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Further Aerostructures Consolidation Will Negatively Impact Industry

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Dec 19, 2023,01:09pm EST

The aerostructures segment is very important to the aerospace and defense industry. Companies within the aerostructures segment tend to be lower margin businesses and historically have been treated as a less attractive commodity due to the airframer’s Airbus and BoeingÌýÌýretaining the aircraft intellectual property. These lower margins can lead to financial challenges, constrained cash flow and higher debt positions.

The airframers in the early 2000’s divested their aerostructures businesses to achieve their vision of becoming aircraft integrator. Boeing divested major fabrication and assembly operations in 2005, creating Spirit AeroSystems Airbus completed in 2009 its aerostructures divestitures of its European aerostructures divisions into Stelia Aerospace and Premium Aerotec.

Airbus has recently reversed course and combined these formerly independent European aerostructures companies in January 2022, creating a subsidiary called Airbus Atlantic. This vertical integration for European structures companies works because of the commercial focus with Airbus in Europe. Airbus’ return to a vertical integration with its aerostructures, now leaves the North American aerostructures segment still independent and being a low margin segment of the supply chain.

George Ferguson, Senior Analyst from Bloomberg Intelligence said that to win work with airframers over the last decade, aerostructures companies have had to bid contracts very competitively, counting on improving efficiencies predicated on volume gains to make programs more profitable. Ferguson further stated the COVID-19 pandemic-induced aerospace sector downturn significantly challenged this strategy, with lower volumes across programs decreasing profits and cash generation.

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Though the industry is quickly increasing build rates on many programs, consolidation in the aerostructures segment was accelerated by lower production volumes and associated higher operating costs from the impact of the pandemic. Restructurings and exits from this segment across large and small aerostructures companies are rapidly taking place.

Former North American aerostructures providers such as GKN Aerospace, Triumph GroupÌýÌýand Precision CastpartsÌýÌýÌý(PCC) continue consolidating, divesting and rationalizing their businesses. GKN is closing plants in Missouri and New York. Triumph wound down its aerostructures capabilities in California with the completion of the 747 program, and divested Texas, Georgia, Tennessee, and Florida facilities. Since being taken private by Berkshire Hathway, PCC has also consolidated facilities.

These companies along with the many sub-tier machining and fabrication companies within the supply chain are vital to the industry. Further consolidation and business rationalization in this segment could negatively impact the industry. Spirit is the remaining large aerostructures provider that has unique and large-scale manufacturing capabilities both for North American commercial and defense programs.

Robert Spingarn, a Senior Analyst with Melius Research shared concerns in a recent analysis about Spirit’s longer-term outlook. Spingarn stated that Spirit faces significant structural headwinds to sustained free cash flow due to being locked into long-term contracts with Airbus and Boeing that requires pricing step-downs as production volumes rise. Spingarn further noted, that Spirit will get squeezed on price and cost in this inflationary environment; specifically on the loss-making contracts for the 787, A220 and A350 programs.

The industry dynamic is different in North America with Spirit being the only remaining large scale aerostructures provider. Further consolidation in this segment would likely involve Spirit and the following three options for Spirit is not ideal for the company, nor the industry.

Boeing would not buy Spirit back as it would be a significant cash investment and it would be moving back into aerostructures and away from the integrator model established in 2005. Spirit has diversified over the last 10 years to the extent it would be difficult for Boeing to assume these other industry customers such as Airbus and Northrop GrummanÌýÌý.

Airbus has no incentive to add more aerostructures capability by acquiring Spirit, having recently established Airbus Atlantic as its internal structures’ provider. Additionally, Spirit’s largest customer, Boeing, would not allow this change of control, as outlined in the recent Memorandum of Understanding signed by Boeing and Spirit.

A private equity group would not take Spirit private because of the difficulty in achieving a positive return on investment due to having to keep the business operating together and not being able to divest parts of the business. Furthermore, a take-private option would require significant financial maneuvering to achieve given Spirit’s current financial situation.

As the remaining North American large scale aerostructures provider, the industry needs Spirit to become profitable again to stem the trend of consolidation. When Boeing does launch a new airplane, it is highly likely there will be a need for Spirit and their sub-tier supply chain. Therefore, for longevity of the commercial aerospace segment and defense industry in North America, having a large tier 1 independent structures business will be very important.

Aerostructures and its supply chain should no longer be treated as a build to print commodity which has driven lower margins and the current consolidation trend. To improve cost structure, profitability and cashflow, aerostructures companies will need to continue working operational efficiencies and quality improvements as the commercial sector production volumes increase. Contract pricing and renegotiation with the airframers will also be required as it is imperative for the industry to have a financially healthy and stable aerostructures segment for future commercial aircraft development and next generation defense programs.

Spirit and other aerostructures companies long term stability and financial health are paramount for the industry. Further consolidation and business rationalization among the remaining aerostructures companies could negatively impact future commercial and defense programs.