OEM Report: Aerospace
Tuesday | 28 October, 2008 | 4:46 am

Few bumps ahead for aerospace

By Lauren Duensing

October 2008 - Commercial air travel is saturated with long lines, extra fees and delayed flights. Frequent fliers work hard to earn every mile. As airlines continue to feel the heat, not only from customers but also from bankruptcies and high fuel prices, restlessness in the industry deepens.

The Aerospace Industries Association reported that the first quarter 2008 "followed seasonal trends, with most aerospace indicators backing down from record levels. Sales were down 6.7 percent to $57 billion, and orders dropped to $68 billion from last quarter’s $84 billion. However, year-over-year indicators confirmed strong growth, with sales up more than 10 percent and profits up almost 16 percent from the same period last year."

Fortunately, the long-term outlook is somewhat clear because the growing world economy makes air travel a necessity. According to the Federal Aviation Administration’s Aerospace Forecast for fiscal years 2008 to 2025, in spite of challenges such as the impacts of 9/11, heightened concerns about pandemics, the bankruptcy of four network carriers and record-breaking fuel prices, "the number of passengers traveling has grown, demonstrating the value of air transportation to the public. ... U.S. commercial aviation is on track to carry 1 billion passengers by 2016," with international traffic growing at a faster rate than domestic.

Nathan Smith, aerospace and defense industry analyst, Frost & Sullivan, Mountain View, Calif., notes, "The aerospace market began to see the economic effects of a sliding economy in late 2007, when oil prices began their upward trend. The end of 2007 saw oil at $99 per barrel and by mid-February the price for a barrel of oil hit triple digits, and the downward trend began."

Currently, Smith says, "The market is reeling from skyrocketing fuel costs. Fuel is now the largest expense in the industry. Several airlines are now bankrupt or have ceased operation. To reduce cost, airlines are reducing capacity, reducing their work force, and charging for most in-flight amenities and baggage. Airlines are also removing older, less-efficient aircraft from their operations. These aircraft aren’t expected to return to the airlines’ operation in the future.

"The economic downturn and the rising cost of fuel have weakened the industry’s ability to expand or purchase new aircraft with the numbers necessary to replace their aging fleet," he says.

"Production is expected to remain strong for both military and commercial aircraft and engines," says Christine Murner, aerospace segment manager, inspection, for GE Sensing & Inspection Technologies, Billerica, Mass. "In-service will be somewhat weaker. For in-service applications, the small-aircraft segment is expected to be the softest. For commercial air transit maintenance [airlines], the United States is presently the weakest market. This could quickly spread to Europe or Asia. To date, Asia’s commercial transport market has been immune from the weakness in the United States, but the current economic situation could change this."

Military technology
According to an AIA press release, there are significant issues and policy choices facing the next administration because "past military modernization has been chronically delayed. In the decade of 2010 to 2019, the United States must change course or risk falling behind other global powers."

A second quarter 2008 Titanium Supply Channel Survey, conducted by Longbow Research, pointed out that "titanium demand from the defense market was more stable in the second quarter 2008 than for commercial aerospace, averaging -2 percent year over year. This compares to -10 percent growth last quarter and 2 percent in the second quarter of 2007."

The survey noted that "steady demand from the F-22 and F-16 fighter programs are helping to offset lower requirements from other programs, which are winding down, including the C-17."

One survey respondent commented, "Demand from the defense market is relatively flat year over year for us. Next year is looking to be a good year for fighter demand, as the F-22 engine program is back-end-loaded, and 2009 requirements will double over 2008."

"We don’t work on the fighter programs, but ‘black box’ work has been slow," commented another respondent, who noted that the fact that it’s an election year is helping to keep spending low.

Overall demand affecting metals
Connie Mayhill, president, Altemp Alloys Inc., Orange, Calif., says the company has seen a steady demand for its aerospace products, but "due to the current market and strikes, it appears demand could decrease for the last quarter of 2008 and possibly affect first and second quarter of 2009."

Mayhill also echoes the weakness in the commercial airline sector. "Altemp Alloys’ strength is typically in the military and aerospace industry. Again, due to the current market status, we’ve seen a weakness in the commercial end of the business," she says.

