On January 19, 2017, the French multinational plane engine manufacturer Safran announced that it had entered into an agreement to acquire the aircraft seat supplier Zodiac Aerospace in a transaction valued at €9.7bn.
The deal will give rise to the third largest global aerospace supplier, following General Electric and Pratt & Whitney. The French Prime Minister Francois Hollande described the transaction as a “beautiful industrial operation” and is optimistic about future growth.
About Safran S.A.
Safran was initially established through a merger between SNECMA and SAGEM in 2005. Today, the company is headquartered in Paris and operates in three core market segments: aerospace, defence and security.
Safran places great emphasis on innovation and indeed invested €1.7bn in R&D in 2016. Through a joint venture with GE, the firm developed the LEAP (Leading Edge Aviation Propulsion) Engine, which reduces fuel consumption and CO2 emission levels by 15%. Other products include biometrics and explosive detection systems, as well as X-ray diffraction technologies. In FY2016, the firm announced revenues of €15.78bn, which represents a substantial increase compared to €15.53bn of the previous year. The company’s operating income also increased, growing 5.3% from €2.28bn in 2015 to €2.40bn in 2016.
About Zodiac Aerospace
Zodiac Aerospace was founded in 1896 and supplies interior furnishing and control systems for aircrafts and helicopters. The firm operates in 100 sites and employs more than 35,000 individuals across the globe.
In 2011, the firm formed the IAEG (International Aerospace Environmental Group), which aims to reduce greenhouse gas emissions and to limit the irresponsible disposal of diverse chemical products. Furthermore, Zodiac Aerospace recently engaged in cost cuttings to limit labour inefficiencies.
In FY2016, Zodiac Aerospace reported total revenues of €5.21bn, a 5.1% increase compared to the €4.95bn figure in the previous year. Net income, however, has decreased from €185m in 2015 to €108m in 2016 (mainly due to impairment charges).
Industry Overview
The aircraft manufacturing industry is dominated by two key players, Boeing and Airbus. Their demand is closely tied to the health of the airlines sector and, in turn, the financial position of the plane makers affects their suppliers: Safran and Zodiac Aerospace are two of them.
Both deliveries and new orders of aircrafts are crucial to the financial success of plane manufacturers and their suppliers. As a matter of fact, while the largest chunk of the payments from airlines and lessors comes at delivery, new orders brings with them pre-delivery cash transfers which are crucial for the aircraft manufacturers to sustain current operations.
For the aerospace industry, 2015 was an outstanding year: low oil prices saved the industry billions of dollars and key metrics such as capacity and Revenue Passenger Kilometers (RPK) were up by 6.7% and 7.4% respectively. Therefore, it was of course a good year for airplane manufacturers too: 1,400 jets were delivered and 2,400 were ordered in 2015.
However, in 2016 an unexpected slowdown occurred and the industry has not yet recovered from it. Boeing reported net income of $4.9bn in FY2016, down 5% with respect to the previous year and revenues are expected to decline even more in 2017. Part of the slowdown in production is attributable to the fact that manufacturers are transitioning to new aircraft models, which should support growth in the future. In addition to that, other factors causing such a slowdown can be traced back into the surplus in second-hand aircrafts delaying airlines’ needs to upgrade their fleet and all the economic and geopolitical issues which have caused plane tickets bookings to dry up.
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