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July 1, 2005

Gaining Altitude

The Aerospace Industry Attempts a Recovery

All the world watched on April 27 as the Airbus A380 took off on its maiden flight from Blagnac airport in France. As the 421 metric-ton craft, the largest commercial airliner in history, rose into the sky with what The New York Times described as “a whisper more than a roar,” many believed the brief flight heralded a new—maybe even glamorous—era in aviation. Colorful British entrepreneur Sir Richard Branson planned to outfit the planes he'd ordered for his Virgin Atlantic airline with onboard gyms and private double beds—a throwback, perhaps, to the planned sky lounges of an earlier jumbo jet, the Boeing 747.

Metals industry executives may see the A380 as one more sign of a nascent revival within the aerospace industry—welcome news for companies that supply aircraft manufacturers with aluminum, specialty alloys and composites. The aerospace industry could use such good news after years of being broad-sided by terrorist attacks, defense industry restructurings, fears of a killer-virus in Asia and the chronic financial pains of commercial airlines.

Only recently have these woes seemingly begun to abate. Earlier this year, the Federal Aviation Administration (FAA) estimated that worldwide air passenger traffic grew by more than 9% in 2004, more than compensating for slowdowns resulting from fears of severe acute respiratory syndrome in Asia and the outbreak of the Iraq War in 2003. Domestic traffic, as measured by “available seat miles,” grew by 7% in 2004, surpassing pre-Sept. 11 levels. The federal agency said that those and other factors led it to be “cautiously optimistic about the future.” At the same time, a separate FAA study forecast a 2.9% annual growth rate in aircraft fleets until the middle of the next decade.

NEW IN THE SKY

“Big planes mean more metals,” says Dan L. Greenfield, spokesperson for Allegheny Technologies, a maker of specialty metals, citing in particular the A380's four huge engines. Last October, the company expanded its Richburg, South Carolina, rolling facility in part to meet projected demand—which could be considerable. By mid-June, Airbus had reportedly received commitments to purchase 280 A380s, and while Singapore Airlines planned to put the first A380s into service by next year, the plane's largest customer so far is Dubai-based Emirates Airlines, which placed orders for 43.

In fact, the A380 was one of several new planes destined to consume vast quantities of specialty metals from U.S. suppliers. U.S. aircraft industry leader Boeing likewise forecast strong demand for two of its planes. In April, the company announced 65 additional buy commitments for its 787 Dreamliner, and 123 for its 737. Carrying fewer than 200 passengers, the 737 is designed to serve the short- to medium-haul market, while also serving as an executive jet.

The largest of the 787 line, meanwhile, the 787-9, is designed to carry 259 passengers, not many when compared with the 800-passenger capacity of the A380. But the Boeing entry will have a range of 8,300 miles and use 20% less fuel than its competitors. Boeing says the plane is intended to “bring the economics of large jet transports to the middle of the market.”

In late April, Boeing received a $7 billion order for 50 of its aircraft of varying designs from Air India. If the deal proceeds, it hints at vast potential for aerospace manufacturers and their suppliers thanks to the exploding Indian economy. With a population of more than 1 billion, India has a commercial aircraft fleet of only 165. The United States by comparison has 6,000 airliners to serve its 300 million citizens.

INDUSTRY FORECASTS

Flushed with pride over the reception its A380 received, Airbus predicted that in coming years commercial airlines will need to increase seating capacity by 4.5% annually. And the messages from other industry insiders were likewise upbeat.

John W. Douglass, president and CEO of the Aerospace Industries Association (AIA), noted that 2004 industry sales totaled $161 billion. The 8% rise over the previous year amounted to $12 billion, putting current-dollar sales at their highest level in the industry's history, following a $4.5 billion decrease in sales in 2003.

Much of that gain can be attributed to defense. Sales of military aircraft grew 15%, while missiles rose 10%. However, even traditionally weaker sectors showed signs of strengthening. Sales of engines and spare parts posted modest gains. And while revenues from civil transport declined by just over 1%, or $200 million, this was a far cry from the 26% decline during 2003. In fact, coming on the heels of two disappointing years, deliveries of commercial jetliners increased by four planes, or 285 planes in all, the AIA said.

The picture was equally bright for foreign sales of U.S.-made aerospace products, the AIA reports. Aerospace exports increased 8% in 2004 to $57 billion, which included an increase of $1 billion for military exports and $3.3 billion for exports of civil aerospace exports. True, exports of commercial aircraft declined by $900 million, Douglas says. But increases in other areas more than made up the difference. General aviation exports, for instance, rose by about $600 million and sales of helicopters reached $313 million, a 54% increase. Similarly, foreign sales of engines and parts rose $2.6 billion. And most dramatic of all, foreign sales of rockets and satellites doubled during 2004, to $575 million.

 

TITANIUM GOES FULL TILT

Producers of specialty metals were among those most likely to gain from these rising sales—both domestic and foreign. TheStreet.com market watcher Jonathan Moreland predicted that titanium production would approach full capacity by the onset of 2006, and that already supplies were tightening.

Echoing that view, Tom Stundza, executive editor of Purchasing Magazine, wrote that specialty metals such as titanium would undergo a “full-blown expansion in 2006 and beyond. Use of super alloys, which had stagnated at about 135 million pounds annually for the past two years, now is expected to rise by almost 5% this year and maybe even double that growth rate in 2005.”

