Wood On Plastics: Aerospace Reaches Cruising Altitude

Overall production of aircraft/aerospace products and parts in the U.S. has been relatively stable during the past few years.

That’s not to say that all sectors of this industry were recession-proof, or even that there were not some wild fluctuations recently in market demand for certain types of aircraft. But when looked at as a whole, production of these types of goods has been relatively steady. Our forecast is for another year of stability in 2011: U.S. output of aerospace products will rise 4% this year following a 4% decline in 2010.

To get a clearer picture of this market, one must divide the industry into two categories: defense and non-defense (commercial) aircraft. Most of the large suppliers (like Boeing) are deeply diversified in both sectors, and plastics parts will play an increasingly important role in each. But market conditions in all sectors of the aerospace industry are changing rapidly, so processors should take a tip from the test-pilot handbook as they approach the future: Plan for the best, but prepare for the worst.

Our outlook for the defense category starts with a simple but powerful hypothesis: The world is a dangerous place, and things are getting worse. Many of the oil-rich dictatorships in the Middle East and Northern Africa have money to spend on more aircraft and are presently motivated to spend it. One of the great ironies of a No-Fly Zone is that it requires a huge number of aircraft to either enforce it or defy it, depending on which side you are on. This is just one example that strongly suggests that global demand for defense-related aircraft will not diminish any time soon.

While the current cycle of geopolitical instability will keep the market for conventional aircraft aloft for the foreseeable future, some long-term technological trends will continue to generate tailwinds. The defense budgets for the U.S. and most of our allies will be subjected to intense pressure and scrutiny due to burgeoning debt problems. But issues of national security will trump everything else (even healthcare), so new programs will continue to be funded if they can be shown to be effective.

On the non-defense side, the market forces are much different, but no less exciting. The primary concern at present for the commercial aircraft sector is rising fuel costs. In the short term, higher fuel costs cut into the profit margins of commercial carriers, and without profits, there is less demand for new aircraft. At a certain point, rising fuel costs due to higher overall energy prices also correspond to lower customer confidence and restrained demand for both travel and air cargo services.

Over the long term, higher fuel costs drive demand for more fuel-efficient planes. Both Boeing and Airbus are trying to get their latest fuel-efficient models to market, but it is still too early to know whether the planes will deliver on all of the their promises. Many would-be purchasers of large aircraft are currently in a “wait-and-see” mode.

Despite the upward direction of fuel costs, the strongest prospects for long-term growth in the aerospace industry are the emerging markets of China and India. These countries have robust economies and large pools of potential customers, and they are both ramping up investment in transportation infrastructure. Smaller, regional air carriers, along with business jets, will likely see the strongest growth in these emerging markets.

WHAT IT MEANS TO YOU

•Expect a flurry of industry consolidation during the next five years. This will be true for the airlines as well as their suppliers. If this is a big market for you, establish yourself as a supplier your customer cannot afford to lose.

•Fuel costs are of paramount importance. If higher costs cannot be pushed through to customers, then there will be strong pressure to push them back to suppliers. Look for ways to streamline your operation and cut your costs.

•Most of the research and design operations for aerospace products will remain in the U.S. and Europe, but the strongest growth in production activity will be in Asia. Are you prepared to compete?