Aerospace sector M&A: Impacts on the supply chain

Mergers and acquisitions have been reshaping the aerospace sector since 2021. These activities are influenced by supply chain challenges, regulatory pressures and market positioning. With the M&A outlook in this space starting to decline, aerospace suppliers need to assess how that dip will affect them.

A 2024 U.S. Government Accountability Office (GAO) report highlights that, due to workforce and material shortages, the aviation industry has faced challenges in increasing production to meet demand. Ongoing regulatory pressure and continued labour challenges will significantly affect deal volume as investors become more cautious about investing in aerospace companies. The compression of the supplier landscape could result in fewer sourcing options and higher prices for specialized components and raw materials, impacting Tier 1 and Tier 2 suppliers. This may lead to longer lead times and potential supply chain bottlenecks. A February announcement that the U.S. will impose tariffs on steel and aluminum imports could add further stress to the aerospace supply chain. 

Forty-two percent of middle market companies said inventories rose in Q4 2024, while half expected to boost inventories over the following six months, according to an RSM US Middle Market Business Index survey. Rising inventory levels signal that suppliers expect continued growth in demand. Companies should work collaboratively with a third party to efficiently identify risk and opportunities within their supply chain, as supplier positioning could quickly shift in tandem with the changing M&A landscape.

The state of aerospace M&A

In 2023, several major aerospace companies engaged in significant M&A activities to consolidate their market positions and enhance their technological capabilities. The aerospace market saw peak M&A deal volume in 2023 before experiencing two consecutive quarters of decline in Q3 and Q4 of last year, according to Bloomberg. We anticipate that this decline will likely continue through Q1 2025. 

Larger aerospace companies are well positioned to engage in attractive M&A activity, and many have strategically divested noncore assets to free up capital. Investors, however, will proceed with caution and look to more risk-averse operational models. Larger aerospace companies will likely move from a vertically integrated model to a more specialized industry model.

With deal activity likely to continue to drop in the near term, suppliers should act now to make their supply chains more resilient. This will help bolster operations in a time of uncertainty but also can ultimately make the business more attractive once M&A activity picks back up.

Suppliers will need to focus on high-margin or high-volume parts production to increase profitability, rather than diversifying product mixes to appeal to potential buyers. They’ll need to evaluate the current product portfolio mix; double down on cash cows; and leave low-margin, low-volume parts and research and development for low-scale innovative parts to other companies, such as those in the advanced air mobility space.

These measures will restore capabilities in core areas and allow suppliers to focus on meeting customer demand and complying with evolving regulations from the Federal Aviation Administration, environmental organizations and other regulatory bodies. Once suppliers can get back to the basics with quality and operational efficiencies, supply chain resiliency will ensue and aerospace company valuations will increase, fostering a better environment for an uptick in deal volume.

Middle market implications

A continued decline in M&A activity could reduce demand for parts from original equipment manufacturers and weaken suppliers’ bargaining power in contract negotiations. With continued cost increases and less ability to pass them downstream, aerospace suppliers can expect a margin squeeze. Lower deal volume also leads to fewer resources and a smaller financial bandwidth for aerospace companies to address ongoing operational delays and quality control issues, and it increases expectations of suppliers. There is the possibility that a looser regulatory environment could positively affect the outlook, but much remains to be seen on that front.

The takeaway

Investors are likely to view aerospace companies as higher risk, which can result in lower stock prices and reduced market capitalization. Persistent supply chain constraints and labour shortages lead to production delays and increased costs, making it difficult for manufacturers to fill existing orders—and causing airlines to reduce flights and extend the life of current parts.

To navigate the challenges of M&A and optimize their supply chain, aerospace parts suppliers should focus on solutions and strategies to mitigate risks. This includes investing in supply chain resilience, enhancing operational efficiencies and fostering strategic partnerships to strengthen their existing core product portfolio. By adopting these strategies, suppliers can better position themselves to weather the current challenges and capitalize on future opportunities in the evolving aerospace landscape.