6
Third Quarter 2014
• Spread of communicable diseases
• Oil prices
• Interest rates
• Monetary policy concerns in emerging markets
• Long-term environmental regulations
• Potential external shocks
That said, since 2001, we’ve seen pretty significant traffic growth despite
SARS, volcanos, the worst world recession since the 1920s and multiple
terrorist events. I take my hat off to the airlines and OEMs for being
ahead of environmental concerns. They’ve taken it upon themselves to
manufacture more fuel-efficient airplanes and the airlines have taken it
upon themselves to operate the planes in a more fuel-efficient manner,
which creates less of an environmental footprint.
With industry cost and productivity initiatives (e.g., Partnering for
Success), how do you see the supply chain dynamics playing out
over the next decade? What do you view as successful strategies
for suppliers navigating the current environment?
What’s going on right now is not very different from what’s gone on in the
past – passengers want lower fares, airlines want cheaper and more
efficient airplanes. The OEMs’ response to this is rippling through the
supply chain. It’s been happening for decades. OEMs want to reduce
costs year in and year out and to meet this demand, suppliers need to be
on board with lean processes and working with the OEMs on value
engineering changes. You’re going to see continued consolidation to
achieve economies of scale in the supply chain.
Industry One on One
(Aerospace)
Source: Boeing Long-term Forecast
World Annual Air Traffic (RPKs - trillions)
I think new technologies
being used in the supply chains will continue to
drive down costs. Companies that do that well will continue to have higher
profits and will pass some of that on to the OEMs.
Where do you see increased M&A activity in the future?
We haven’t seen too many large transactions with the exception
being UTC’s acquisition of Goodrich. We’re starting to see increased
M&A activity at the lower levels and I think this will continue. The issue is
that the multiples are pretty darn high, but for good reason. I could
certainly see more consolidation in the aero-structures area. Precision
Castparts has been very acquisitive in the last several years and I think
they will continue to be aggressive. Some of the other aero-structures
players likely will follow that lead.
Do you have additional thoughts or observations on the commercial
aircraft industry and its outlook?
Airline Consolidation - The US is down to four big carriers and in Europe
there’s consolidation going on with Lufthansa, British Airways and others.
In the future, there are going to be fewer and larger airlines and they’re
going to have more leverage in the marketplace. So there will be fewer,
but larger competitions, which will be “must-win” for the OEMs. As in the
past, the most capable airplane will win those competitions, but with fewer
of them, “must-win” competitions are going to be more important.
Increased Role of Lessors - The airlines are outsourcing a lot of things
they used to do in the past: maintenance activities, a lot of the catering,
and who owns the airplanes. I think these trends will continue. Airplanes
are very tangible assets that hold their value and are a good place for
returns when compared to other investments.
Airlines’ Ability to Manage Capacity - No one has pushed the panic
button and flooded the market with excess capacity. Low fuel prices and
well-managed capacities have allowed the airlines to have the profits
they’ve had over the last couple of years. In the past, they’ve not been as
disciplined as we’re seeing this time.
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Projected Annual Growth
2013 – 2033 is 5.0%
