The year 2007 saw a record number of deals ratified in the commercial aerospace sector. Half-way into 2008, the number of deals is slightly down, but it has still been a strong year in terms of industry transactions. During the first half of 2008, there were 67 aerospace and defence merger and acquisition (M&A) transactions, worth $8 billion, against 83 transactions worth $18.9bnin value during the first half of 2007, according to Securities Data Corporation.
The ‘perfect storm’ that appeared in 2007 as a result of cheap and available credit, low interest rates and affordable fuel prices, has impacted this year. Nonetheless, deals continue to be completed, particularly strategic purchases.
There has been a fall in larger, billion-dollar-plus leveraged buyouts (LBO), as these are dependent on a robust credit market. But mid-market deals are still coming to fruition in significant numbers. Recent examples include the sale of M/A-Com to Cobham plc; the acquisition of Odyssey Industries and Global Tooling Systems by Hampson Industries plc; L-1’s recent acquisition of Digimarc’s identification business; and Cobham’s acquisition of Sparta in the services sector.
This trend is continuing with more and more European companies making acquisitions in the US – especially in the defence sector, which continues to boast the biggest market spend.
Commercial aircraft orders from emerging economies – India, China, Russia and the Middle East, especially – is propping up demand in an increasingly difficult global climate. Future aircraft orders from the US and Europe are still somewhat in question, because of the current high oil prices and the weak dollar. New order announcements at the Farnborough Show this week are likely to be from developing economies rather than from US and European airlines.
Still, there are a number of challenges having an impact on the commercial sector – including high oil prices, restricted credit markets and problems associated with the real estate and home mortgage market in the US. If these factors worsen, airlines could cancel some orders – although predicted cancellation figures to date have not materialised in any significant numbers. Instead, several legacy and low-cost airlines are adopting short-term strategies such as grounding aircraft over the summer.
Airliner orders are likely to be boosted by airlines upgrading their fleets to newer, more fuel efficient aircraft. Environmentally friendly aviation is another crucial issue and one that it not going to go away any time soon. Airlines will have to face these constraints head-on and build additional costs into their refined business models.
In the defence sector, a slowing US economy, a tightening of budgets and a looming US Presidential Election all pose challenges for second and third tier defence contractors, which want to maintain the significant growth they have been enjoying. As well as organic growth, aerospace firms are looking to make strategic acquisitions that will spur growth in areas such as homeland security, command and control systems, inter-operability and cyber security.
Regardless of who wins the Presidential election, it is unlikely there will be a quick exit from either Iraq or Afghanistan, and the “war on terrorism” shows no signs of abating in the foreseeable future. Furthermore, modernisation of older platforms and equipment will become necessary as new procurements are curtailed.
Source: Flight International
