The overall health of the commercial aerospace industry is tied to that of the global economy. Therefore, it should come as no surprise that production rates at Boeing Company (BA – Free Analyst Report) and Airbus S.A., especially on new generation planes, are expected to forge ahead during the upcoming years. Growing airline traffic, and the possibility of sustainable profits for air carriers after years of red ink, are driving these renewed expectations. What’s more, aircraft order cancellations and deferrals are dwindling, a positive sign of things to come.
The favorable outlook for the commercial aerospace sector kicked off at the 2010 Farnborough Airshow in England. That event resulted in a whopping $47 billion worth of orders, a sharp improvement over the $7 billion in deals finalized in 2009, which augurs well for industry behemoths Boeing and Airbus, as well as their suppliers.
In particular, we are upbeat about the prospects of titanium and composite producers because all new-generation planes (Boeing’s 787 Dreamliner and Airbus’ A380 and A350) make greater use of both than their earlier versions. Demand for these products within the aerospace sector is derived from both jet engine components (engine cases, blades, discs, etc.) and airframe parts (wing supports and fasteners, bulkheads, hydraulic systems, landing gear, and tail sections). Moreover, these lighter materials are purported to help increase fuel efficiency by at least 20%, which is attractive to airlines since they face the likelihood of persistently high fuel prices. For certain air carriers, fuel accounts for nearly 50% of all operating expenses. A need to boost airline margins, which are rebounding from historic lows, is driving demand for the fuel-efficient Dreamliner. Indeed, Boeing’s newest flagship has wracked up $349 billion in orders, for 892 planes from 57 customers. Although a string of setbacks has delayed the plane’s debut by more than two years, the initial Dreamliner delivery is scheduled for the first quarter of 2011. Production of Airbus’ A380 and A350, which also make greater use of titanium and composites than the company’s previous models, is scheduled to accelerate in the years ahead. All told, Airbus has secured 234 firm orders for the former (worth in excess of $70 billion) and 558 orders for the latter (totaling approximately $110 billion).
Titanium Metals Corporation (TIE) is a producer of titanium sponge, mill products, and industrial fabrications. It sells titanium products to numerous companies in the commercial aerospace sector, including airframe manufacturers Boeing and Airbus. The company’s list of customers also includes builders of aircraft engines, including Rolls-Royce, Safran, GE’s (GE - Free Analyst Report) General Electric Aircraft Engines, and Pratt & Whitney, a division of United Technologies (UTX - Free Analyst Report). Not only is Titanium Metals highly dependent on the commercial aerospace industry, but it’s also likely to generate a considerable amount of business from two principal partners in the Dreamliner project (Boeing and Rolls-Royce). In particular, a supply agreement with Boeing augurs well for operations, since the world’s leading aerospace company generally uses a relatively higher percentage of titanium (than Airbus planes) in its airframe.
Customer order trends during the first half of 2010 indicate that destocking activity for titanium, which hurt the company in 2008 and 2009, has abated. Note that Titanium Metals is locked into fewer long-term agreements than its competitors, which should enable it to capture rebounding titanium prices. Moreover, advancing utilization rates and improved operating leverage should combine to boost sales and margins during the years ahead. These circumstances ought to enable healthy earnings gains during that timeframe.
Another company likely to benefit from a rebound in the commercial aerospace realm is Allegheny Technologies (ATI), one of the largest and most diversified specialty metals producers in the world. Allegheny manufacturers a series of alloys and composites used in applications that demand a combination of characteristics, including strength and resistance. Moreover, the company’s track record for innovation and reliability helped it finalize an eight-year $2.5 billion supply agreement with Boeing. Like Titanium Metals Corporation, three of the company’s key customers, Boeing, GE Aircraft Engines, and Rolls-Royce are major participants in the production of the new-generation Dreamliner. In recent years, ATI has expanded capacity to take advantage of rising demand for titanium, and its operations should grow along with the Dreamliner’s production rate.
Whereas Titanium Metals Corporation is highly dependent on the aerospace industry, Allegheny strives for market and product diversification. Moreover, the latter also provides specialty metals solutions to the oil & gas industries, as well as electric energy providers.
That said, Titanium Metals and Allegheny Technologies are positioned to benefit as titanium usage becomes more incorporated in other industries. Due to favorable physical and performance properties, titanium is being used more frequently in ground combat vehicles and naval vessels. Too, the importance of military markets to titanium producers should continue to grow as defense budgets escalate in the face of global conflicts. The alloy is also being used more often in transportation and architecture, especially in emerging markets. Lastly, oil & gas companies are starting to utilize it in offshore developments such as deep-water projects, which call for titanium’s light weight, high strength, and corrosion-resistance properties.
Other companies likely to benefit from the development of new-generation planes include BE Aerospace (BEAV) and Rockwell Collins (COL). The latter makes a wide array of aviation products, including information technology, pilot control, and cabin systems for commercial and government clients. Rockwell has a long-term working relationship with Boeing, as well as a $2.5 billion agreement to provide navigation and information systems for Airbus’ A350. Moreover, the company’s Commercial Systems division (which accounted for 42% of sales in 2009) is positioned to report steady gains as airlines work to replace aging fleets with newer aircraft. COL’s other segment, Government Systems, is likely to secure new orders from customers as they upgrade legacy defense platforms.
BE Aerospace is the world’s largest manufacturer of cabin interior products for commercial airlines and business jets, and a leading distributor of aftermarket aerospace fasteners and consumables. The production of new-generation planes should boost the company’s commercial business, which typically accounts for the lion’s share of BE’s results. In particular, we expect demand for aircraft seats (along with other comfort amenities), food & beverage receptacles, and storage equipment to increase nicely. Boeing and Airbus have also selected the company’s oxygen delivery systems for the Dreamliner and A350, respectively.
The start of several new commercial aircraft programs is improving the prospects of the overall aerospace industry. Indeed, airframe manufacturers, as well as their myriad suppliers, are positioned to report accelerating earnings growth. Investors with a patient disposition stand to reap considerable capital gains over the long haul.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.