The aerospace market seems to be in a never-ending cycle of stocking and destocking, creating a bumpy ride for the intricate supply chain below. In 2018, the destocking that began in 2017 began to moderate, creating an improved environment for those companies serving it.
“We expect strong demand in the fourth quarter and 2019 as destocking further moderates and airframe manufacturers continue to ramp up build-rates to address both increased demand and the nine-year order backlog,” said Jack Hockema, chairman, president and CEO of Foothill Ranch, Calif.-based Kaiser Aluminum at his company’s third-quarter conference call. “There will be some destocking impact next year, but it will be less than this year and certainly less than last year.”
The inventory builds and run-offs by the two major air builders, Boeing and Airbus, will stagger year-to-year growth rates in the industry, but it doesn’t do much to the overall trajectory. Aerospace is in the middle of a historic growth cycle, with no dark clouds on the horizon.
Even in 2017, when destocking began in earnest, it merely meant that growth levels were in the low single-digit range. This year, industry growth was forecast to reach 4.1 percent by Deloitte in its annual Global Aerospace and Defense Industry Outlook. “Recovery in global gross domestic product, stable commodity prices – including crude oil – and growth in global passenger demand, especially Asia-Pacific, the Middle East and the Latin America region, is likely to drive the commercial aircraft sector growth in 2018,” Deloitte wrote in its outlook.
Jerry Bashir saw that prediction unfold. “We have been seeing a steady increase in demand over the last nine to 10 months and do not see any slowdown,” says Bashir, the president and CEO of Falcon Aerospace, Weston, Fla., a distributor which specializes in the aero and defense markets.
As always, there’s the backlog. Entering 2018, the backlog stood at nine and a half years, with 14,000 units on order. That number represented an all-time high for the industry. A solid year of growth in the aerospace sector has only knocked down that number marginally.
Bob Mraz, vice president of sales and marketing for TW Metals, Exton, Pa., says all of the trends are heading in the right direction. “All elements of aerospace appear to be pointed up. And when you look at passenger miles and the revenue per passenger miles and new entrants, there’s no end in sight.” According to Deloitte, global passenger miles are expected to grow at an annual rate of 4.7 percent over the course of the next 20 years.
Castle Metals’ Damien Mancini agrees that the outlook is promising. “Build rates are increasing and the backlog for aircraft is strong. It also appears demand for regional and business jets is coming back,” says Mancini, the vice president of Global Aerospace for Oak Brook, Ill.-based A.M. Castle & Co.
One trend in the market is the shift away from wide-body aircraft, which are in a bit of an oversupply condition, Deloitte noted. Hockema agreed. “Boeing and Airbus continue to talk about doing everything they can to ramp up their single-aisle build rates.”
Boeing was expected to boost production of its 737 from 47 units per month to 52 in 2018, followed by another five-unit-per month gain in 2019. Airbus is doing the same with its A320 neo model.
“The days of large aircrafts such as B747 and A380 are numbered. The cost of operating these large airliners versus the efficiencies of today’s contemporary aircrafts like the B777, B787 and A350 outweigh the benefits of flying 774s and 380s,” says Bashir. “The public’s demand for low travel cost is changing the dynamics. However, to meet the global demand for products to be delivered on short notice by the likes of Amazon and others there is going to be a shift in the role of 747s and A380s to the cargo sector.”
While the outlook is quite clear, the ways of getting there are a little more challenging for the supply chain. “There are two areas of concern, but the market isn’t one of them,” says Richard Aboulafia, vice president of Teal Group, who specializes in the analysis of the aerospace and defense market. “There are a lot of cost pressures coming from the primes. When your materials and energy costs are going up and your prices are coming down, that’s pressure. It seems a little dysfunctional.”
Additionally, he said the ongoing ramp up in new technology and processes are being undertaken while the supply chain members are still expected to deliver material on time and at low cost. “Your stuff will show up exactly when we need it. We’ll let you worry about the details,” is how Aboulafia describes the attitudes from the builders.
