A United Technologies electronic controls factory in Huntington, Indiana, is seen in 2016. (AP Photo/Michael Conroy)

A United Technologies electronic controls factory in Huntington, Indiana, is seen in 2016. (AP Photo/Michael Conroy)

Boeing, Airbus voice doubts on $23 billion supplier merger

Bloomberg

Boeing and Airbus voiced concerns about a proposed tie-up of two leading suppliers Tuesday, potentially upsetting United Technologies’s $23 billion acquisition of Rockwell Collins.

The world’s largest planemakers added to the chorus of skeptics of a deal that would create an aerospace behemoth with a range of products to outfit jetliners and warplanes. Investors sent United Technologies shares plunging by the most in two years, while credit ratings companies said the manufacturer risks downgrades. Boeing, which has been squeezing suppliers for discounts, warned it would take action to protect itself if it saw the merger as harming its business.

“Until we receive more details, we are skeptical that it would be in the best interest of — or add value to — our customers and industry,” Boeing said. “Should we determine that this deal is inconsistent with those interests, we would intend to exercise our contractual rights and pursue the appropriate regulatory options to protect our interests.”

Boeing and Airbus are wary of distractions the merger could create for a key supplier just as the planemakers embark on the biggest production ramp-up in history for single-aisle jets, their largest source of profit. The merged aerospace businesses, to become a separate unit called Collins Aerospace Systems, would make a host of products spanning seats, landing gear, flight controls, and the data pipelines linking pilots and passengers to the internet.

Boeing and Airbus will have a say on the merger’s fate because they both have “disproportionate influence” on deals throughout their supply chains, Nicholas Heymann, an analyst at William Blair & Co., said before the deal was announced. The planemakers hold contractual clauses that give them broad authority over parts production, essentially making each customer “a gatekeeper for potential structural changes in the supplier base,” he said.

Chicago-based Boeing hasn’t been afraid to exercise its clout in the past. The company shifted to a Canadian upstart to manufacture the landing gear for its 777X jetliner when United Technologies’ Goodrich balked at providing concessions.

The U.S. planemaker, for one, may be able to renegotiate terms of some of its supplier agreements with Rockwell Collins because of a provision allowing the contracts to be reopened if there is a change of control. The avionics company has won the rights to provide large flight displays across much of the Boeing product line-up.

“We don’t see anything that would be a show-stopper,” Greg Hayes, United Technologies’ chief executive officer, said of the potential for a contract dispute.

Airbus, one of United Technologies’ largest customers, pressed the company to make sure it can keep up with commitments to deliver its Pratt & Whitney jet engines on time after a rocky rollout for the company’s geared turbofan.

“We hope that this M&A would not distract UTC from their top operational priority,” an Airbus spokesman said after United Technologies confirmed the cash and stock deal for Rockwell Collins. “Our total focus is on delivering planes.”

Despite the doubts, planemakers stand to benefit from technology breakthroughs, such as synthetic vision or autonomous planes, that might come out of Rockwell Collins labs once they are able to tap funding from United Technologies’ deeper pockets.

The tie-up would “mean Rockwell is better capitalized and can do more R&D that benefits the planemakers,” said Gordon Bethune, a former Honeywell International Inc. director, Continental Airlines CEO and Boeing executive.

Brazilian planemaker Embraer SA said the consolidation of the two companies will probably bring greater efficiency and economies of scale “that, we expect, will benefit the whole industry.”

United Technologies dropped 5.7 percent to $111.21 at the close in New York Tuesday, the biggest drop since July 2015. The company plans to hold calls Tuesday and Wednesday with customers to discuss the merits of the deal, CEO Hayes said.

“We didn’t want to get ahead of ourselves, the board literally voted yesterday to do this deal,” he said. “We’ll be talking to all of them, trying to make sure they understand the benefits of bringing these companies together.”

United Technologies’ Pratt unit builds engines for Airbus’s best-selling A320neo series, but its new geared turbofan technology — which cost $10 billion to develop — has been beset by manufacturing hurdles, delivery delays and technical glitches. That’s elicited stark rebukes from Airbus.

Pratt’s engines are one of two options for A320neo models, competing with turbofans from the CFM International joint venture of General Electric Co. and Paris-based Safran SA. While Pratt has signed just one buyer this year, the CFM turbine has snatched up about 10 times more orders amid the United Technologies unit’s operational challenges.

Airbus CEO Tom Enders said in July that the revamped A320neo narrow-body workhorse is a major concern, with the company hitching its earnings goals to Pratt meeting delivery targets and providing a reliable fix to problems.

“There are just too many maturity issues on this engine,” Enders said at the time. “That is frustrating for us, that’s frustrating for the customers.”

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