10-2009 Commercial Aircraft Market
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Aerospace Metals When Will They Gain Altitude?
Suppliers of aerospace metals may have to wait until 2011 for production of civil aircraft to rebound.

By Myra Pinkham, Contributing Editor

The commercial, or civil, aerospace market is a study in contrasts as the build rates and backlogs for large commercial airliners continue to hold up—at least for the time being—while production of business and regional jets continues to head down.

There is also a dichotomy within the large commercial airline sector. “While there continues to be a record number of aircraft produced, the market itself is in grim shape,” says Richard Aboulafia, vice president of the Teal Group, Fairfax, Va.

Bill Sales, senior vice president for nonferrous operations at Los Angeles-based Reliance Steel & Aluminum Co., agrees that aerospace is “trending down,” but offers a more positive perspective. “The market isn’t falling off the cliff. It still remains strong compared with how some other markets are doing.”

Many aircraft metals distributors—even those who do not supply the major airframe builders directly, but rather sell to their subcontractors—are starting to feel a slowdown. Mike Contis, sales manager for Aviation Metals Inc., Charlotte, N.C., says his company has seen aluminum demand decline by 28 percent recently. Orders for titanium have declined even more sharply, by as much as 50 percent.

This challenging business environment could offer certain service centers an opportunity to demonstrate their value in the supply chain, says Bob Mraz, vice president of sales and marketing for TW Metals Inc., Exton, Pa. He observes that certain OEMs use distributors, especially those with a global footprint, as integrators for their extended supply chains. Such service centers are responsible for eliminating redundancy in the supply chain and ensuring that material flows to the airframe builders as needed.

It’s certainly no surprise that the commercial aerospace market would lose altitude due to the recession; what is surprising is how long it defied the downturn. Bill Chadwick, research director for the Aerospace Industries Association of America, Arlington, Va., says deliveries of large civil aircraft remained at record highs as recently as the first half of this year, while most other industries were struggling. Boeing Commercial Airplanes and Airbus Industrie jointly delivered a record 500 aircraft in the first half, up nearly 30 percent from the first six months of last year. Even with such higher deliveries, the order backlog remained near 7,000 planes, or six years worth, at the end of the first half.

“Traditionally, aerospace lags the rest of the economy, which is why we are just now starting to see some softening,” explains Kevin Lowery, spokesman for Pittsburgh-based Alcoa Inc.

The first sign of softening came at the end of the first half when the industry backlog declined for the first time in six years, Chadwick says, a dip of 6 percent from the orders in the pipeline at the end of 2008. The decline is largely attributable to deferments and cancellations by various airlines of Boeing’s new 787 Dreamliner jumbo jet, he adds.

Boeing’s troubles with its Dreamliner design are well documented. By late August, the aircraft maker had announced its sixth delay in production of the 787, which is hoped to be groundbreaking in its use of lightweight composites and titanium in place of aluminum and other materials. If adhered to, the latest schedule would result in a first flight at the end of 2009, first delivery in the fourth quarter of 2010, and full production of 10 planes a month starting in late 2013—two and a half years later than first planned.

This summer saw more evidence of weakness in aerospace as deliveries declined 29 percent from June to July and another 10 percent in August due to a combination of financing, supplier and production problems. Nevertheless, aircraft deliveries should approach 950 by year’s end, says Aboulafia.

Aerospace declines are not all the result of Boeing’s problems with the 787, says Jeff Wise, vice president of sales for Titanium Industries Inc., Rockaway, N.J. For example, Airbus recently announced that it was decreasing the build rate for its A320 planes to 34 per month, down from 36. Prior to the financial crisis, it had considered building 40 a month, Wise says.

“We will probably see a decline next year [in aircraft production], unless there is a sudden turnaround in the economy,” Aboulafia says, noting that passenger traffic is down 5 to 10 percent. That is a dramatic turnaround from the past 15 years when passenger traffic had been growing at a 5 percent compounded annual rate.

This has made airlines choose between two conflicting strategies of how to improve their profitability—either add more fuel-efficient planes, like Boeing’s composite- and titanium-intensive 787, or reduce the size of their fleets.

With passengers traveling less, airlines all over the world have been actively reducing their capacities. The six largest U.S. airlines reportedly plan to reduce their combined capacity by up to 7 percent this year. The reductions were more pronounced earlier in the year when the airlines weren’t able to take planes out of the air as fast a people stopped flying, Wise notes, but now the number of planes is more in balance with revenue passenger miles. Most airlines still are not looking to add aircraft to their fleets, even as their planes age.

