In business, when the proverbial right hand doesn’t know what the left hand is doing, that's usually a sign of trouble. At Rockwell Collins these days, it’s a sign of something else: opportunity.
The U.S.-based company, best known for its avionics and communications product lines, looks a little different these days. Its largest business unit makes seats, galleys, lighting, and just about everything else found in an airliner or business jet cabin. The business unit, of course, is the former B/E Aerospace, which Rockwell bought earlier this year, closing the deal on April 13.
When the 2017 Paris Air Show opens, the integration will be about two months along. But the two organizations have already identified myriad opportunities to compare notes, combine capabilities, and pull in business that often eluded each one before the merger.
Briefing reporters at a pre-Paris Air Show media event in May, Rockwell Collins chairman, president and CEO Kelly Ortberg offered a prime example of what made the deal so appealing. Recently, Rockwell Collins was talking with one of its dealers about a legacy business jet flight-deck upgrade package, similar to the one it developed for the Falcon 50. Building the deal around a set of integrated LCD displays obviously made sense, but when Rockwell Collins began discussing its newly acquired Interior Systems product line, the offering soon grew.
“The dealer had no idea that there is another set of certified seats, and other interior products we can add to that package, like lighting and galley inserts,” he explained. “The package went from a flight deck upgrade to an aircraft upgrade. The dealer is ecstatic about the business opportunities.”
Access to a dealer network, and the insight it provides, is one of the major boosts that the new Rockwell Collins Interior Systems division will enjoy that it did not just a few months ago. “The problem the legacy B/E team has is they don’t know where the airplanes are,” Ortberg said. “They don’t have a dealer network, they don’t know when they’re coming in for modification. They just weren’t selling what they had.”
Dealers, which usually provide or are linked to maintenance services, “are going to be getting those airplanes in for a major check, and that’s the time you have to make that sale,” Ortberg added. “People won’t typically take their aircraft down to do” interior modifications.
Connecting what legacy B/E and Rockwell Collins know and packaging their product lines offers major upside for the new, combined entity. Organizational synergies are expected to yield $125 million in after-tax savings—most of them within three years, the company believes. But opportunities like the legacy business jet upgrade package expansion could yield as much as $1 million per airframe, Ortberg said.
Cognizant of the connections that will reveal themselves simply by getting its legacy operation and its new interiors business on the same page, Rockwell Collins has set up working groups to identify near-term opportunities. Business aviation and air transport—large markets for both companies pre-merger—are obvious sources. Another area that intrigues company management is on the defense side.
Both companies have content on many defense platforms—Rockwell Collins has myriad avionics and communications systems, while B/E Aerospace makes seats and other interiors products, mostly for tankers, transports, and helicopters. But while Rockwell Collins aggressively seeks out its defense positions, B/E Aerospace’s offerings usually found opportunities only when interested customers found them.
Ortberg plans to change this. While the potential may not rival the business jet or air transport markets, he believes that combining seating and other interiors options with the existing packages that Rockwell Collins offers will lead to some incremental boosts on the defense side.
“We have a really good line of sight to how we’re going to be able to create those revenue synergies,” he said. “We will be bidding interior systems components on the military side within a year.
Other synergies are far more apparent. In the air transport market, Rockwell Collins has a strong line of standard and buyer-furnished equipment on the flight deck and in the avionics bays, with some connectivity extending into the cabin. Its new interiors business has the rest of the cabin practically covered, from seats and galleys to lavatories and lights.
Most of Rockwell Collins’s best-known legacy products, like flight-deck displays, are installed prior to an aircraft’s delivery and fly for the life of the airframe. Save for a software update or two, there is very little regular aftermarket demand. The interiors product line, by contrast, has a strong refurbishment market, with most passenger aircraft undergoing major upgrades or reconfigurations at least twice during a 20-year service life.
“There’s a lot of opportunities,” Ortberg said soon after Aircraft Interiors Expo in April. “At that show every year, the interiors team does a detailed forecast of the opportunities over the next 18 months. They sit down with each one of their customers and go through their forward-fit and retrofit plans. And that looked pretty encouraging [this year]. The retrofit was a higher component of that outlook than it was last year.”
Whether it’s aircraft transitioning between operators or carriers seeking to maximize their assets by prolonging aircraft lives, interiors modifications offer a stable revenue stream that, while not recession-proof, is not linked to new-aircraft demand.
“It is an opportunity that we don’t see in our core business, so I really like the nature of the aftermarket revenues here,” Ortberg said. “When aircraft production rates slow, we don’t enjoy that in avionics. If the OEM rates go down, there’s no aftermarket for us to pivot to. In our interiors business, we can pivot to the aftermarket when the OEM rates are challenged.”
Not that he expects a dip anytime soon. “The production rates are fundamentally driven by traffic, and the traffic growth”—8.1 percent in the first quarter as measured by revenue passenger kilometers, according to the International Air Transport Association—“is very robust this year,” Ortberg said. Narrowbodies remain strong, while the widebody market is a bit softer, and likely will be for “a couple more years,” he said. One probable ramification: more downward pressure on legacy widebodies, he suggested.
While the B/E Aerospace acquisition offers plenty of complimentary combinations right away, the new, expanded entity sees tremendous potential for collaboration. “Both companies believe strongly in innovation and both companies think long-term,” said Werner Lieberherr, the former B/E Aerospace president and CEO who transitioned to executive vice president and COO of the Interior Systems business.
One of the most promising areas is in connectivity, company executives believe. The legacy company’s product line is deep into both onboard systems, such as routers, and air-to-ground connectivity. The new business unit’s interiors expertise offers a chance to integrate connectivity into new areas.
“We see great synergies, particularly as we move to the digitally connected airplane,” Ortberg said. “All of the galley equipment is going 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 access.”
Legacy B/E Aerospace was “being pressed by their customers to bring smart devices that integrate that capability,” he continued. “They don’t have that capability; we do. We don’t have the products; they do. It’s similar to what’s happening in your house. Everything is going to get integrated. [Operators are] going to be able to deliver better products and services with integrated sensors.”
The onboard connectivity push is being driven by a shift away from embedded in-flight entertainment (IFE). Rockwell Collins was once in the IFE hardware business, but exited it a few years ago and has no plans to get back in.
“That business is going away. More and more airlines are going to move to bring-your-own-device, and IFE is going to be delivered by wireless networks,” Ortberg said. “That’s where we believe the market is going. We’re not going to invest in the wired, but we’re going to continue to invest in the infrastructure and onboard distribution.”
Swallowing an $8.6 billion acquisition and adding a business unit with $2.8 billion in annual sales—or about 35 percent of the new, larger company’s annual revenue–hasn’t completely satisfied Rockwell Collins’s appetite for expansion. But any deals over the next few years will be smaller ones. Rockwell Collins has assured ratings agencies that it would service a chunk of the debt it took on as part of the B/E Aerospace acquisition. While that effectively removes the company from the major mergers-and-acquisitions game, Rockwell Collins remains open to smaller deals—the $50-million-and-under range, Ortberg said—that make sense.
“We’ll continue to look at small, bolt-on acquisitions that could build out our portfolio,” he said, pointing to January’s deal for self-service bag-drop specialist Pulse.Aero as an example. “I feel good about our portfolio,” he said. “I do feel we’ll have opportunities here and there, but I don’t think we have gaps that are going to keep us from being successful.”