Financial Headwind Slows Aerospace

With the pace of new aircraft orders slowing, the outlook for aerospace metals sales next year is up in the air. By Myra Pinkham, Contributing Editor While certainly not in a nosedive, the high-flying commercial aerospace market has hit a stiff headwind. Like most other industries, it is feeling the effects of the widespread financial crisis and fears of an impending recession. "Commercial aerospace had an amazing five years, but all good times eventually come to an end," says aerospace analyst Richard Aboulafia, vice president of the Teal Group, Fairfax, Va. "Demand all of a sudden has fallen off markedly," he says, accelerating from the slow decline that began early this year. "It got worse with the weakening economy and much, much worse with the financial crisis and its accompanying credit crunch." Aboulafia predicts the downturn will first affect demand for business jets, followed by regional jets and then, eventually, the large commercial jetliners. This is not good news for the aluminum and titanium suppliers servicing this market, who tend to feel the impact of weakening demand even quicker than the airframe manufacturers themselves. Both Boeing and Airbus are cushioned by order backlogs that extend out five to seven years. The widely publicized production delays that have plagued both Boeing and Airbus as they strive to launch new, more fuel-efficient aircraft, coupled with the months-long Machinists strike at Boeing, promise to magnify the market's slowdown. Neither Boeing Commercial Airplanes or Airbus would hazard a guess as to the ultimate effect of the financial crisis on its metals suppliers. Boeing spokesperson Ann Schmidt says the economic downturn has not yet affected aerospace raw material demand, "although we continually assess the potential impacts to future demand." Meanwhile, Airbus Americas spokesperson Mary Anne Greczyn says she cannot comment on the effects of the current financial crisis, economic downturn and oil price volatility, though all of these factors will be covered in depth in Airbus' upcoming Global Market Forecast. "There is no doubt that the commercial aerospace market, while not deteriorating, is getting cautious," says Bill Chadwick, director of research for the Aerospace Industries Association of America, Arlington, Va."While it might seem counterintuitive, the weak economy is actually resulting in certain airlines ordering more new aircraft," he says, as their drive to replace older models with more fuel-efficient designs gains newfound urgency. Any fall in global aerospace sales will be cushioned by the record backlog of orders, which stood at 7,320 aircraft at mid-year, adds Chadwick. Both Boeing and Airbus enjoyed a record-breaking sales year in 2007, with Boeing receiving 1,423 gross orders and Airbus receiving 1,458 gross orders. While the pace of orders slowed in the first three quarters of 2008, it remained fairly strong. Airbus reported 737 gross orders for aircraft, while Boeing reported 633 net orders (which takes into account cancellations and other adjustments) through mid-October. Sales, however, have slowed in the past three months, says Aboulafia, "As far as production goes, flat is the new up. Right now people aren't talking about raising numbers, but rather just staying in place." Much depends on how badly the financial crisis affects would-be airline passengers, he adds. "Already, airline travel is starting to fall off. Many airlines are starting to worry about their traffic numbers and, in some cases, cutting back flights to keep operating costs down." Greczyn at Airbus admits that "demand in North America has certainly been dampened. Airlines here have raised ticket prices, added ancillary fees for bags, drinks, meals, etc., and taken about 10 percent of capacity out of the domestic fleet." "Thank God the cost of fuel is down. That is one thing that is helping the airlines," says Jerry Bashir, president of Davie, Fla.-based aerospace distributor Falcon Aerospace. Experts agree that moderating oil prices, and lower jet fuel costs, are critical if the airlines are to return to profitability. Bashir is not surprised that passenger travel has begun to scale back. "What is happening on Wall Street is impacting everyone in the world, not just the United States." Nevertheless, Bob Mraz, vice president of sales and marketing for TW Metals Inc., Exton, Pa., does not believe that the decline in air travel will be all that dramatic--certainly nowhere near the decline that followed the Sept. 11 terrorist attacks. In fact, he continues to describe the commercial aerospace market as "very strong." Mraz admits that the Boeing strike and the production delays for the new Boeing 787 Dreamliner are pushing back some material orders."But