This Is Why Boeing Should Fear a Blockbuster Deal Between United Technologies and Rockwell
A Boeing plane.

Shares in Boeing Co.  (BA)  have continued their run, helped by shifting perception of the market for aircraft, particularly wide-body aircraft.

But Boeing's relationships with suppliers could face a challenge were conglomerate United Technologies Corp. (UTX) to take over avionics and airplane interiors maker Rockwell Collins Inc. (COL) . Reports of a potential deal have surfaced.

To be sure, a strong aircraft market is lifting all tides in aerospace.

"Amid talk that Middle Eastern airlines, which are the largest group of users for wide-body aircraft, may defer Airbus and Boeing airplanes, there are conflicting signs that the bleak view of the sector isn't as weak as perceived," aviation consultant Scott Hamilton wrote Monday in his blog, Leeham News and Comment.

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Two major aircraft lessors, Air Lease Corp. and AerCap, expressed confidence in the wide-body sector during earnings reports last week. Moreover, the chairman of Emirates Airline said in a recent interview with Abu Dhabi newspaper The National that despite challenges, Emirates expects to place an order by year's end for either Boeing 787s or Airbus A350s and possibly for A380s as well.

Meanwhile, the International Air Traffic Association said last week that global air traffic rose 7.8% in June. For the first six months of 2017, global air traffic grew at a 7.9% rate, a 12-year-high, IATA said.

"Aerospace is fantastic, " Jim Cramer said Monday on TheStreet TV.

"It drives me crazy -- we just presume that all high growth is in tech," Cramer said. "The best long-term growth story is in aerospace, after the cloud. The cloud is a great long-term story but there's a lot of competition. Aerospace has very little competition and is a great long-term story."

On Monday, Boeing shares closed at $240.23, up 1%. Shares in the Dow leader have risen 54% year to date. In midday trading Tuesday, shares fell 0.9%.

If a deal between Rockwell Collins and United Technologies were to occur, it would pair two Boeing suppliers. "It's a great way to be able to be able to balance the tension against Boeing," said Cramer, who endorsed the deal.

"Boeing can play off everybody," Cramer said. "But If you own the landing gear, you own the brains, you own the inside, the seating, you can be a player that can say to Boeing 'we're not part of your partners' plan.' To be able to make you more money, you're going to make us more money. So it changes the balance of power."

Boeing's Partnering for Success (PFS) plan hasn't exactly been wildly popular with suppliers.

Hamilton wrote last year that PFS "drew ire from {Boeing} suppliers and scorn from observers for its heavy-handed, threatening cost-cutting demands: shave your costs to Boeing 15%-25% or be put on our own no-fly list of companies that we won't do business with."

"Even supply-chain giant United Technologies was placed on Boeing's no-fly list when it balked at the onerous demand," Hamilton wrote.

However, Rockwell Collins has taken a different view.

In a note on Monday, Credit Suisse aerospace analyst Robert Spingarn wrote that Boeing "has created a unit to develop aircraft controls and other avionics in an effort to gain better participation in the aftermarket, which we believe is part of the company's push further into the supply chain and overtime will enhance its margins.

"Given that {Rockwell Collins} is one of the more willing subscribers to Boeing's PFS initiative, at this early stage in the process, we do not think Boeing is targeting COL's core content with Boeing," Spingarn wrote.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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