The aerospace industry is flying high with strength in all sectors.
The recovery of the commercial aerospace market – and aerospace in general – has been described by certain market observers and participants as being one of the best they have ever seen. It’s also one that could be even stronger if it wasn’t being limited by certain supply-side challenges.
“This is the first simultaneous civil and military aerospace uptick that we’ve seen since the Cold War,” declares Richard Aboulafia, adding, “It is also the first time in over 35 years it isn’t about market demand, but about the ability of companies to build as many planes as the market wants.”
Obviously, the shift in demand for commercial aircraft is a big factor. Michael Leshock, a senior associate for metals and aerospace for KeyBanc Capital Markets, points out that during the COVID-19 pandemic the commercial aerospace sector went through a big recession, with demand bottoming out in 2020 after declining about 35 percent from 2019 levels.
“But the rebound from the COVID crisis has been nothing short of amazing,” says Jerry Bashir, president of Falcon Aerospace. “The return of essential business travel as well as the public’s eagerness to reclaim their freedom of movement and desire to travel and explore the world caught everyone by surprise as this return to normality happened at a lot faster pace than had been anticipated.” He says this resulted in an acute shortage of aircraft and a need for airlines to cut their schedules and to reduce their flight options.
Bruce McClelland, a senior analyst for the Teal Group, points out that another drag upon availability was the grounding of some commercial aircraft, including Boeing’s 737 MAX and 787 Dreamliner.
McClelland notes that each of those aircraft had different problems, with the Federal Aviation Administration grounding the 737 MAX, which had two major accidents, until it made safety-related fixes. While it didn’t ground the 787s in the same way as it did the 737, the FAA forbade Boeing from making any deliveries of that aircraft until it fixed some manufacturing flaws the agency had identified.
As far as the 737 MAX, Boeing initially continued to produce planes at a lower rate – about 42 vs. 52 aircraft per month – before completely shutting down production of the aircraft until mid-2020, when it finally restarted, notes Peter Zimm, principal of Charles Edward Management Consulting.
Brian West, Boeing’s CFO, recently said at Jefferies’ Industrials Conference that as of early September, 97 percent of the 737 MAX fleet was back in service, with the company planning to deliver 400 to 450 planes this year.
But as far as the 787 Dreamliner is concerned, after resuming deliveries late last year, a new issue related to its fuselage was discovered, forcing it to halt deliveries of about 75 percent of the 220 787s it had in inventory. West says that while Boeing knows how to fix the issue, it is still early in the rework process.
Even with these challenges, as well as the production constraints exerted by certain supply chain and labor issues, there is no question the commercial aerospace – particularly single-aisle aircraft – is squarely in the middle of a recovery, with both Boeing and Airbus forecasting sizable ramp ups of deliveries by 2025-26.
“And they are already looking up,” McClelland says, forecasting the OEMs will deliver about 1,301 commercial aircraft this year, up from the 1,143 planes they delivered in 2022. This comes at a time when both Boeing and Airbus have historically high backlogs – as long as 10 year – and with the airlines continuing to get to line to buy new planes, Bob Mraz, vice president of sales and marketing at TW Metals, observes.
Even before the pandemic, the OEMs already had big backlogs of planes, Johan Petry, Novelis’ vice president of aerospace sales and marketing, points out. However, he says, they really grew once COVID hit and their customers were put new orders on hold.
It is a different situation now that air travel has picked up again. According to Aboulafia, U.S. air travel has already returned to 100 percent or more of what it had been in 2019, helped by the all-time high levels this summer. Worldwide travel, albeit lagging domestic, is at about 95 percent of its peak.
“For all practical purposes the pandemic is no longer a factor when it comes to people’s travel at the same time that there continues to be a strong economy and people have some travel revenge on their minds,” Aboulafia says, declaring, “To completely recover from the 80 percent drop in air traffic that we saw in April 2020 is a heck of an upward rise.”
Mraz says this increasing demand is prompting the OEMs to build more planes, faster, as long as they can. However certain factors have made that difficult, including that material lead times for almost all the products that go into these planes are out 40 to 60 weeks, with the longest lead times being for materials used in the aircrafts’ engines. This, Leshock explains, is because some of the new engines being put on new planes run hotter, and therefore burn out faster and require more replacements. Nevertheless, Boeing’s Plant said he doesn’t believe the issues with engine production, a condition which is improving, has held back aircraft production.
As far as the impact upon the lead times of such aerospace metals as aluminum sheet, plate, bars and extrusions, titanium products, stainless steel bars and nickel products, Bashir says that won’t be a short-term issue. Rather, he predicts it could be late 2025 – once some new production capacity comes online – that things will ease a bit.
A bigger issue, according to Teal’s McClelland, is that aircraft production – particularly for the planes used by smaller, regional airlines – has been impacted by the shortage of pilots, several of which retired during the pandemic and have not yet been replaced. “Now larger airlines are scooping up pilots from the regional airlines, meaning that the regional airlines need to park some planes because they don’t have pilots to fly them,” he says.
