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Aerospace Supply Chain & Raw Material Outlook

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Kevin Michaels, global managing director – aviation consulting & services at ICF International, presented at the 2nd Annual European Aerospace Raw Materials & Manufacturers Supply Chain Conference. The conference is designed to serve a full-range of participants in the dynamic global commercial and military aerospace markets.

In this presentation, Mr. Michaels addresses Aerospace demand outlook and supply chain trends in the market.

http://www.icfi.com/markets/aviation

Published in: Business
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Aerospace Supply Chain & Raw Material Outlook

  1. 1. 1icfi.com/aviation | Presented by: Dr. Kevin Michaels Global Managing Director – Aviation Consulting & Services Aerospace Supply Chain & Raw Material Outlook 2nd Annual European Aerospace Raw Materials & Manufacturers Supply Chain Conference September 15, 2014 Toulouse, France
  2. 2. 2icfi.com/aviation | Agenda  Aerospace Demand Outlook  Aerospace Supply Chain Trends
  3. 3. 3icfi.com/aviation | Air Transport 62% BGA 13% Military 11% Military RW 11% Civil RW 3% AEROSPACE DEMAND OUTLOOK Total aircraft production in 2014 is 4,972 units; air transport aircraft account for 62% of value Source: ICF analysis Air Transport 33% BGA 22% Civil RW 21% Military RW 15% Military 9% By Units 4,872 By Value $171B 2014 Aircraft Production by Market
  4. 4. 4icfi.com/aviation | AEROSPACE DEMAND OUTLOOK Annual production value is expected to reach more than $200B, with unit production eclipsing 6,000 aircraft by 2024 Source: ICF analysis * Constant 2014 US$ Aircraft Production 2014-2024 By Market Segment # Aircraft 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2014 2019 2024 Military, (0.9%) Military RW, 0.4% Civil RW, 0.7% BGA, 4.9% Air Transport, 2.7% Total CAGR = 2.2% Type, CAGR $B USD* $0 $50 $100 $150 $200 $250 2014 2019 2024 Civil RW, 1.2% Military RW, 0.7% Military, 0.3% BGA, 4.8% Air Transport, 2.4% Total CAGR = 2.3% Type, CAGR
  5. 5. 5icfi.com/aviation | Aggregate aerospace raw material demand is 1.44B pounds AEROSPACE DEMAND OUTLOOK Source: ICF analysis Aluminum Alloys 48% Steel Alloys 22% Titanium Alloys 11% Super Alloys 9% Other 6% Composites 4% 2014 Aircraft Raw Material Demand By Material Type (buy weight) Total 1.55 B lbs  Aluminum alloys are nearly half of all total demand  Steel alloys & titanium also are large driver of demand due to their high buy to fly ratios  Composites are relatively small part of total demand at just 4% due to their lightness of weight and their relatively low buy to fly ratio Aggregate “Buy to fly” ratio is ~ 6
  6. 6. 6icfi.com/aviation | Boeing and Airbus aircraft account for nearly 70% of raw material demand AEROSPACE DEMAND OUTLOOK Source: ICF Analysis  Boeing and Airbus aircraft models comprise 67% of demand  GE is the next largest consumer – 7% when including its share of CFM Boeing 36% Airbus 30% General Electric 5% CFM Intl 4% CFM 3% Rolls-Royce 3% Embraer 2% Pratt & Whitney 2% Other 15% Total 1.55 B lbs 2014 Aircraft Raw Material Demand By OEM (buy weight)
  7. 7. 7icfi.com/aviation | AEROSPACE DEMAND OUTLOOK The total aerospace raw material market is worth about $12 billion  Aluminum and titanium are the largest material markets by value – both are worth just over $3B  With 787 production ramping up, and A350 long-lead items under production, composites are the third largest category at $2.3B  The value of superalloys is $1.8B, driven by aero- engine production Source: ICF analysis 2014 Aircraft Raw Material Value By Material Type Titanium Alloys 27% Aluminum Alloys 26% Composites 19% Super Alloys 15% Steel Alloys 10% Other 3% Total $11.9B
  8. 8. 8icfi.com/aviation | Over the next decade aluminum demand will remain solid while composites & titanium will grow significantly AEROSPACE DEMAND OUTLOOK Source: ICF analysis 2014– 2023 Aerospace Raw Material Demand By Material (buy weight) Million Lbs Total CAGR = 1.1% Type, CAGR  Overall raw material demand growth will be lower than aircraft unit growth due to lower buy-to-fly ratios and greater use of composites  Composites and titanium will be the fastest growing material categories  Aluminum demand will be relatively flat0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2014 2019 2024 Other, 1.0% Composites, 4.9% Super Alloys, 1.2% Titanium Alloys, 3.6% Steel Alloys, 0.1% Aluminum Alloys, (0.5%)
  9. 9. 9icfi.com/aviation |  Aerospace Demand Outlook  Aerospace Supply Chain Trends Agenda
  10. 10. 10icfi.com/aviation | There are several important aerospace trends that are shaping aerospace supply chains Growing capital market interest Key Aerospace Supply Chain Trends SUPPLY CHAIN TRENDS Source: ICF “Right Shoring” Advanced Aeroengines Additive Manufacturing Supply Chain Transparency & Control OEM Vertical Integration OEMs Push For Cost Reduction
