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The Evans Gambit: Evolution of commercial aerospace supply chains will
drive increased global M&A activity and capabilities going forward
By Brian Karpiel - Senior Vice President, Janes Capital Partners
The current shift in the number and type of airlines is larger than at any point in
history, particularly in emerging markets. Based on Airclaims data, since 2000 there
have been approximately 650 (over 90%) new entrants, displacing approximately 350
(50% of those operating in 2000) airlines that dissolved or were acquired, driving a
more than 40% increase in total carriers over the last decade. Approximately 70% of
the projected passenger growth in the next 20 years is forecast by analysts to occur in
emerging markets. As the landscape of airlines changes geographically and by type,
one implication for the commercial aerospace supply chain is that the pace of M&A
activity should increase substantially.
The need for suppliers in legacy markets to invest in emerging markets is clear. Airbus and Boeing each benefitted
from being leading players domiciled within the largest growth markets of the past 25 years. This is not the case
going forward. The strongest growth markets are in Brazil, India, the Middle East, China and the broader Asian
countries. These nations are quickly growing to represent the largest global aerospace wallet share, and wield
growing trade leverage with the OEMs. Commercial aerospace is considered to be strategic at the national level by
many of these nations. Therefore, national interests dictate that foreign OEMs (today’s incumbents) will likely
have to invest in content from these countries to gain market share in them. Effectively, this dynamic creates the
foundation for the next generation of engineering capabilities, using component-for-airframe “offsets” to drive
incumbent suppliers to invest heavily in emerging market economies.
While greenfield expansion is one option, an interesting dynamic is at play that may favor M&A. New airframe
OEM entrants in the regional jet segment (SCAC/Sukoi SSJ 100, Mitsubishi/MRJ, KHI, CACC China/COMAC C919) are
joining the established regional jet OEM players (e.g., Embraer and Bombardier). Some or all of these entrants
may succeed, and some may fail. But it is clear that the below 100-seat market is getting crowded, and new OEMs
may move upwards into the lucrative 100-150 seat market, targeted by Bombardier’s introduction of the C-Series.
Regardless of which of these entrants succeeds, local manufacturers will develop substantial engineering talent
and infrastructure alongside incumbent OEMs. Companies in China, Brazil, the Philippines, Singapore and the
Czech Republic, among others, have already built sustainable engineering capabilities to rival the US and Europe.
Heavy competition means that there may be plenty of developed “real estate” to acquire as things shake out, and
all players are providing a developed entry point in emerging markets.
The value of expanding cross-border is also apparent to suppliers in emerging markets – supporting M&A needs in
both directions. The US remains a large, developed commercial as well as the largest military market in the world.
Importantly, foreign OEMs and suppliers have a growing need to increase USD-denominated costs to create a
natural hedge, as aircraft sales are largely in USD. Airbus’ ongoing cost-cutting programs (Power8, EADS Vision
2020) also alluded to elements of rebalancing cost through natural hedging and acquisitions in the US.
As has been proven across many industries (autos, electronics, chemicals, materials), globalization of one part of a
supply chain is only the “beach-head” to large-scale global re-balancing of capabilities. (Thus the Evans Gambit
analogy for chess enthusiasts: an aggressive opening sequence made popular by Kasparov’s use of it, that attacks
19200 Von Karman Avenue
Suite 340
Irvine, CA 92612
Phone: (949) 769-3323
Fax: (949) 769-3327
the far side of the board – f7 – early in play by sacrificing a pawn.) Growing players in emerging markets currently
desire market presence, USD-denominated sales, access to alternate markets and the corresponding transfer of
knowledge and engineering capabilities. Suppliers in the legacy North American/European markets require
“offsetting” local content in emerging markets.
The lessons of past disruptions signal a message today: expand into growing markets when you have the sustained
cash flow to do so, before the spigot is turned down or off and the acquiror becomes the target in the future.
Incumbent suppliers in legacy markets have the near-term opportunity to leverage the upswing of next generation
composites-based airframes (such as 787 coming online). Backlogs for these platforms are quite strong, as the
globe emerges from the Great Recession. This backlog provides Tier I and Tier II players the necessary dry powder
to invest today and enter into these new markets.
The implications for future M&A is clear: strategic necessity to expand cross-border, availability of developed
assets and near-term positive cash flows provide the context for increased M&A activity in the commercial
aerospace supply base. Notably, global players historically suffer in formal auctions that are not designed to favor
their inclusion. Cross-region activity (vs. in-region, such as North America or Euro-zone) represented only a
moderate fraction of all aerospace and defense M&A activity in the last 5 years, despite considerable globalization,
indicating a preference for organic growth and the difficulty in consummating such transactions. Therefore,
globalization strategies will drive the need to significantly improve this capability. We believe that this trend is
likely to accelerate.
About Janes Capital Partners
Janes Capital Partners is an investment bank focused on Aerospace & Defense companies with enterprise values
ranging from $25 million to $500 million. The firm is headquartered in Irvine, CA and provides services to private
business owners, large corporations and private equity groups seeking to acquire, divest or recapitalize companies
or business units serving the aerospace, defense and government services markets. Janes Capital Partners’ senior
bankers are experienced operating and financial executives with a combined track record of more than $7 Billion in
closed transaction value. Securities transactions are conducted through JCP Securities, Inc.; Broker/Dealer,
Registered Investment Advisor and member FINRA/SIPC.