Onward and Upward or Caution and Concern? Aerospace Weighs Forecasts...

By Michael C. Gabriele

Earlier this year, as the rollout of Covid-19 vaccinations started gaining momentum, the commercial aerospace industry enjoyed an increase in ticket sales—a welcomed business development when compared with the crash of 2020 and potentially good news for the hard-hit supply chain, especially the titanium industry.

However, in recent months, there have been growing concerns about the return of the pandemic via the highly contagious Covid-19 “Delta variant” and how it might, once again, disrupt the aerospace sector (and the hospitality industry). Economic uncertainty remains high, supply chains continue to experience difficulties and some government officials have quietly considered the possibility of restricting international flights.

What’s the best way to assess current business conditions for the commercial aerospace market and its effects on the titanium industry? Based on a variety of news reports and industry analysis, looking ahead to the fourth quarter and moving into the first half of 2022, the “safe” answer is that the situation is improving but remains in transition, with aspirations that the pace of recovery for the aerospace business will continue to steadily gain traction, to benefit the titanium industry’s showcase end-use market.

Providing an overview on the state of the global commercial aerospace industry, the Montrealbased International Air Transport Association (IATA; website: www. iata.org), in a Sept. 1 press release, reported that both international and domestic travel demand “showed significant momentum in July 2021 compared to June, but demand remained far below pre-pandemic levels. Extensive governmentimposed travel restrictions continue to delay recovery in international markets.” The IATA noted that comparisons between 2021 and 2020 monthly results “are distorted by the extraordinary impact of COVID-19,” and drew comparisons with data from July 2019, which followed a normal demand pattern.”

‘Government Decisions Not Driven by Data’

The IATA indicated that total demand for air travel in July 2021 (measured in revenue passenger kilometers or RPKs) was down 53 percent compared to July 2019. “This is a significant improvement from June (2021), when demand was 60-percent below June 2019 levels. International passenger demand in July was 73.6 percent below July 2019, bettering the 80.9 percent decline recorded in June 2021 versus two years ago. All regions showed improvement and North American airlines posted the smallest decline in international RPKs."

Willie Walsh, director general of the IATA, explained that the July results “reflected people’s eagerness to travel during to the Northern Hemisphere this summer. Domestic traffic was back to 85 percent of precrisis levels, but international demand has only recovered just over a quarter of 2019 volumes. The problem is border control measures. Government decisions are not being driven by data, particularly with respect to the efficacy of vaccines. People traveled where they could, and that was primarily in domestic markets. A recovery of international travel needs governments to restore the freedom to travel. At a minimum, vaccinated travelers should not face restrictions. That would go a long way to reconnecting the world and reviving the travel and tourism sectors.”

“As the Northern Hemisphere summer travel season draws to a close it is clear that too many governments missed the opportunity to apply a risk-based approach to managing their borders,” Walsh continued, quoted on the IATA website. “The growing number of fully vaccinated travelers and the prevalence of testing provided the chance to restore international connectivity and bring much needed relief to economies that are heavily reliant on travel and tourism. Instead, governments continued to behave as if it was the summer of 2020. Economies and the labor force will pay the price for decisions that were made not based on science, but on political expediency. Governments have rightly urged their populations to be vaccinated; now governments need to have confidence in the benefits of vaccinations—including the freedom to travel.”

The IATA is the trade association representing 290 airlines or 82 percent of total global air traffic.

Airlines Order Single-Aisle Jets

Aside from interpreting air travel RPK percentages, there have been positive developments for the commercial aerospace industry this year, most notably the move by United Airlines to order 270 new single-aisle/ narrow-body jets. The Wall Street Journal, in its June 29, 2021 online edition, reported that United “made its largest-ever plane order, adding Boeing and Airbus jets to fuel its post-pandemic growth plans. The order— the largest by a U.S. airline since American Airlines ordered 460 new aircraft in 2011—is the latest sign of U.S. airlines growing confidence that travel is on course to snap back after being decimated by the coronavirus pandemic last year. United lost more than $7 billion last year and accepted billions of dollars in government aid to continue paying workers.” The order includes the purchase of 200 Boeing 737 MAX jets and 70 Airbus SE A321 neos, “a deal valued at more than $30 billion,” according to the Journal report.

Two months after the United Airlines transaction, Delta Air Lines booked an order for 30 Airbus A321 neo jets. The online Airbus newsroom reported that the new aircraft come in addition to the airline’s existing orders for 125 existing orders for the aircraft, “bringing the outstanding orders from Delta to a total of 155 A321 neos.” Delta will begin receiving shipments of the new jets in early 2022. The A321 neos will be powered by next-generation Pratt & Whitney PW1100G turbofan engines. “Many of Delta’s A321 neos will be delivered from the Airbus’ production facility in Mobile, AL,” according to the Airbus report. These bookings for new jets should boost the titanium industry.

Aboulafia Weighs in on Trends

These recent orders for single aisle jets coincide with the outlook offered by aerospace industry analyst Richard Aboulafia (website: https://richardaboulafia.com), the vice president of analysis at the Teal Group Corp., Fairfax, VA (website: www.tealgroup.com). Aerospace Manufacturing and Design magazine (website: www. aerospacemanufacturinganddesign. com ) held a webinar, broadcasted on May 27, which featured Aboulafia’s “Aircraft Market Outlook, Second Half 2021.” His analysis and projections are frequently cited in charts and graphs presented by speakers at TITANIUM conferences, which are organized and sponsored by the International Titanium Association.