  11. 11. 11icfi.com/aviation | 0% 10% 20% 30% 40% 50% 60% 70% 80% 2009-11 2012-14 Move Between High Cost Countries Reshore Move Between Low Cost Countries Offshore SUPPLY CHAIN TRENDS – RIGHTSHORING Shifting manufacturing economics underpin increased interest in manufacturing “onshoring” Source: The Economist January 19 2013 Note: data is for general manufacturing and is not aerospace-specific Manufacturing Outsourcing Cost Index % of US Cost Companies’ Intentions To Change Manufacturing Source Worldwide, % of Capacity
  12. 12. 12icfi.com/aviation | The southeast U.S. and Singapore are now two popular locations for aerospace manufacturing investments SUPPLY CHAIN TRENDS – RIGHTSHORING • The southeast U.S. is benefitting from a wide variety of investments • Manufacturing & some engineering investments from airframe & engine OEMs, as well as airframe suppliers • Singapore is becoming a new manufacturing hub in Southeast Asia • Investments include range of high-tech manufacturing, MRO, and engineering Southeast U.S. Singapore Source: ICF
  13. 13. 13icfi.com/aviation | SUPPLY CHAIN TRENDS – RIGHTSHORING “Rightshoring” is the new aerospace investment mantra Source: ICF * Note – Russia is emerging for Western certificated equipment Global Aerospace Manufacturing Clusters Established Clusters Emerging Clusters
  14. 14. 14icfi.com/aviation | SUPPLY CHAIN TRENDS – COST REDUCTION Initiative Activity New commercial terms • Unilateral price reductions and revised terms • “No fly” lists for suppliers that don’t participate Part redesigns • Value engineering • Material substitution New processes • Shift to lower cost process • Leverage new processes Capture revert • Where possible, capture revert from suppliers • Work with supply chain integrators to close loop on material OEMs are utilizing a variety of cost reduction initiatives… Source: ICF analysis
  15. 15. 15icfi.com/aviation | SUPPLY CHAIN TRENDS – COST REDUCTION …and cost reduction will be important as aircraft OEMs target double-digit profitability  Major aircraft OEMs are driving for double-digit profitability  One initiative is to secure concessions from suppliers to ensure access to future programs  OEMs are also expanding their influence and role in the aftermarket  The implication is downward margin pressure on suppliers Source: ICF analysis, Wall Street Journal
  16. 16. 16icfi.com/aviation | SUPPLY CHAIN TRENDS – ADVANCED AEROENGINES The push to deploy advanced technology underpins recent re-engining decisions – more are likely “G2” E-jet Photo credits: Embraer, Boeing, Airbus  In January 2013 Embraer selected Pratt’s GTF for is “G2” E-Jets  Boeing announced the B777-X with GE9X aeroengines in November 2013  Airbus announced the A330neo with the Trent 7000 at Farnborough 2014 for 2018EIS  A future re-engining possibility includes the A380 777-X A330 neo “Every 25 years a big moonshot ...— that’s the wrong way to pursue this business. The more-for- less world will not let you pursue moonshots.” Jim McNerny – CEO, Boeing
  17. 17. 17icfi.com/aviation | …however aeroengine material trends are encroaching on titanium’s “sweet spot” in aeroengines Source: CFM, ICF analysis CFM LEAP-X SUPPLY CHAIN TRENDS - ADVANCED AEROENGINES Nickel alloy moving forward in the High Pressure Compressor module Composite fan and fan cases increasingly popular Titanium’s “sweet spot” in aeroengines  Composites  Powder Metals  Advanced super alloys  Titanium Aluminide Winning Materials
  18. 18. 18icfi.com/aviation | Supply chain transparency and control is growing in importance SUPPLY CHAIN TRENDS - ADVANCED AEROENGINES  Customers (driven by OEMs) demanding increased visibility into supply chain  This contributes to the use of latest technology (physical control centers and software) for 'early alerts'  There is also growing use of data analytics  Sub-tier suppliers are being asked to provide utilization and ramp-up plans
  19. 19. 19icfi.com/aviation | Some OEMs are trending towards greater vertical integration; Boeing is a notable example SUPPLY CHAIN TRENDS – VERTICAL INTEGRATION Selected Examples of Boeing Vertical Integration Source: ICF analysis  Boeing has set up the nacelle and pylon Center of Excellence in South Carolina  The 777X wing production will remain in Everett  Facility expansions in Winnipeg, South Carolina, and Helena, MT will support machining and in- house production of structures assemblies
  20. 20. 20icfi.com/aviation | GE is also vertically integrating for strategic technologies SUPPLY CHAIN TRENDS – VERTICAL INTEGRATION Acquired Avio • LPTs • Gearboxes Acquired Morris Technologies for additive manufacturing capability Will make ceramic matrix composite blades, vanes, seals Established JV with Parker to make fuel nozzles via additive manufacturing Selected Examples of Vertical Integration - GEnx CFAN JV with SAFRAN makes composite fan blades Source: ICF analysis