all that will do is cause pent-up demand. There have been some push backs, some delays, but no cancellation of orders," he notes. Chadwick also played down these two events. "While the Boeing strike has caused some turbulence in the market, it is just a bump in the road. It is not expected to cause long-term problems." Production delays on Boeing's 787, and the Airbus A380 last year, were not unexpected, he adds. "It is normal to have delays with newly designed planes. It takes a while to get all the bugs out. It isn't a catastrophe." Still, the slowdown of the 787 program has caused problems for suppliers of many raw materials including aluminum, titanium and stainless steel, says Bashir. Falcon Aerospace supplies about 45 products for the 787, so he is definitely concerned about the delay. The affect was further compounded when Airbus changed its production schedule for the A380. "We thought they were back on track when they delivered planes to Singapore, but then they revised their production schedule down again," Bashir says. Though not offering much detail due to Airbus-client confidentiality, Greczyn admits "A380 industrialization problems have slowed deliveries to our launch customers."While some planes are now being delivered, "the process is certainly challenging." Boeing 787s that were scheduled for delivery by the end of this year will not be shipped until at least May of next year, which will have a big affect on titanium suppliers, says Richard Leone, spokesperson for RTI International Metals Inc., Niles, Ohio. Because the 787's design uses new composite materials in place of many conventional aluminum parts, it also consumes more titanium than other aircraft, because titanium is the alloy most compatible with composites. To build each 787 requires Boeing to buy 250,000 pounds of titanium to machine into parts, explains Leone. Now that the company will ship only 25 aircraft next year instead of the 109 planes originally planned, "that means they will be taking about 21 million less pounds of titanium, which is quite substantial. Annual industry shipments worldwide are only about 70 million pounds." The growing trend among commercial airframe designers to use more lightweight composites to make their new planes more fuel-efficient also results in the use of more titanium per plane, often at the expense of aluminum. While titanium accounted for about 5 percent of the total weight of most previous aircraft, the 787 is 15 to 20 percent titanium. "Titanium, unlike aluminum, works extremely well with composites," Leone explains. Titanium parts and the composites they are attached to tend to expand and contract in the same proportion, while aluminum changes at a different ratio. "In addition, aluminum and composites corrode and erode each other, which is something that doesn't happen with titanium and composites." Chadwick at AIA adds that all trends point to the growing use of composites, titanium and other specialty metals and materials going forward, often "cannibalizing" some of the aluminum on each plane. This does not mean the demise of aluminum used for commercial aircraft, Mraz emphasizes. "We really aren't seeing a decline in overall aluminum consumption by the aerospace market. While there is, in some cases, less aluminum used per plane, there are also more planes being built." Demand for certain older, aluminum-rich aircraft models also remains strong, Mraz adds. "There continue to be tremendous backlogs for single-aisle planes. A Boeing 737 takes off and lands every 30 minutes somewhere in the world, and the A319 and A320 are also very much in demand." Lloyd O'Carroll, senior vice president of research for Davenport & Co., Richmond, Va., writes in his latest Davenport Quarterly Aluminum Outlook (published late in September) that aluminum shipments to the aerospace market--most of which end up in commercial aircraft--will likely be up about 12 percent in 2008, although some of that will come out of inventories. He expects aluminum shipments to the aerospace market to increase about 5 percent next year, including about 788 million pounds to be used for the A380, which contains more aluminum than any other model. Actually, the aircraft production delays and the Boeing strike might end up being good for the commercial aerospace industry, says Aboulafia. "Anything that slows production decreases the risk of overcapacity," he notes. "Even with the financial crisis, things aren't that bad for commercial aerospace, probably due to the large backlogs," says Chadwick. "The industry will eventually bounce back again," concludes Bashir. "It won't reach the same level it had been previously, but that isn't necessarily a bad thing. After all this is over, I believe that supply and demand will be at a better ratio."