That’s just a fact of life for companies in the supply chain. “Designs and forecasts quickly change and are out of our control,” says Jeff Adams, marketing manager for O’Neal Industries’ United Performance Metals, Hamilton, Ohio. “What we can control is how quickly and efficiently we respond, and UPM has the processes in place to handle market change.”
“Service providers are playing a more crucial role in driving efficiency in the supply chain and optimizing the use and management of raw materials,” Mancini says. “This includes the supply of Near Net Parts delivered at the point of use in the manufacturing facility as well as managing and recycling the scrap generated by those materials.”
The supply chain is responding to the pressures placed on it in many ways, most notably through the use of additive manufacturing. “Adaptive manufacturing is growing at a rapid rate, creating a new platform of opportunities to reduce the cost and time and that will impact the traditional manufacturing methods. The cost-benefit of adaptive manufacturing will change the future role of mills and distributors as to how they supply products to the OEMs and the subs,” Bashir says.
Mancini sees it similarly. “Improving buy-to-fly ratios (the percentage of raw material that is used in making a part) for aluminum and titanium components is a high priority,” says Mancini. “Additive manufacturing and composite structure solutions, as well as the use of extrusion and forging in place of machined-plate parts, are design trends that are gaining traction at the major OEMs.”
Service Center giant Samuel, Son & Co. Ltd., Mississauga, Ontario, has seen that change and acted rapidly to get in front of it. The company acquired Burloak Technologies, a leader in additive manufacturing, earlier this year. “One of the real issues driving the aerospace industry is buy-to-fly. If you look at how much aluminum actually goes from the amount purchased to that which is applied, it’s a tiny fraction. Where in additive, it’s a very efficient process,” Samuel President and CEO Bill Chisolm said during last month’s CRU North American Steel Conference in Chicago.
Trade talk dominated that gathering of steel executives, but it’s been a much smaller part of the conversation for nonferrous suppliers. The aluminum industry has generally demonstrated less enthusiasm for the 10 percent fees assigned to foreign product through Section 232 than their carbon counterparts have for the 25 percent tariff on imported steel.
Hockema said his company has incurred some costs as a result of tariffs thus far, though he expects them to be neutral to a mild positive in the long run. Curt Gillingham, director of sales for UPM, has a similar assessment, believing the effect on the aerospace market is minimal. Bashir is more of a skeptic that 232 and other trade measures will be any kind of positive for a global market such as aerospace. “I’m not sure random imposition of tariffs can keep the commercial aerospace growth on a steady track,” he said. “I remain optimistic that a solution will be found to avoid negative impacts.”
Most suppliers to the commercial aerospace market also work with the defense industry, which has a heavy tilt toward planes and helicopters. While the defense sector had dipped in recent years, 2018 saw a return to more robust spending.
Deloitte projected defense sector expenditures to grow 3.6 percent this year, as “global tensions continue to persist and a majority of the affected countries plan to recapitalize and improve their defense posture. As security threats continue to rise across the globe, defense spending growth is likely to continue over the next five years.”
Deloitte estimates that growth will take place at a CAGR of 3.0 from 2017-2022. By the final year of that time frame, the company estimates global defense spending to eclipse $2 trillion.
The U.S., of course, is leading the way. The U.S. Department of Defense budget for 2019, including Overseas Contingency Operations funding, is $79 billion higher than Fiscal Year 2018, Deloitte reports.
The expectation is for that trend to continue, though Bashir is keeping a close eye on the elections. If the Republicans lose the House of Representatives, he said, “We are in for adjustments that may slow the defense industrial complex ambitions.”
Even with a change there, the skies remain pretty clear for suppliers to these markets.
“Your typical boom cycle lasts 6-7 years. We’re in Year 14, and there doesn’t appear to be any threats,” says Aboulafia. “A trade war is the single biggest risk. If there’s a trade war, commercial aerospace is always the first casualty.”