In industrial terms, Farnborough was dominated by the show debut of EADS (European Aeronautic Defence and Space). But although the appearance of the new global heavyweight - formed from Aerospatiale Matra, DaimlerChrysler Aerospace and CASA - represented a shift of seismic proportions, the show also gave evidence of more subtle, though equally important, changes.
The consolidation of the aerospace and defence sectors is far from complete, with the creation of EADS being the industry's sole truly international mega-merger to date. Yet already the face of the industry has changed almost beyond recognition from only a few years ago - and not merely in terms of company size.
While last year's Paris show was memorable for the number of major industry players parading new partners, at Farnborough it was the impact of these mergers on the companies concerned that was most visible. Across the industry, businesses are restructuring as new purchases are amalgamated, and, at the same time, non-core activities are being shed and niche acquisitions targeted to fill any gaps.
The net effect of these processes - major mergers, internal overhauls and niche disposals and acquisitions - has been to sharpen the focus of companies, and to make increasing sense of the jumble of deals completed in the last few years. As aerospace businesses refine their operations, their differences are becoming clearer, with this, in turn, identifying the industry's natural competitors and likely allies.
As the sector pursues focus, the options that remain for further merger moves are also becoming clear. With transatlantic deals now high on the agenda for the industry's major players - though inevitably some time off - the room for manoeuvre available to the European and US primes is already sharply defined.
A further consequence of merger activity was also evident at Farnborough. While the drive among the industry heavyweights is towards systems integration (the tag "airframer" having become a dirty word), their suppliers have found it necessary to make a strategic leap in order to accommodate this new reality.
Tier one suppliers, of course, have responded with major mergers of their own, with some - notably the new Honeywell (merged with AlliedSignal) - now rivalling the smaller primes for size. But the effects of consolidation have also been felt further down the supply chain, with components manufacturers forced to metamorphose into sub-assembly and even full assembly specialists. This in turn has elevated some hitherto unfocussed businesses to effective "tier one status", while transforming others radically, causing them to enter the merger fray or restructure in order to offer the sub-systems capabilities their customers now demand.
Lockheed Martin, which came early to the merger game, identifies a clear three-stage structure - consolidation, rationalisation and transformation - to the revolution gripping the aerospace and defence sector. Executive vice president, Systems Integration, Bob Coutts says that, for Lockheed Martin, the consolidation stage ran from 1990 to 1996, during which time it purchased GE's aerospace division (1993), then Martin Marietta (1995) and finally the defence electronics and systems integration businesses of Loral (1996).
Rationalisation, Coutts says, involved "a right-size analysis" of the enlarged business, followed by a pruning exercise involving some job losses and factory closures, as well as outright divestments where appropriate (most recently of the Sanders electronic warfare operation). The process, which Coutts says began in 1994, should be completed this year, overlapping with a hoped-for transformation which he says should be finished by 2005. The net effect should be "to turn a hardware producer into a systems solution provider".
Dozens of other aerospace players offer obvious parallels with Lockheed Martin, although it and other primes have driven the process, motivated by a post-Cold War need to access overseas markets, acquire global reach and build up the capital base necessary to launch new defence programmes.
BAE Systems' chief executive John Weston recognises the stages Coutts identifies. "The consolidation of the industry is a process that has been going on since 1930 in the UK," he grins. "But really we have a process brought on by the end of the Cold War, first in the USA and then in Europe, although the European moves were the first to jump national boundaries. The stage we have reached is where we are now big enough to have global reach."
Farnborough 2000 was awash with examples of companies busy absorbing their recent acquisitions, the tier one and tier two suppliers having followed the example of the primes in targeting critical mass as a must-have in the face of the globalisation of the industry. Crucially, however, though the merger trend has pervaded the industry, consolidation has actually led to less - not more - uniformity.
Whereas Europe and North America were once home to a dozen diversified aerospace companies, the industry now has a clear structure based on specialisations. Only two primes, Boeing and EADS, are truly diversified, although both are heavily reliant on civil work (Boeing's Commercial Airplanes division accounting for 66% and EADS' civil production 76% of sales respectively), and both are seeking to invest in high margin military and communications work in order to counter their high degree of exposure to the vagaries of the world air transport market.
Lockheed Martin and BAE, by contrast, are clearly defence systems integrators, deriving the vast bulk of revenues from military and government contracts, while in Europe the UK company can be further differentiated from Thomson-CSF, established as the continent's leading defence/civil electronics specialist following the purchase of Racal.
As the sector's new giants focus on core activities, the role played by chance in the reshaping of the industry becomes apparent. BAE, after all, could so easily have formed the core of what is now EADS, had GEC's Marconi unit not come up for sale just as BAE was about to close a deal with DaimlerChrysler Aerospace.
Further down the hierarchy, other companies have focused on niche competencies - for example, Sweden's Saab buying compatriot Celsius and dropping "Aerospace" from its name in favour of "Technologies", reflecting its focus on high-technology.
The impact of consolidation on "traditional" component suppliers is demonstrated by engine parts specialist Doncasters. A supplier to the three big aeroengine-makers and other OEMs, the Anglo-US company has adopted a "modular approach" to parts manufacture, "clustering objects together into sub-assemblies", says president and chief executive David Simm.
The new global industry has brought with it new watchwords, and these were in evidence at Farnborough. "Turnkey solutions", involving the provision of full systems packages, whether by primes or suppliers, offer added value and are regarded as key to profitability, especially where they tap into cross-divisional synergies, while for defence players "systems interoperability" is regarded as vital.
The rise of the service sector looms over all these developments. Boeing is jealous of GE's finance-related profitability, and, like aerospace's other major players, is looking to migrate into this area. Even after future mergers, perhaps transatlantic ones, the industry will remain a work in progress. Fragmentation along even more specialist lines is one possibility as service-related income rises and the industry brushes up against related sectors, especially in the area of telecommunications.
Source: Flight International
