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737 Max Grounding Helps Fuel Collins Aerospace Aftermarket Sales Growth

 - November 17, 2019, 12:01 AM
Kelly Ortberg, CEO Collins Aerospace.

Strong sales growth in Collins Aerospace’s commercial-aviation aftermarket business will persist in the short term as a result of both the worldwide Boeing 737 grounding and the U.S. and European ADS-B equipage mandate, according to CEO Kelly Ortberg.

Collins Aerospace celebrated the first anniversary of its formation—through the merger of UTC Aerospace Systems and Rockwell Collins—on November 26. Its commercial-aviation aftermarket business achieved sales growth of 17 percent in this year’s third quarter. The strong growth was fueled, in large part, by deliveries of ADS-B equipment from the company’s avionics business units to U.S. operators needing to outfit their airliners in time to meet the FAA's January 1, 2020 deadline; and to European operators needing to meet the European Union’s June 7 deadline, said Ortberg.

But just as important for the company’s third-quarter aftermarket sales growth was the extra business Collins Aerospace won from operators keeping older aircraft in service longer than they originally planned; action needed to minimize seat-capacity shortages they are experiencing as a result of the 737 Max grounding, Ortberg told AIN.

“We’re seeing a very high level of provisioning and parts repair,” he said. “It’s clear that narrowbody aircraft are flying more hours; and operators are keeping older aircraft in service longer. That’s driving pretty good parts and repair business for us.”

This business is more than offsetting the somewhat reduced level of 737 Max-related new-equipment deliveries Collins Aerospace experienced in the third quarter due to Boeing’s decision to cut the narrowbody's monthly production rate from 52 to 42. “The impact to us is the same as it is to the industry overall,” said Ortberg. However, “We’ll be working with them [after the grounding order is lifted] to both ramp production back up...and...to do all the field work necessary to bring [already delivered] aircraft back to service.”

Collins Aerospace will have teams working with 737 Max customers in restoring stored aircraft to fully operative condition. “It’s not unusual for us to have forward-deployed teams,” for instance in assisting customers with equipment- and interior-retrofit programs, he said.

As a result of the U.S. and European ADS-B equipage deadlines, Ortberg expects today’s high rates of ADS-B equipment deliveries to “spike in the middle of next year.” Then the rate will gradually wind down by 2021 to a continuing residual ADS-B sales level. In the company’s third-quarter financial results conference call, Greg Hayes, CEO of Collins Aerospace's parent United Technologies Corp. estimated that level to be between $60 million and $75 million per year.

Other Areas of Sales Growth

Another area of strong short-term sales growth for Collins Aerospace is its military business, which in the third quarter grew at a high single-digit percentage rate. This growth “is really just a fall-out of the improved budget environment [over the past three years] within the [U.S.] Department of Defense,” said Ortberg. It takes three years from when the DoD receives budget-funding authorization by Congress for specific acquisition programs to the point when the U.S. armed forces begin placing orders under those programs. “The military market has significantly grown” for Collins Aerospace because of massive aircraft-purchasing programs such as the F-35 and the KC-46, he said.

“I also think we have got runway ahead of us, yet” in terms of growth potential for military-market sales, said Ortberg. Collins Aerospace has been very successful in selling the U.S. Army “ground-communications radios, Ortberg said. "It’s a new area for us and we’re seeing really strong demand and growth.”

Collins Aerospace says top revenue synergy attributed to last year’s merger is the opportunity to market its entire range of products and services to business-aviation operators as their aircraft come in for maintenance. But those synergies have yet to lead to strongly increased sales. “We haven’t converted [received] orders to [completed] sales yet,” said Ortberg.

In the long term, Ortberg reckons the push for increasing connectivity represents some of Collins Aerospace's most significant sales-growth opportunities. This is based on the company's ability, since the merger, to provide integrated solutions for cabin electronics, connectivity and airframe/engine condition data. Those opportunities will be “more driven by commercial-aviation growth” than by other markets. But he sees all of the company’s six businesses as offering healthy revenue-growth opportunities in each of its three major end markets—commercial aviation, business aviation, and military equipment.