Many of the world’s airlines are making ongoing improvements to their onboard products in response to various economic and competitive pressures. But resulting demand for interior products such as seats is placing a growing strain on the relatively few manufacturers, resulting in new business opportunities for smaller, upstart providers, sources say.
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At the same time, mergers have swept the upper end of the industry, with Zodiac Aerospace and B/E Aerospace both set to be acquired.
“At long last, it appears that we have found ourselves in the midst of an epic global battle to improve aircraft interior product quality and comfort,” wrote Jonathan Berger, vice-president of aerospace and MRO at consultancy ICF International, in a blog post. “Should the major cabin interior suppliers fail to get their respective acts together – and soon – then we should logically expect to see a proliferation of new market entrants.”
American Airlines’ manager of onboard products Jay Mapston tells FlightGlobal: “It’s a small supply chain.” He notes that suppliers such as Zodiac and B/E dominate the interiors industry. “When the entire industry is relying on that small supply chain, everyone is eating from the same tree, and it runs out of apples,” he says.
“The supply side of this still remains stretched very thin,” says Fred Cleveland, managing director of PwC’s transportation and logistics practice. “Over the last 12 months, suppliers have made gains in meeting delivery schedules, but it is not unusual to have a plane delivery delayed for interior components.”
Indeed, demand has surged in recent years amid a worldwide flood of new aircraft orders and booming demand for overhauls of existing aircraft cabins. Between the end of 2010 and March 2017, Boeing’s outstanding commercial aircraft orders jumped 66% to more than 5,700, while Airbus’s outstanding orders nearly doubled to more than 6,700, according to the manufacturers and Flight Fleets Analyzer.
After 15 years, American's 777 fleet is getting a mid-life interior upgrade
AirTeamImages
Top US carriers such as American Airlines, Delta Air Lines and United still have hundreds of orders outstanding each, many for fuel-efficient types like the Boeing 737 Max, 787, Airbus A320neo and A350. Boeing predicts in its 2016 market outlook that the number of aircraft in service will double to 45,240 by 2025, with nearly 40,000 of those being new aircraft.
Interior providers are busy equipping all those new aircraft, but at the same time several factors are leading carriers to update cabins of existing aircraft. For starters, airlines are seeking to compete with rapidly expanding Middle Eastern and Asian carriers, many of which provide an improved onboard product, Berger notes.
Combine that with a broader battle to attract lucrative business travellers, rapidly advancing technology and availability of cash thanks to low fuel prices, and carriers see good reason to make their cabins sparkle, he adds. “Historically, airlines refresh their cabin interiors once a decade during a major aircraft overhaul. Today, the situation has clearly changed,” Berger writes. “Similar to the constant need to upgrade your smartphone every few years, the fiercely competitive airline industry must keep up with the rapid pace of onboard product and technology innovation.”
PwC’s Cleveland notes the “merger mania” that swept the USA left consolidated companies with giant fleets and differing onboard products. For example, the 2008 merger creating the current Delta brought together roughly 450 Delta aircraft with 350 from Northwest Airlines, Flight Fleets Analyzer shows. Likewise, the United-Continental Airlines and American-US Airways mergers brought hundreds of aircraft together.
The resulting carriers have since been standardising and upgrading their fleets, adding more seats to coach, outfitting aircraft with “slimline” and lie-flat seats, premium economy sections, new carpets and sidewalls, and upgraded IFE systems, Cleveland notes.
At the same time, carriers have been ordering new aircraft.
“We are in the post-mega-buying phase,” says PwC’s Cleveland. “We’re also in the post-mega-merger phase, where dissimilar fleets have been combined, promoting a homogenisation of interiors of old fleets, further exacerbating the demand on new interiors.”
American, for instance, is removing first class from its 777-200s, adding lie-flat seats in business class and international-style premium economy seats as part of a mid-life upgrade to the roughly 15-year-old aircraft, Mapston notes. The project should be completed in the third quarter of 2017. “The cabins we had were getting older and the market has changed,” he says. “The move into the two-class configurations – that’s become a big industry trend.”
Berger, however, says that in moving to “two-class” aircraft, airlines have, in effect, really just shifted their product and retained three classes: business, premium economy and economy.
American is also fitting 24 757s with lie-flat business-class seats and equipping 777-300ERs, 787s, A330s and A350s with international premium-economy sections. The carrier rolled out premium economy on newly delivered 787-9s this year, and expects to complete the installations by 2019. It is also standardising “trim and finish” inside its 737- and A320-family aircraft, a project that includes new seats, carpets, IFE and power ports.
