Large local investment reflects strength of aerospace industry (Pittsburgh Business Times - by Justine Coyne - July 11, 2014)
When the first aircraft took flight in 1903, Orville and Wilbur Wright relied on crankcase casts produced by the Pittsburgh Reduction Co. In 1908, a year after the company became the Aluminum Company of America, a German engineer named Alfred Wilm developed Duralumin, an extraordinarily strong copper, aluminum, magnesium alloy Alcoa did not possess, as its research facilities at the time were virtually nonexistent.
In the wake of World War I and under pressure from the federal government, Alcoa developed its Duralumin substitute — known as the 17S alloy — that would be used to build the first commercial all-metal airplane in the U.S., the Ford Trimotor.
From those humble beginnings, Alcoa built an aerospace business that one day would reap more than $4 billion in revenue.
Today, every Western commercial aircraft features Alcoa fasteners and castings. On one Airbus A380 alone there are about 1 million Alcoa fasteners.
With backlogs stretching well into the next decade for large U.S. aerospace manufacturers such as Boeing Co. and Airbus SAS, Alcoa and other local companies are seeing sales soar.
“All you really have to do is look at the value that we have in there and look at the projections from the aircraft makers,” Alcoa CEO Klaus Kleinfeld said on a July 8 conference call. “… I mean I couldn’t be more optimistic on that.”
In just the past couple of months, Alcoa announced it would spend $2.85 billion to acquire Firth Rixson Co., a global leader in aerospace engine parts; invest $25 million at its facility in Hampton, Va.; and expand its aerospace operations in La Porte, Ind., to the tune of $100 million.
“Because the backlog is so extensive, there’s a lot of comfort among manufacturers to make these investments,” said Josh Sullivan, senior research analyst at Sterne Agee. “The amount of investment you’re seeing really speaks to the strength of the aerospace industry overall.”
And it’s not just Pittsburgh’s largest public companies that are investing to meet growing aerospace demand. In October, Houston, Pa.-based Perryman Co., which has grown to about 450 employees, said it would spend $40 million to expand its facilities in Houston and California, Pa., effectively doubling its capacity to produce aerospace fastener stock material and bar products.
“As the build rates increase, that means there’s more opportunity for us to increase,” said Frank Perryman, president and CEO of Perryman Co.
Boeing’s commercial backlog jumped to nearly 5,200 planes at the end of May, up from about 3,770 at the end of 2011. In the same month, Airbus’ backlog stood at 5,514 aircraft.
To put this into perspective, at $441 billion, Boeing’s backlog is more than the gross domestic product of all but 26 countries.
Airbus said at the beginning of this year it had orders to build $809 billion worth of merchandise at list prices and enough work to keep it busy for the next eight years — even if it didn’t get another order.
Meanwhile, Boeing and Airbus also have plans to increase the monthly production of their single-aisle aircraft, representing about 8,000 of the more than 11,000 large commercial aircraft in the current backlog.
“Over the last couple of years, we’ve been able to grow capacity, grow revenue and add team members,” Perryman said. “Looking at all of the indicators we follow and with how we are positioned across both aircraft manufacturers, we’re very bullish on the future of aerospace.”
In addition to Perryman, Pittsburgh-based manufacturers PPG Industries Inc., Allegheny Technologies Inc., RTI International Metals and Oberg Industries have all stepped up their presence in the sector to meet growing demand.
In its long-term market outlook, Boeing forecasts global airline passenger traffic will grow by 5 percent annually over the next two decades, prompting airlines to continue to expand their fleets. At the same time, airlines are looking to replace heavier, antiquated planes as they continue to battle with persistently high jet-fuel prices, which constitute close to a third of their total operating expenses.
“To be relevant on next-generation aircraft, you really have to partner with the major (original equipment manufacturers) to come up with solutions,” Sullivan said. “That’s why you see the investments Alcoa has made in its technology group paying off, and it’s the same thing with ATI’s proprietary metals.”
Sullivan said it takes a few years for new materials to work their way into plane production, but with build rates as high as they are, it’s something that can pay off handsomely.
“ATI is now just bearing some of the fruit of its long-term investment,” he said.
In October, the company announced it had extended its titanium products supply agreement with Boeing for greater use of ATI’s next-generation and advanced titanium alloys in both long- and flat-rolled product forms.
The company is now “well-positioned” to participate in Boeing’s growth into the next decade, said Rich Harshman, chairman, president and CEO of ATI.
Commercial aerospace represents about 55 percent of RTI’s total sales, and the company also has seen a boost in demand for titanium, said Patricia O’Connell, executive vice president, commercial. Longer term, RTI has identified manufacturing titanium parts from powder using 3-D printing as an area for growth, she said.
“We and our aerospace customers see this as a substantial opportunity to manufacture smaller, more complex parts on a more cost-effective basis,” she said.
The real driver behind the elevated build rates is air traffic globally is growing at two times gross domestic product, O’Connell said.
Strong economic and passenger growth, particularly in the Asia-Pacific region, will spur new airplane demand, Boeing projected. It estimated the region’s airlines will need an additional 12,820 airplanes — valued at $1.9 trillion — that will represent 36 percent of new deliveries worldwide over the next 20 years.
“Asia-Pacific economies and passenger traffic continue to exhibit strong growth,” said Randy Tinseth, vice president of marketing for Boeing Commercial Airplanes, at the Singapore Airshow. “Over the next 20 years, nearly half of the world’s air traffic growth will be driven by travel to, from or within the region.”
Tinseth said the Asia-Pacific fleet will nearly triple, from 5,090 airplanes in 2012 to 14,750 in 2032, to support increased demand.
Growth isn’t nearly as robust for Tier 2 suppliers, unless they are among the preferred companies doing business with Boeing and Airbus.
Bob McCormick, sales engineering manager at Ace Wire Spring & Form Co., said while aerospace is one of the McKees Rocks-based manufacturer’s largest segments, it hasn’t seen sales correlate to the ramp-up in plane building. Ace provides the springs that are used in constructing overhead compartments and cup holders, among other things.
“As a small manufacturer, it’s tough to get in with a company like Boeing or Airbus because they rely on so many buyers,” he said. “The opportunity is there. It’s just about breaking in to take advantage of it.”
David Rugaber, vice president and general manager of manufacturing at Oberg Industries, said for many other suppliers, the ramp-up has been slower than originally thought.
“It was projected to take off like a rocket, but it’s been more of a steady increase,” he said.
That’s not to say Oberg isn’t growing as a result. Rugaber said it has added people, new equipment and leased another building to expand aerospace operations.
“We’re making those investments because we are seeing a return,” he said. “It may not be as fast as originally projected, but demand is definitely growing.”
Barring any unforeseen events, it’s likely the increase in production will last through 2020 as projected, RTI’s O’Connell said.
“As long as fuel costs remain high and barring anything like another major recession or geopolitical event, this cycle should continue for a while,” she said.
Even during the economic crisis six years ago, airplane manufacturing wasn’t hit as hard as other industries.
“Airlines are very reluctant to get out of the backlog given how long it takes to get back in,” Sullivan said. “Even during the 2008 downturn, the sector remained very resilient in moving customers within the backlog.”
For Perryman Co., the investments it is making aren’t for today, but for when peak demand hits from 2016 to 2019.
“After the peak of what we see in 2019, you may see backlogs slide off a bit,” Perryman said.
But with the age of the average aircraft reaching 15 to 17 years old at that point, replenishment will help drive demand.
“After 15 years the technology and fuel efficiency of those planes just can’t compete with the new models being produced today,” Perryman said. “It’s like most technology; just think about what your phone looked like 15 years ago.”