It is because of the combination of increased air traffic and limited number of pilots and other flight crew staff that production backlogs are so large, particularly for single-aisle, or narrow-bodied, planes, which Charles Edwards’ Zimm places at eight to 10 years, compared with about four years normally.
“Also, due to the very large backorders in place, aerospace OEMs and their multi-tier subcontractors are facing challenges of sourcing material as long as these long deliveries remain in place,” Bashir says, adding that there is no short-term solution as the demand for all aerospace products exceeds the ability of the supply chains to deliver them on time.
Aboulafia agrees that by far the biggest growth has been for single-body planes, such as the Airbus 320 and the Boeing 737, which have grown about 20 percent year on year – a growth rate that would have been even greater absent such production constraints as supply chain issues and factory slowdowns.
He says there are a variety of reasons for this preference, including that the pandemic reminded everyone that small is beautiful. Also, domestic travel has recovered faster than international travel (which is the biggest use of wide-bodied planes) and the new generation of single-aisle planes are much more efficient and capable. “In fact, we are even seeing some of them fly on international routes across the Atlantic.
Philip Gibbs, KeyBanc Capital Markets’ senior metals and aerospace equity analyst, notes that major redesigns of wide-body planes, including increased use of composites, had many considering those planes as more efficient, particularly when international travel was stronger.
But that has since changed and there is now a clamoring for new single-aisle planes. Due to a technology shift that began in 2018, aircraft builders have been able to reduce fuel consumption by 20 to 40 percent. With that coming at the same time many of the older narrow-body planes are being retired, it has resulted in a strong push for these new single-aisle planes, he says.
TW Metals’ Mraz points out the desire for those planes is being further accelerated by the way people look to travel, given that single-aisle planes tend to take passengers point to point as opposed to hub to hub with wide-body planes, therefore eliminating the need to connect to another flight.
“There is also a significant amount of business going on outside of the U.S.,” Mraz says, observing that for example, India has recently placed two of the largest aircraft orders ever, mostly for narrow-bodied planes.
The popularity of single-aisle aircraft is good news for aluminum, Aboulafia says, given the heavy use of the material there. Generally there isn’t very much concern about the aerospace OEMs and their component suppliers getting the aerospace grades of aluminum (such as 2000-, 6000- and 7000-series products) they need, or at least not as many issues as certain other aerospace metals, such as titanium.
There have been some challenges doing so, however. For example, Mraz points out that aerospace grades of aluminum plate are on allocation, although many of the programs have contracts in place and could possibly get it with a 50- to 60-week lead time.
Novelis’ Petry says that six to 10 months ago aluminum flat-rolled producers were struggling to ramp up capacity, but production is now entering calmer waters with capacity back to pre-COVID levels, resulting in a good balance of supply and demand.
He points out it is more difficult for certain other metals such as titanium and specialty metals, which have been more adversely affected by issues such as the Ukrainian war. “There had been some concerns about aluminum from Rusal,” Petry admitted. “But given there are sufficient alternatives, the aerospace OEMs have been able to avoid using Russian-origin aluminum,” he says, noting that is harder to do with titanium.
Titanium is used in all commercial aircraft, but to a larger degree in wide-body planes given their higher composite content. That, Aboulafia says, is because titanium bonds better with composites than aluminum.
KeyBanc’s Gibbs agrees, noting that about a third of the world’s supply of titanium was knocked out of the market virtually overnight when the aerospace OEMs decided to move away from VSMPO. That, Zimm says, was due to concerns the company could be sanctioned in light of Russia’s invasion of Ukraine, which hasn’t been the case.
But it was seen as a signal for companies to move to more secure sources of supply, which even under normal conditions takes some time – about 24 months – to do. Zimm says that, as a result, titanium lead times are currently quite extended – out about two years.
Some titanium producers are expanding their capacity. For example, Precision Castparts – through its TIMET unit – broke ground in March on a new melt facility in West Virginia. “But it is a multi-year proposition to build the capacity needed to replace Russia-sourced titanium,” Zimm points out.
Lead times for nickel, which is used in aircraft engines as well as for competitive uses such as electric vehicle batteries, all also about as long – about 40 weeks, according to Bashir.
“Overall, the outlook for the commercial aerospace market should remain very positive as people continue to travel more,” KeyBanc’s Leshock says. “It is just a question of the supply chain overcoming some of the issues it is currently facing.”
Teal’s McClelland agrees, noting that while there might be a few hiccups, largely the demand will be met. “Everyone is trying to sprint faster and faster to meet that demand.”
As far as the product mix, Aboulafia says the recent major shift toward single-aisle planes at record production levels will continue. While wide-body aircraft output has already come back more than halfway to where it was pre-pandemic, though he doesn’t see the market getting fully back to the 2019 peak for another decade.[Caption:]
The view from the cockpit of an A330. (Photo courtesy Airbus)