Likewise, United’s more than 200 narrowbodyies are being fitted with new first-class seats, and the carrier is equipping widebody aircraft with a new business-class product dubbed “Polaris”. Widebodies will get new lie-flat business-class seats manufactured by Zodiac, 16in entertainment screens, privacy dividers, improved meals and new amenity kits, United has said.
A wholesale shift by airlines to aircraft such as the 737 Max has stimulated demand
Boeing
The carrier began operating a newly-delivered 777-300ERs with the product in February, and expects to equip 767-300s, 777-200s, 787-10s and A350s with the product, it has said.
Delta expects to receive in autumn its A350 with international-style premium economy seats and suite-style lie-flat business-class seats with privacy doors. The carrier will install premium economy on other widebodies, and, working with Zodiac, is equipping 126 A319/A320s with new IFE systems, overhead bins, galleys and “pod-like” over-seat control units, it says.
Other carriers are also revamping cabins. For instance, Zodiac is helping Air France revamp its A330 cabins, and Iberia is adding premium economy to A330s and A340s.
Likewise, JetBlue Airways has been adding lie-flat seats on many aircraft, Alaska Airlines has been upgrading 737s with new seats, and Hawaiian Airlines is replacing traditional business-class seats on A330s with lie-flat seats.
All those orders have placed immense strain on interior suppliers, and have put retrofit orders in competition with new interior orders, Cleveland says. At the same time, suppliers are seeking certification of new, lighter-weight designs, adding complexity to an already tight production schedule, he adds.
“They are really, really going to be struggling to get all that done at the same time,” Cleveland says of suppliers. “The pipeline is flooded with new interiors.”
Berger writes: “The cabin suppliers are attempting to simultaneously manage both historic OEM demand to meet record aircraft production rates and surging airline demand for the latest cabin interior products.” He adds: “The supply chain is clearly overwhelmed and simply cannot keep up.”
That demand bodes well for the modification industry, which was worth $5.1 billion in 2016, or 7% of the $67.6 billion global MRO industry, according to an ICF report.
The company forecasts the modifications sector will grow an average of 5.2% per annum up to 2026, reaching $8.5 billion, or about 9% of a then-$101 billion MRO industry.
The size of the interior modifications industry, a subset of the larger modification sector, will grow 5.6% per annum for 10 years, ICF predicts.
No doubt modification providers will be busy, but surging demand has meant bottlenecks. “Ask any airline or OEM who their lowest-performing suppliers are, and their answer is unanimous: ‘Our seat and cabin interior suppliers’,” writes Berger.
France-based Zodiac has faced among the most-visible production problems. In 2015, American announced it was replacing Zodiac as supplier of 777-200 and 787-9 business-class seats because of delivery delays. “Zodiac has not been able to deliver new seats in a timely fashion according to the terms of its contract,” American told FlightGlobal in 2015. “The seats are far behind schedule and continue to cause significant delays.”
Such troubles are not unique to American. “The issues we are having with suppliers – other carriers are facing them as well,” says Mapston.
Zodiac’s production problems, including a shortage of lavatories, also delayed A350 deliveries and weighed on Zodiac’s earnings.
The A350 problems resulted from “quality issues” at a plant in California and a slower-than-expected ramp-up at a Montreal facility, the company has said. Also, the angled layout of business-class seats caused more complex certification requirements, Zodiac tells FlightGlobal.
Zodiac insists the issues are being fixed, noting that it has opened a third production site in Germany, hired new staff and created processes with the goal of achieving normal operations by the end of 2017.
In January news broke that aerospace company Safran was seeking to acquire Zodiac, a deal that would create the second-largest aircraft equipment supplier – a company with about $10 billion in revenue in the sector.
Safran chief executive Philippe Petitcolin said Safran could help Zodiac’s interiors business recover. “Our industrial expertise will also accelerate the return to their historical levels of profitability in the seats and cabin activities,” Petitcolin said.
Zodiac is producing the new Polaris business-class seat for United Airlines
United Airlines
Safran has said it expects the deal to be completed by the end of 2017, and the merger to take place in early 2018. Zodiac, however, announced in mid-March that its aircraft interiors sales declined 4.5% to €1.4 billion in the September 2016-February 2017 period, which is the first half of the company’s 2016-2017 fiscal year.
Nonetheless, Safran still has interest in Zodiac. Safran “confirms its confidence” in its ability to restore to operating profitability to Zodiac’s business units that are “currently in difficulty”, Safran says.
Aircraft manufacturers have also become involved. “The performance of cabin components remains challenging for Airbus, especially on the A350, and we are working closely with our cabin suppliers to resolve these issues and minimise potential delays,” says Airbus. “With regard to Zodiac, we have identified the main bottlenecks impacting on-time and on-quality delivery of seats and, in particular, lavatories, and have developed a way forward.”
