A redefined airline industry is universally positive about future growth

November 2011- After years of waiting, it’s finally here. On Sept. 26, The Boeing Co., Chicago, celebrated the delivery of the first 787 Dreamliner to All Nippon Airways. The plane aims to redefine the experience of flying with cleaner cabin air, higher humidity, lower cabin altitude, larger windows, electrochromic shades, bigger onboard luggage bins and LED lighting.

In addition to creature comforts, composite materials, advanced aerodynamics and modern engines work together to make the 787 a dream for airlines’ bottom lines.

Competing with composites for these future aircraft designs has caused metals companies to re-engineer products as well as introduce new alloys.

“While the jury is still out on how dramatic the move to composites will be in single-aisle aircraft, the 787 has already impacted the future of aircraft construction in unexpected ways,” says Tom Kennard, president of United Performance Metals, Hamilton, Ohio, a supplier of specialty stainless steel and high-temperature alloys. “One of the storylines has to be the aluminum companies’ response to the threat of composites. A whole new suite of new, lighter weight, stronger aluminum alloys has emerged.”

“Aluminum, titanium and nickel alloys are all very important to aviation and will continue to be,” says Scott Thompson, aerospace and defense leader at PwC, which has U.S. headquarters in New York. “Some aircraft components are being replaced by composites. I think the recent developments around lithium aluminum alloys are very interesting, and we will see whether they can successfully defend against the trend toward composites. At the same time, I expect composites to continue to improve, so it may remain a game of leap frog.”

Key driver: large commercial aircraft
These types of ongoing innovations in the design of large commercial aircraft will keep demand high.

Dennis Oates, president and CEO of Universal Stainless & Alloy Products, Bridgeville, Pa., a manufacturer of semi-finished and finished specialty steel products, says, “Aerospace is about 40 to 50 percent of our sales, and the market is very strong right now. Customers universally are very positive about 2012. And, if you look at our incoming orders, they’ve stayed firm; our backlog is building.”

Global growth is driving the industry’s continued expansion, and Thompson calls globalization the “principal driver behind the aviation boom. The growing middle class, particularly in the BRIC economies, is driving big demand for air traffic,” he says.

“The key driver in the aerospace market appears to be large commercial aircraft,” Kennard says. “This trend appears to be driven not only by the needs for aircraft in developing countries but also by the replacement of older aircraft domestically.”

Next-generation aircraft are more fuel efficient, environmentally friendly and have multiple bells and whistles, courtesy of new technology. As a result, “it’s pretty hard to come up with the scenario where people are going to start canceling orders, even if there is more of a credit crunch around the world because there is such a positive on the fuel-efficiency numbers,” Oates says. “I can’t believe that since this recent cycle, which has the Boeings of the world booked out for six, seven, eight years, [demand] that is basically driven by Asian and Middle Eastern clients, that we’re going to sit around in North America and fly a bunch of 1980s airplanes that are gas hogs.”

As global demand grows, the supply chain will need to adjust to keep up with build rates for Airbus and Boeing, Kennard says. “Promised delivery rates on both single- and twin-aisle aircraft are at record levels. The emergence of a global supply chain that is still maturing has created a few obstacles in supply.”

“The wait time for a narrowbody plane is more than seven years,” Thompson says. “Boeing and Airbus have both announced production increases to 42 narrowbodys per month and will probably go into the 50s per month. The key challenge will be raising output without breaking the supply chain, including the raw materials metal suppliers, like specialty alloys from titanium, nickel and aluminum.”

Adequate supply
In response to raised output, Oates says “a lot of the OEMs are trying to make sure there’s adequate metal supply. Universal just made an investment to support our aerospace business with our acquisition of Patriot Special Metals, and some of the mills, they’re doing what we did to meet what they anticipate to be future demand. ... Everybody has reacted to the signal and is investing money, so there will be an adequate amount of metal flowing into the supply chain.”

Universal’s purchase of Patriot Special Metals will allow the company to expand its high nickel alloy and super-alloy markets for aerospace parts, landing gear and helicopter rotor masts and gears.

On Aug. 24, Carpenter Technology Corp., Wyomissing, Pa., a producer and distributor of conventional and powder metal specialty alloys, announced it will construct a 400,000-square-foot, state-of-the-art manufacturing facility in response to strong customer demand for premium products primarily in the aerospace and energy industries.

“The new facility will play a key role in further developing our capabilities in the production of our premium products, primarily serving the aerospace and energy markets,” said David L. Strobel, the company’s senior vice president, in a press release.

Rich Harshman, chairman, president and CEO of Allegheny Technologies Inc., Pittsburgh, spoke at the Jefferies 2011 Global Industrial and Aerospace & Defense Conference in New York City Aug. 10. He pointed out his company is investing in the future through its manufacturing capabilities for titanium, titanium alloys and nickel-based and specialty alloys and by adding new products to improve customer productivity and help increase the speed of making parts.

Buying trends
A tighter supply chain means even if the aerospace industry experiences an unexpected pullback, it won’t last long, Oates says.

“It seems like it took forever to work off some of the inventory that was built up over the ’05, ’06, ’07 timeframe in aerospace, and it finally got worked off and is pretty much in balance, perhaps thin in some areas, but the end-use demand is still strong,” he says.

The need for aircraft-grade metal will boost the market through 2012 and beyond.

“We expect our aerospace business to remain healthy in 2012, largely based upon our involvement with manufacturers participating in the build of twin- and single-aisle commercial aircraft,” Kennard says. “Additional involvement with suppliers participating in the spares market also lends strength to the 2012 outlook.”

“It’s a pretty solid market,” Oates adds. “We’re very optimistic long-term and short-term. We’ve put our money where our mouth is with the investments we’ve made in recent years and the major acquisition we just did. I see the rest of the industry responding, and the caution signs are very few.” MM

Budget cuts
Behind the strong demand forecasted for the commercial aircraft industry is uncertainty surrounding the proposed cuts in defense spending. Tom Kennard, president of United Performance Metals, Hamilton, Ohio, says the need for spares and the delivery of helicopters remains strong in the military sector, but a reduction in defense budgets could change the outlook.

“The negatives out there are the possibilities of the defense cuts, but quite frankly, if you really step back and look at the amount of metal the defense area drives compared to commercial airline, it’s relatively small, so I don’t view that as a major threat,” says Dennis Oates, president and CEO of Universal Stainless & Alloy Products, Bridgeville, Pa.

“For defense, it’s all about affordability and uncertainty,” says Scott Thompson, aerospace and defense leader at PwC, which has U.S. headquarters in New York. “We know defense budgets are coming down. But we don’t know how much and how quickly or specifically which programs will be terminated or downsized. So companies are aggressively seeking cost reduction. Since about two-thirds of the cost is in the supply chain, that means holding suppliers accountable for cost reduction, too, including the raw materials metal suppliers.”

Not knowing the scope of cuts makes it “difficult to know where the cuts will come from and which metals will be impacted most,” Thompson says. “There is clearly going to be a pullback of defense spending by at least 10 percent over the next decade, maybe more. That will drive a corresponding decline in the demand for metals used in defense equipment.”

Interested in purchasing reprints of this article? Click here