’ smaller, regional carriers. (The Ukraine conflict will stall M&A among European airlines.)
Prime contractors and Tier-1 suppliers will need to identify control points they should own rather than leave as weakened independent suppliers. But the window of opportunity might close if would-be acquirers hesitate; their main competitor could snap up the quarry. Expect uncertainty and sudden actions during the next 12 months.