“No one is replacing aircraft the way that they should,” adds Henry Reid, sales manager of Factory Steel and Metal Supply Co., Detroit.

The same scenario has been occurring on the cargo side of the business. Demand for cargo aircraft had been growing for the past 15 years, but is expected to dip about 20 percent in 2009, says Keith Harvey, vice president of sales and marketing for Kaiser Aluminum, Foothill Ranch, Calif.

Lloyd O’Carroll, senior vice president of research for Davenport & Co., Richmond, Va., reports in his second-quarter Davenport Quarterly Aluminum Outlook that Boeing and Airbus deliveries could decline by 15 percent next year before rebounding in 2011.

Much of the aerospace sector’s problem is due to the two-and-a-half year delay of the Boeing 787 following so closely on the two-year delay of the Airbus A380. “It was thought that the 787 would inflate the market, but the market doesn’t need the capacity now. It was the right type of jet at the wrong time,” Aboulafia says.

“These delays have had a major impact on the market and on metal producers supplying this market,” says Christophe Villemin, president of the Alcan Global Aerospace unit of Rio Tinto Alcan. “However, on the other side of the coin, we have seen it as an opportunity to help our customers deepen the cost-benefit analysis on available material options.”

At least some industry observers question whether the composite-oriented design of the 787 has contributed to its delays. Wise acknowledges it is a whole new technology. “It is the first time that a composite/titanium airframe has been used for any aircraft other than a defense plane,” he says. “Still, I see the trend of using this kind of airframe in future aircraft. Once the airframe builders overcome the technological hurdles they have been experiencing, it will be easier to use more composites and titanium in the future, as the groundwork will have been laid.”

Some aluminum suppliers are speculating whether the September announcement by Mitsubishi Aircraft Corp. to delay and reconfigure its Mitsubishi Regional Jet could mean a change of mindset in the aerospace industry. Mitsubishi’s plan involves replacing a carbon fiber composite with an aluminum wing box to allow for shorter lead times on structural changes.

Kaiser’s Harvey says that this kind of changeover could also occur on the 787 and other commercial airliners that contain composite components. “The aluminum content of the 787 has already grown since the plane was first conceived,” he says.

“While there is still a tremendous amount of interest on the part of Boeing and Airbus in using composites, I think the technology is more questionable than it was a year or two ago,” Sales agrees.

Aboulafia maintains that while the jury is still out on the value of using composites in smaller aircraft, such as regional jets, composites will continue to make inroads in wide body airliners. “It is just a matter of time for the airframe builders to get accustomed to the new manufacturing technology.”

The trend toward the increased use of composites in aircraft represents both a challenge and a driver for Alcan and other aluminum suppliers to the aerospace industry, Villemin says. “On one hand, we are seizing the opportunity to better understand how our metal solutions can perform in a more hybrid environment. On the other hand, we are pushing even further the boundaries of aluminum as the material of choice for key structural aircraft components.”

In his report, which was published prior to the latest delay in the 787 build schedule, O’Carroll had estimated that aluminum aerospace shipments would fall 14 percent this year and then snap back 11 percent in 2010 due to restocking and the ramp up of the 787 and A380 programs. Many industry observers now don’t expect such of a recovery until late 2010 or early 2011.

The markets for smaller regional and business jets could take even longer to recover, say the experts. Demand for business jets has been directly affected by the recessionary decline in company profitability and the net worth of wealthy individuals.

The weakness has also been compounded by a psychological component. Auto executives made headlines earlier this year when congressmen chastised them for traveling by business jet to Washington seeking a bailout. “It just doesn’t look good when executives of companies that are laying off thousands of employees are riding around on business jets,” Wise notes.

While not faring as badly as business jets, the regional jet sector has also been quite weak. Even during the boom years for aerospace, regional jets were losing the competition with narrow body airliners, which are about twice as large, says Aboulafia.

How steeply will commercial aircraft production descend? Industry executives say they can only speculate, though many expect a relatively shallow dip. Wise is hopeful that even with the latest Boeing 787 delay, the market could start heading back up sometime next year. “2011 should be a very strong year for commercial aerospace and metal suppliers to that market, assuming that the 787 does indeed fly at the end of this year.”



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