For Murner’s production inspection products, "the ramp-up of new commercial platforms is expected to increase the demand over the next six to 18 months. In-service inspection devices are expected to remain constant, with new purchases to support delivery and inspection of Boeing 787s being offset by overall market contractions."

Longbow Research’s second quarter 2008 Titanium Supply Channel Survey noted that demand for titanium products has fallen 0.6 percent year over year, "driven by further weakness in commercial aerospace market demand related to the push-outs in Boeing’s 787 program and Airbus’ A380."

And the Longbow titanium survey said, "Supplies remain high throughout the supply chain as a result of the commercial aerospace delays and inventory liquidation, and increased mill competition has resulted in aggressive price cutting by both distributors and mills. Excess inventories are expected to take numerous quarters to work down."

Soaring growth
However, metals have several high-growth opportunities. Smith says aircraft engines, frames and components are set to grow over the next 20 years. "Aerospace and defense is a growing industry, with the world’s commercial aircraft fleet expected to exceed 26,500 aircraft by 2026," he says. "Helicopters and general aviation growth will follow. Aircraft manufacturers and end users desire lighter, durable, environmentally friendly materials that are compatible with new technology and next-generation aircraft."

He continues, "New technological advancements in metals from R&D will drive demand in the metal market. Companies with new innovations will prosper. End users expect cost-effective products and solutions for the future needs of the industry. Those who follow this strategy are likely to maintain their competitive edge."

Many of those new innovations focus on weight. "The major concern for the metal industry is producing a stronger but lighter product and competing with the composite manufacturers," Smith notes. "Aircraft weight is an essential element that can determine if the end user will profit or lose. Shedding a few pounds can mean millions of dollars in savings each year.

"Manufacturers and engineers desire lightweight materials that provide durability and flexibility with reduced cost to manufacture," he says. "Polymers have been successfully designed and have displaced metals in many aerospace applications, and the market is growing. Some polymers are extremely strong, flame-retardant and inert, but most important, these polymers can easily be fabricated into tight-tolerance parts. Aircraft seats, clamps and cover blades to electrical motors are just a few examples of how polymers are replacing metals. Composite fasteners are corrosion-resistant, lighter, and have the static strength and fatigue properties of aluminum and titanium.

"Next-generation aircraft will gradually move away from metals and lean heavily toward composite aircraft: the Boeing B-787, B-747-8 and the Airbus A350WB are examples of such moves."

Recent U.S. market news, however, puts a dark cloud on the horizon. These uncertain skies may stall the previously unflappable aerospace market.

"The aerospace industry is in the last year or two of a phenomenal surge," says Richard Aboulafia, vice president, analysis, Teal Group Corp, Fairfax, Va. "The past five years of growth have been strong, and this is the first simultaneous civil and military market upturn in decades. A combination of globalization, economic growth, strong corporate profits and wartime needs basically grew the world aerospace market by 50 percent in the space of five years."

However, all good times must come to an end. "The current global economic crisis is affecting the aerospace industry in different ways," Aboulafia notes. "In the short term, the business jet industry will be first to feel the effects. A credit crunch makes financing difficult for luxury goods that aren’t easily sold and don’t generate revenue. By contrast, the jetliner business still enjoys reasonable finance terms. Jetliners are a tangible asset, almost a safe haven. They generate revenue and can be moved to any air travel market that needs them. But in the medium term [within a year or two] the likely decline in premium traffic--mostly business travelers--will take a heavy toll on airline finances, reducing jetliner demand.

"So far, the military market is the least affected by the crisis," he says. "U.S. forces are still heavily engaged in Iraq and Afghanistan, defense spending is still politically popular and the military is in terrible shape, with worn-out equipment. But if the economic situation doesn’t improve, there’s no doubt there will be severe long-term budget pressures on defense. Even with improvements to the economy, there’s no way the United States can keep spending $700 billion to $800 billion per year on defense, and the level of procurement spending--about $140 billion--is definitely not sustainable." MM

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