Such predictions already were being fulfilled in the bottom lines of some metals producers. During the April earnings season, when companies announced their previous quarter results, Reliance Steel & Aluminum Co. saw its earnings rise 55% in Q1 compared to a year ago, due to what the company said were strong orders from aerospace manufacturers.

Sales at Allegheny Technologies increased 41% in 2004 compared with 2003 in part due to increased demand from the aerospace sector.

A JET OF YOUR OWN

Americans crowding into airports and herded into cramped airline seats might argue that this nation could use a larger airliner fleet. Others, namely the richest and most powerful among us, are increasingly opting to fly by private jet.

Last year, business jet production increased by almost 5%, says the FAA. The General Aviation Manufacturers Association reports U.S. manufacturers delivered 2,355 aircraft in 2004, including 403 turbojets. In Canada, 342 aircraft were manufactured in 2004. Airline consulting firm the Teal Group predicted that “a total of 7,417 business aircraft valued at $106.7 billion (in 2005 U.S. dollars) will be produced over 2005-2014, marking a decisive turnaround after several years of stagnation in the business jet and fractional jet ownership market.” An estimated 40% of the business jets produced would be for larger models such as those produced by Gulfstream and Bombardier Aerospace, the firm's research reported.

DARK CLOUDS

Those private jets will no doubt prove invaluable should commercial air travel face another setback. Any number of unexpected paradigm-shifting events could dramatically reduce both the availability and the demand for air travel, and wreak havoc with the aerospace supply chain. Currently, nations in Asia and elsewhere are planning flight embargoes should another potentially deadly disease, bird flu, show signs of rapid spread.

Given, the very real possibility that some earth shattering event might occur, Richard Aboulafia, vice president with Teal Group, said that the downside for the commercial aviation industry was far greater than the upside, especially given the financial vulnerability of U.S. carriers. “Superficially, everyone has survived,” he says, a fact that shouldn't be taken lightly.

A March FAA aerospace industry forecast noted that legacy carriers lost $6 billion in 2004, while regional and budget airlines earned $740 million. Legacy carriers have yet to restructure to the extent one might expect in light of these losses. But that “should not imply optimism. It could mean that the worst lies ahead,” says Aboulafia.

THE CHINA CARD

At least one U.S. company supplying metals to the aerospace industry is hedging its bets by looking to China. In June of last year, Chicago-based Alcoa Mill Products opened the doors to a 40,000-square-foot facility in Shanghai, which is intended to serve customers throughout the Asia-Pacific region.

In March, Alcoa, which already supplies materials to Airbus and Boeing, signed an agreement with Shanghai Aircraft Manufacturing Factory (SAMF) to supply the aluminum extrusions for portions of the Boeing 737 tail section through 2009. Under the SAMF agreement, Alcoa will supply 650,000 pounds of hard alloy aluminum extrusions annually from plants located in Indiana and South Korea.

A similar agreement calls for Alcoa to supply extrusions for another Chinese aircraft manufacturer, Xian Aircraft, as well as for the 737 tail assembly over the next several years.

MILITARY MAINSTAY

Whatever the future of aerospace in China, India, the United States, or elsewhere, the industry's supply chain has traditionally relied on defense contracts as an important bulwark of support. Indeed, defense aviation shows signs of stepped-up activity for the foreseeable future. With design and development of the multi-nation joint strike fighter program now well underway, the United States and Great Britain alone have committed to buying 2,600 aircraft.

Additionally, Boeing recently received a contract worth nearly $19 billion from the U.S. Navy to build 109 large planes known as the Multi-Mission Maritime Aircraft. The planes, used to hunt and attack enemy submarines, will be modified versions of the company's 737-800. They will replace the aging fleet of Lockheed Martin Corp., Orion P-3s. Deliveries of the Boeing planes are set to begin in 2009 and extend beyond past 2013.

THE COMPOSITE PARADIGM SHIFT

Large though they may be, these are but two contracts. Yet, the state-of-the-art aircraft involved will use more than their share of specialty metals. New civil aircraft increasingly rely on specialty metal content as manufacturers seek to eek out additional performance, lower cost and fuel efficiencies.

In particular, growth in the use of composites has been dramatic. Three decades ago composites made up just 5% of the 747 and 737 aircrafts' content. By contrast, composites make up 17% of the Airbus A320. Composite content in the Airbus A380 will total more than 20%, says Dr. Sanjay Mazumdar, president and CEO of the consulting firm E-Composites Inc.

Compare that to the upcoming Boeing 787s, whose composite content could be as high as 60%, says the Teal Group's Aboulafia. He also sees aluminum-lithium alloys making increasing inroads in aircraft designs.

Just as the metals used in aircraft manufacturing are changing, the methods used to supply these exotic new materials could change radically as well—as radically, perhaps, as the A380 could change the experience of flying.

Researchers at the University of Wisconsin-Milwaukee are developing mobile foundries that can create spare parts made from advanced materials right at the location where a plane is being repaired. The mobile foundries could help the military repair vital aircraft in conflict zones—avoiding the need to wait for parts deliveries. But the mobile foundries could serve an important purpose in the civilian arena as well. Specifically, they could give U.S. specialty metals producers a key advantage over foreign competitors, and could also do away with service centers.

Time carries a huge dollar cost when expensive jumbo airliners like the A380 remain parked for repairs. The University of Wisconsin units could get them up and flying—avoiding the need to stockpile or send for foreign-produced parts.