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AERO Analysts are betting on full seats and an aging fleet

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A recovery in air travel has the commercial aerospace sector gaining lift, and this upcycle will gain even more thrust when Chicago-based Boeing Co. ramps up to full production on its new 787 Dreamliner.

"The aerospace sector is being driven by the continued increase in production at Boeing and to a lesser degree by when Airbus (SAS) steps up production of the A380," said Howard Rubel, managing director of aerospace equity research at Jeffries & Co. Inc., New York. "We've seen air traffic increase, and that increase has been international. As a result, it's created greater demand for wide-bodied jets compared with previous business cycles."

But as larger planes drive aircraft makers to lighten the load, what does this mean for the metals that typically make up the aircraft?

"Composites continue to take share away from aluminum in aerospace, but that won't fully take shape until Boeing ramps up to full production on the 787, which should happen sometime in 2008 or 2009," Rubel said.

About 40 percent of the 787 Dreamliner consists of non-metallic composite materials, which is expected to yield a roughly 20-percent fuel savings vs. similar-sized planes today, and just 19 percent aluminum, which traditionally accounted for the bulk of airliner raw materials. Boeing's latest plane, the 777, for example, has a 50-percent aluminum content and earlier planes even more. However, aluminum alloys are being eyed to help the light metal reclaim some of its lost share in airframes (AMM, April 16).

But the most perplexing thing in the aerospace sector currently is the continued high price of nickel used in high-temperature metals for airfoils in jet engines, Rubel said.

Rolls Royce Plc, London, the second-largest producer of jet engines after General Electric Co., Fairfield, Conn., projects that over the next 20 years more than 114,000 engines will be delivered with a dollar value of approximately $600 billion, creating exponential growth in demand for airfoils. Rolls Royce makes engines for both Boeing and Airbus.

This upswing likely will last through to the end of the decade, Peter Arment, vice president of JSA Research Inc., Newport, R.I., said, echoing the comments that the upcycle is being led by the recovery in commercial air travel. "We're going to see increasing production through the end of the decade. You can see what is going on with raw material prices like titanium and nickel alloys. This is all a function of a really robust commercial air cycle."

However, while aluminum is facing stiff competition in the commercial aerospace sector, metals are marking gains in defense. Both Alcan Inc., Montreal, and Alcoa Inc., Pittsburgh, stand to benefit from the F-35 joint strike fighter program, which is ramping up production to roughly 60 planes a year by 2012 and almost 140 annually by 2015. Alcan will be the leading supplier of heavy-gauge plate for the F-35 through a supply chain agreement with Transtar Metals Corp., Torrance, Calif., which is providing supply chain management services to Lockheed Martin Corp., Northrop Grumman Corp. and BAE Systems Plc. Alcoa's content on the JSF has been estimated by the company at in excess of $1 million per plane.

"In the defense sector, we've had really healthy defense spending since President Bush came into office in 2001," Arment said. "There's been a dramatic step up in defense spending. You're seeing the recapitalization of the helicopter fleet to replace aging aircraft, and this also generates increasing demand for raw materials."

In terms of the geographic driver of the upswing, Arment pointed to the Pacific Rim, Asia and the Middle East for the commercial sector, although the United States takes the lead in defense. "It goes along with infrastructure spending. I don't really see that letting up. In North America, the aerospace sector is driven by defense," he said.

J.B. Groh, senior research analyst at D.A. Davidson & Co., Great Falls, Mont., agreed that on the commercial side, emerging markets like India, China and the Middle East are driving the growth. "These areas have large populations and small fleets of aircraft. There is also a growing middle class in need of air transportation," he said.

And while there's been very little growth in North America, Groh indicated that could change soon as the existing commercial fleet grows older. "The fleet continues to age and eventually you reach a tipping point at which operating a new aircraft is more cost effective than maintaining an aging fleet, and we are near that point when North American carriers will have to re-enter the market to replace aircraft," he said. "Defense spending is high and will remain high while we're still in Iraq."


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