Industry Week in Review – September 2, 2016
Aerospace & Defense Update
This past week, Boeing announced that it will not raise commercial aircraft list prices for the first time in seven years. The Company typically raises prices annually (2.9% and 3.1% in 2015 and 2014, respectively) to account for increases in cost of materials, services, and labor. The last two times Boeing did not raise its prices were following the 2009 financial crisis and following the 9/11 attacks in 2001. This year, the Brexit vote, a commodities market crash in Latin America, and fluctuating oils prices all are major factors for the recent sharp decline in aircraft demand. The Company’s commercial aircraft list prices range from $81 million for its smallest narrow-body aircraft to $400 million for its largest twin-engine jetliner. Though it is normal course for airlines to negotiate steep discounts from list prices, Boeing’s move to continue to quote the same prices are largely symbolic and indicative of the slowdown in the overall market. However, decreased demand will have less meaningful effect on Boeing’s short-term financial results as it boasts an impressive ~$470 billion worth, or seven to eight years, of production backlog.
The Chinese government has established a new state-owned aircraft engine maker as an attempt to have a major presence in the global aircraft market. The creation of Aero Engine Corp. of China (“AECC”) is seen as a strategic move to boost China’s national prestige and military prowess. Announced in March, AECC is the result of AVIC Aviation Engine Corp., AVIC Aero-Engine Controls Co., and Sichuan Chengfa Aero-Science & Technology Co. merging to become a single entity. The new company currently has approximately 96,000 employees and 7.5 billion in capital. In the past, Chinese engineers have struggled to produce reliable turbofan engines for commercial use and China now hopes to create a homegrown self-sufficient aerospace sector to replace foreign manufacturers currently used for most of its military jets. In addition to aerospace, China is also revamping its state-owned manufacturing sectors in robotics and nuclear power.
Government Technology Solutions Update
A set of new Federal Aviation Administration (“FAA”) rules allowing small unmanned aircraft (“drones”) to operate without waivers came into effect on Monday. The FAA expects up to 600,000 commercial drones to be operating in the U.S. by year-end. The new rules still prohibit flying drones over 400 feet, at night, over crowds of people, or beyond the pilot’s line of sight without a waiver. According to Transportation Secretary Anthony Foxx, the integration of drones in the U.S. Economy can add an additional $82 billion to GDP and support 100,000 jobs within 10 years. Drones have practical use outside the commercial or consumer markets. The Department of the Interior awarded a contract to 3DR to supply 40 small drones in order to conduct a variety of tasks, such as wildlife and vegetation surveys or search and rescue. Drones can also be used to monitor the conditions around construction or infrastructure projects in a more cost-effective manner.
The Federal government has been taking several steps recently to bolster the nation’s cyber capabilities. On Thursday, the Department of Homeland Security (“DHS”) issued a Request for Information (“RFI”), asking for expert input on measures necessary to operate a cybersecurity laboratory, which it has named the Cyber Experimentation for the Future (“CEF”). DHS officials want the CEF to be able to have a variety of complex capabilities, such as: models which work in real and simulated environments, the ability to operate 24/7, and outreach to researchers outside of the Federal government. The DHS plans to use the proposed facility for “modeling human behavior in cyberspace, more open standard interfaces, and new tools for experimentation management.” On the Defense side of the government, the US Army launched the Rapid Capabilities Office (“RCO”) on Wednesday. The RCO will be tasked with quickly and efficiently developing or procuring cyber and electronic warfare solutions as fast as possible once a need is recognized, and that it will “help the U.S. Army keep up with other technological improvements now benefitting adversarial armed forces.”
Big Movers
B/E Aerospace (Up 4.0%) – Shares were up this week after B/E Aerospace was awarded a contract worth as much as $450 million to outfit the new Boeing 777 with first-class suites
AECOM (Down 3.9%) – Shares were down this week after a law firm announced that a class action lawsuit was filed against AECOM concerning possible violations of federal securities laws
Transactions
Logistics Management Institute, Inc. (“LMI”) has acquired FourWinds Limited Company, a provider of performance management, business analytics, and strategy communications services to intelligence and national security agencies. Terms of the deal were not disclosed.
SOCOMORE S.A. has agreed to acquire LORD Corporation’s Aeroglaze and Chemglaze product lines, providers of absorptive polyurethane coatings designed for applications on substrates used in aerospace and other markets. Terms of the deal were not disclosed.