  21. 21. 21icfi.com/aviation | Additive manufacturing represents a potential step-change in cost and part design capability SUPPLY CHAIN TRENDS – ADDITIVE MANUFACTURING Sources: ICF analysis • Additive manufacturing (AM) “builds up” parts with material deposition, rather than removing material through machining • There are many types of additive manufacturing processes and little industry standardization Traditional Subtractive Manufacturing Additive Manufacturing
  22. 22. 22icfi.com/aviation | SUPPLY CHAIN TRENDS – ADDITIVE MANUFACTURING Several OEMs are trialing additive manufacturing on a range of production and aftermarket parts Source: ICF analysis, GKN, GE Aviation, Airbus, Boeing Examples of Additive Manufacturing Adoption • GKN is using AM on aerostructures for Falcon 5X • Driver is cost reduction • Boeing is currently using AM for polymer ducting on F-18 & 787 • Part consolidation & cost driver • GE using AM for Leap-X fuel nozzles in Parker Aerospace JV • Performance is main driver of adoption
  23. 23. 23icfi.com/aviation | SUPPLY CHAIN TRENDS – ADDITIVE MANUFACTURING In addition to adoption on certain parts, OEMs and suppliers are announcing substantial investments in AM Source: RTI, GE, Carpenter Technology, ICF analysis RTI Acquires Directed Manufacturing Jan 2014 ▪ RTI acquired Direct Manufacturing for $23M to enhance production capabilities in medical devices and aerospace ▪ Makes full rate production parts for UAVs GE Expands Auburn AL ▪ GE will expand Auburn facility starting in late 2014 ▪ 10 machines in 2015 with capability for 50 ▪ Will handle full rate production of all AM parts, including Leap fuel nozzles Announced July 2014 Carpenter Powder Facility in Athens, AL ▪ Facility will be located adjacent to current mill facility in Athens ▪ Will produce superalloy powders for isothermal forging and additive manufacturing Announced Oct 2013
  24. 24. 24icfi.com/aviation | SUPPLY CHAIN TRENDS - ADDITIVE MANUFACTURING A long term trend to watch is the penetration of additive manufacturing and its impact on buy-to-fly ratios Ti Wing Beam Concept (China Northwest Polytechnical Univ. Sources: RapidReady, China Northwest Polytechnical University  The industry aggregate buy-to-fly ratio based on subtractive manufacturing is ~6:1; for some parts it is >15:1  In contrast, the buy to fly ratio for additive manufacturing is very low  Early application of AM will be in unmanned systems, experimental aircraft, space, and military sustainment  In the long term, AM will impact mainstream aerospace production and raw material demand
  25. 25. 25icfi.com/aviation | WILDCARD – TITANIUM SUPPLY RESTRICTIONS A Wildcard to watch: political crises with Russia and Ukraine could drastically impact aerospace supply chains Source: ICF analysis, Wall Street Journal VSMPO 30% ATI 23% Timet 22% RTI 10% Japanese Suppliers 10% Others 5% Total 169M lbs  Over 30% of aerospace titanium is supplied by VSMPO  Ukraine is a key supplier of nearly all titanium concentrates to VSMPO  Some OEMs are stockpiling titanium as a contingency 2014 Aerospace Titanium Market
  26. 26. 26icfi.com/aviation | Thanks and Questions Kevin Michaels Vice President Global Managing Director – Aviation Consulting & Services +1 734 821 0220 kmichaels@icfi.com
  27. 27. 27icfi.com/aviation | ICF Aviation is one of the largest and most experienced global aviation & aerospace consulting practices ICF AVIATION  More than 50 years in business (founded 1963)  100+ professional staff − Dedicated exclusively to aviation and aerospace − Blend of consulting professionals and experienced aviation executives  Specialized, focused expertise and proprietary knowledge  Broad functional capabilities  More than 10,000 private sector and public sector assignments  Backed by parent company ICF International ($943M revenue)  Global presence –– offices around the world New York • Boston • Ann Arbor • London • Singapore • Beijing • Hong Kong Airports • Airlines • Aerospace & MRO • Asset Advisory joined ICF in 2012 joined ICF in 2011 joined ICF in 2007
  28. 28. 28icfi.com/aviation | ICF provides end-to-end aviation industry capability and insight delivered through four strategic practice areas ICF AVIATION Operational, strategic and transaction support to regulators, owners, operators, and developers Airports Strategy, marketing, transaction support and Operations & Supply Chain services for manufacturers, MROs and investors Aerospace & MRO Operational, strategic and transaction support to airlines and air transport businesses Airlines Includes industry- focused support for asset and equipment financing activities Asset Advisory

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