The company has “been putting in place some extra resources in production planning as well as supplier management. We’ve made good progress on the issues, but we think full recovery still will take a few more months”, Airbus says.
Boeing says it has worked with seating suppliers for two years to address delays: “Boeing is also adding several new suppliers in order to expand the global supply of seats and provide new options and greater affordability to our customers. Airplane deliveries have been proceeding as normal this year, but we continue to monitor this closely.”
Those production problems are creating inroads for a handful of smaller seat suppliers, some of which have recently landed new deals. “A lot of smaller start-up seating companies have emerged,” says Mapston. “I don’t know if it can solve the overall industry issue of lack of competition and supply, [but] there is a shifting there.”
German seat maker Recaro disclosed in April 2015 that it had signed a “supplier-furnished equipment” deal to provide Airbus with A320 seats. Recaro says it has invested “significantly” in its production sites, processes and products over the past decade. The supplier adds that it has not had delays that have kept customers from meeting agreed schedules.
Recaro delivered more than 100,000 aircraft seats in 2016, and by the end of 2017 the company plans to open a new 6,000m2 logistics site in Germany as part of an effort to meet higher demand, the company has said.
And news broke in April 2016 that a relatively new company called LIFT, a unit of US-based interiors supplier EnCore, will supply Boeing with 737 Max seats, with deliveries in 2017. LIFT, launched by executives who in 2005 sold C&D Aerospace Group to Zodiac, announced in October orders from two unnamed airline customers.
Another German seat maker, Zim Flugsitz, has landed recent deals, including contracts to supply seats for Lufthansa and Singapore Airlines.
UK-based Acro has supplied seats on Boeing and Airbus aircraft operated by several carriers, including the UK’s Jet2, Iceland’s Wow Air and US carriers Spirit Airlines, Allegiant Air and Hawaiian Airlines.
The company has infrastructure needed to meet demand, having moved into a new production facility in 2014 and opened customer centres in Miami and Kuala Lumpur, says Acro commercial director Andrew Bowen.
Hawaiian also chose a smaller player, Italy-based Optimares, to design new lie-flat premium seats for its A330s. The seats are light in colour and have few physical barriers, making them ideal for Hawaiian’s target customers, which tend to be families and couples travelling together, says the carrier’s senior vice-president of marketing, Avi Mannis.
Hawaiian chose Optimares because major suppliers’ seats tended to be dark in colour and boxy, designed for privacy so as to appeal to business travellers, Mannis notes.
In April 2016, UK-based Mirus Aircraft Seating announced AirAsia as the launch customer for its “Hawk” economy seat. The seats will be installed on up to 312 of AirAsia’s A320-family aircraft, said Mirus.
As start-ups seek market share, large existing interior providers are benefiting from strong demand while developing new products. For instance, in 2014, Zodiac announced that it had agreed with Airbus to develop the A320 “Space-Flex v2” rear lavatory and galley module, which provides more galley space and is marketed to carriers that provide full-service catering.
Zodiac is also marketing redesigned overhead bins, modern IFE products provided by its Zodiac Inflight Innovations subsidiary and other upgrades, the company says.
Meanwhile, B/E continues to post strong financial results, earning a net profit of $311 million in 2016. Those results were buoyed by B/E’s commercial aircraft division, which generated revenue of $2.3 billion last year, up 12% from 2015.
B/E predicts orders for new aircraft, particularly widebodies, will continue driving up interior product sales.
The company’s growth caught the attention of Rockwell Collins, which in October 2016 announced its intention to acquire B/E for $6.4 billion.
Speaking to investors last year, Rockwell chief executive Kelly Ortberg said the deal would give Rockwell a foothold in the aircraft retrofit market: “I believe we are coming into a major cycle where a lot of widebodies are coming off lease and will be returned to the lessors. And with that we are going to see great opportunities for retrofit of the cabins.”
He foresees the acquisition combining Rockwell’s systems integration expertise with B/E’s interiors experience, enabling the group to develop high-tech cabin products that are linked into larger aircraft networks. Such a move would bring the interiors business into the broader big-data revolution sweeping aviation.
“All of the galley equipment is going to need to be a node on the network, to either provide a better passenger experience, to allow the crew to interact differently with the passengers or for improved maintenance actions,” Ortberg said.
“Everything is going to become a smart device,” he added. “If you look five years, six years ahead, you’ll see that this is a much different looking product line with... embedded sensors, controls, wi-fi interfaces, secured networks throughout the airplane.”
B/E stockholders approval the merger in March, and the companies have predicted the deal will close this spring.
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Source: Flight Daily News