Among the many points he covered in his online presentation, Aboulafia underlined his observation on the “secular shift” toward the production of single-aisle aircraft (and away from twin-aisle aircraft) in the fleet planning of Boeing and Airbus. This trend towards single-aisle jets isn’t new and has been noted in recent years by Aboulafia and other aerospace industry analysts. Boeing and Airbus, in separate forecasts issued in 2018, said single-aisle jets would dominate commercial aerospace orders through the year 2038—representing up to 70 percent of new aircraft deliveries. Aboulafia, in his presentation, pointed out that the industry’s recovery from the 2020 Covid-19 crash will be driven by single-aisle jets. He said Airbus and Boeing are poised to come “roaring back fast,” with an emphasis on single aisle planes demonstrating signs of health. “The trend is towards single aisle jets, and much is riding on this for the supplier base.”

Aboulafia also confessed to being an optimist, saying that he sees a commercial aerospace recovery, back to near-2019 air traffic peak levels, in late 2022 rather than early 2024, as many other analysts have predicted. “The stage is set for a comeback sooner than expected. People have an awful lot of money saved up, and they’ve stored their vacation days.”

Separately, in a candid interview with Barron’s newspaper, published in March 2021, Aboulafia spoke about Boeing’s need to refocus its efforts on engineering—a notion than has an extended effect on the supply chain and the titanium industry. “They (Boeing) need to rethink where engineers fit in the company org chart. It’s really shocking to have an engineering company that basically doesn’t have engineers on its board. Boeing needs to empower engineers within the chain of command, reinforce engineering capabilities, and add more engineers to the board and the leadership team. Last year, Boeing’s engineering spending fell by over 25 percent. If it keeps losing market share and its engineering spending falls commensurately, it’s really tough to recover from that dynamic.”

In July, the news service Reuters reported that Boeing would cut production of its 787 Dreamliner and is reviewing the status of its 737 MAX, “a double hit to the U.S. plane maker’s Covid-19 pandemic recovery.” According to Reuters, Boeing’s 737 MAX and 787 have been afflicted by electrical defects and other issues since late last year. Boeing delivered 156 jets of all types over the first seven months of 2021, compared with 157 jets for all of 2020. Last June, The New York Times reported that Boeing’s long-range 777X would require an additional two years of testing before it wins regulatory approval. The 787 and 777X are major platforms for titanium, used for frames and engine components.

Outlook from Deloitte Services

Deloitte Services LLP, New York, a global business consulting company and one of the “Big Four” accounting firms, in an online outlook report, stated that the aerospace and defense industry’s revenue would recover in 2021, compared with 2020, but that recovery will likely be uneven across the two key sectors. “The commercial aerospace sector has been significantly affected by the COVID-19 pandemic, which has led to a dramatic reduction in passenger traffic, in turn affecting aircraft demand. As a result, the commercial aerospace sector is expected to recover slowly, as travel demand is not expected to return to pre–COVID-19 levels before 2024. The defense sector is expected to remain stable in 2021, as most countries have not significantly reduced defense budgets and remain committed to sustaining their military capabilities. However, given the disruption in the complex global supply chain, some defense programs could face minor cost increases and schedule delays in 2021.”

Commercial passenger traffic may not return to pre-pandemic levels before 2024, which would negatively affect order books and deliveries for original equipment manufacturers (OEMs). “In 2021, global commercial aircraft deliveries are estimated at 950 aircraft, a decline of 41 percent from 2018—the peak year for deliveries,” according to the Deloitte report. “Though the commercial aircraft order backlog stood firm at about 13,421 at the end of December 2020, it was down 8.7 percent from the peak backlogs of about 14,700 at the end of 2018. Apart from commercial aircraft, deliveries for rotorcraft are also expected to remain nearly 15 percent below pre-pandemic levels in 2021, at 750 units. As new orders are likely to remain subdued in 2021 and airlines continue with order cancellations, aircraft backlog could decline further. Moreover, OEM rate reductions would continue to adversely affect the extended commercial aerospace manufacturing supply chain, especially the mid- to lower-tier suppliers, which may struggle due to lower earnings and cash flows.”

Deloitte forecasted that the overall global aerospace industry will continue to focus on transforming supply chains into more resilient and dynamic networks, which could be done using strategies such as on-shoring, vertical integration, and increased cyber defenses. “To further strengthen supply chains, OEMs and suppliers should leverage digital tools, including automating internal processes and streamlining workflows, implementing smart management systems, and using data analytics. Also, collaboration with regional players to build capabilities and shift manufacturing capacity when needed could make the aerospace and defense supply chain more robust and help the industry manage business disruptions. Many companies are also using an ecosystem approach to strengthen their supply chains. In a recent survey conducted by Deloitte, 72 percent of industry executives said they are investing in supply chain ecosystems to leverage external alliance partners.”

For many, it’s still difficult to fathom the size and scope of the disruption in the commercial aerospace sector in 2020, due to the global pandemic. Pricewaterhouse Coopers (PwC; website: www.pwc.com), based in London, another member of the Big Four accounting firms, in its online “Global Aerospace and Defense Annual Industry Performance and Outlook” report, stated that, for 2020, the aerospace and defense industry reported $697 billion of revenue, down 8 percent from 2019, and $25 billion of operating profit, a decrease of 61 percent, primarily due to the impacts of COVID-19 on commercial aerospace, as revenue passenger kilometers (RPK) plummeted by 66 percent. The four largest Tier 1 suppliers to commercial jet manufacturers (Raytheon Technologies, GE Aviation, RollsRoyce and Safran), reported an aggregate operating profit loss of $1.4 billion for a decline of $16.3 billion.”

(Editor’s note: The International Titanium Association (ITA) does not generate its own industry forecasts. As demonstrated in this article, the ITA gathers and reports on publicly available information, forecasts and trends issued by independent financial analysts, consultants, news organizations and industry stakeholders. Readers are encouraged to assess business analysis from a variety of sources.)