Opportunities in Aviation and Its Supply Chain

Includes: ATI, BA, DCO, GR, PCP, RTI, SPR, TGI
by: Michael Filighera


For the past several years commercial aviation has experienced turbulence across its industry. From excess capacity to escalating fuel prices, fare wars and weak economic growth in core consumer and business traveler markets, the industry has been forced to adapt. It's responded to these challenges through industry consolidation (such as the link up of United and Continental Airlines, Delta and Northwest Airlines, and Air France and KLM), tighter control and hedging of variable expenses like fuel, opening up new revenue sources, and better utilization of key assets and infrastructure. Even with continued volatility in global energy markets, these steps have begun to pay off. As the global economic picture continues to show signs of recovery, there are similar signs of long term growth opportunities within the global aerospace industry.

Airlines such as Southwest (NYSE:LUV) have built a strong reputation in the efficient utilization of aircraft. However the average fleet age of U.S. based airlines is reaching 11 years. The realities of aircraft structural fatigue and aging aircraft fleets coupled with needs for greater fuel efficiency and a more demanding cost conscience customer base is creating new opportunities for companies across the aviation and aerospace supply chain.

Major aircraft manufacturers like Boeing (NYSE:BA), European Aeronautic Defence and Space (OTCPK:EADSF), Brazil's Embraer (NYSE:ERJ) and Canada's Bombardier (OTCQX:BDRAF) among others are key links in the aviation and aerospace supply chain. Each manufacturer is releasing new products to meet growing demand from a rebounding commercial aviation sector. Their products focus on greater fuel efficiency, range, advanced technology, and passenger comfort. Collectively the four manufacturers have either recently delivered or have a backlog of over 1,800 new aircraft. Boeing, for example, is set to deliver the new 787 Dreamliner during the 3rd quarter of 2011. There is currently an order backlog of 851 787's with almost no cancellations. EADS has delivered 45 A380 jetliners with an order backlog of another 199. Embraer and Bombardier each have delivery and order pipelines of roughly 250-300 new aircraft.


There are many component parts and services required in building jet aircraft. Using our research we wanted to analyze three aspects of the suppliers to global aircraft manufacturers such as Boeing, Airbus, and Embraer.

  1. The scope and performance of companies who supply products and services to all of the three manufacturers.
  2. Identification of materials and companies that support greater fuel efficiency, range and passenger comfort.
  3. Identification of companies that provide high technology aircraft parts, auxiliary equipment, and support services for the entire life cycle of an aircraft.

Shared Suppliers

We initially identified over two hundred suppliers to Boeing, Airbus and Embraer. Eighteen of these publicly traded companies have supply chain relationships with all three manufacturers. The focus of their businesses range from Specialty Metals and Titanium Alloys, Satellite Systems, Specialty & Performance Chemicals, Aircraft Engines and Parts to Training & Testing Services. Collectively as a group, these 18 suppliers have delivered a One Year Return % of 19.2%, which is 50% better than the S&P 500 over the same time period. Also within this group, we identified companies which support the goal of great fuel efficiency and range. This was in the area of Titanium.


3 Month Return %

1 Year Return %

3 YR Return %

5 YR Return %

Alcoa Inc
1% 29% -51% -50%

Allegheny Tech Inc





CAE, Inc. (USA)





Curtiss-Wright Corp.





Ducommun Inc





Duerr AG





Elbit Systems Ltd. (ADR)





Garmin Ltd.










Goodrich Corp





Hexcel Corporation










Ladish Co., Inc.





Rolls-Royce (ADR)





RTI Int'l Metals, Inc.










T.A.T. Technologies Ltd.





Titanium Metals Corp





United Tech













Specialty Metals & Titanium Sponges and Structural Shapes

Titanium, which for years has been used in high performance fighter jet aircraft, is recognized for its high strength-to-weight ratio and its corrosion resistant qualities. When alloyed with aluminum it produces a strong lightweight alloy for aerospace usage – for jet engines and fuselages. In its unalloyed condition, titanium is as strong as some steels, but 45% lighter. Boeing, Airbus and Embraer each use a titanium/steel alloy within the fuselage construction of their new aircraft. GE (NYSE:GE), United Technologies (NYSE:UTX), and Rolls-Royce (OTC:RRCEF) also use a titanium alloy in the construction of the turbine blades of jet engines. This makes them lighter and increases aircraft fuel efficiency, which in turn adds to an aircrafts flight range (non-stop distance) capability.

Within the 18 shared suppliers, we identified three companies in the Specialty Metals and Titanium Alloys sector. These companies are uniquely positioned because they not only directly supply the three major aircraft manufacturers. They also supply aircraft engine and part providers GE Aviation, Rolls-Royce, Pratt & Whitney and Ladish. Each of these four engine providers in turn supplies the three major aircraft manufacturers.

  1. RTI International Metals, Inc (NYSE:RTI) – is a producer and supplier of titanium mill products, and a manufacturer of fabricated titanium and specialty metal components for the international aerospace, defense, energy, and industrial and consumer markets. They generate approximately 10% of their revenues from Boeing.
  2. Titanium Metals Corp. (TIE) – is a producer of titanium melted and mill products. Their products include titanium sponge, the basic form of titanium metal used in titanium products; melted products, the result of melting titanium sponge and titanium scrap, either alone or with various alloys such as aluminum. TIE, which also generates 10% of its revenues from Boeing, has steadily outperformed the S&P 500 since November 2009.
  3. Allegheny Technologies Corp. (NYSE:ATI) – is a diversified specialty metals producer including titanium and titanium alloys, nickel-based alloys and stainless and specialty steel alloys. Their products are used in both airframes and aircraft engines. The firm has outperformed the S&P 500 2 to 1 in 2011.

Aircraft Parts, Auxiliary Equipment and Services

These firms provide equipment and services in the design and manufacture of fuselage, hydraulic systems, engine parts, avionics, control systems, and cockpit controls. Within the 18 shared suppliers to the three major aircraft manufacturers, we identified three companies with a broad portfolio of products, life cycle support services, as well as material revenue exposure.

1. Spirit AeroSystems – (NYSE:SPR) – designs and manufacturers commercial aero structures for Boeing and Airbus. The company produces aero structures for every Boeing commercial aircraft in production including the 737, 777, and 787. They generate 85% of their revenues from Boeing and 11% from Airbus.

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2. Triumph Group, Inc – (NYSE:TGI) - designs, engineers, manufactures, repairs, overhauls and distributes aircraft components. This includes hydraulic, mechanical and electromechanical control systems, aircraft and engine accessories, structural components and assemblies, thermal acoustic insulation systems, auxiliary power units (APUs), avionics and aircraft instruments. The company operates two divisions. One is their manufacturing division for aerospace OEMs. The second division provides aftermarket services for ongoing aircraft and aircraft component maintenance and support. The company generates 30% of its revenues from Boeing, which includes support of Boeing's military aerospace division.

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3. Ducommun Inc. – (NYSE:DCO) - designs, engineers and manufactures aerostructure and electromechanical components and subassemblies. They also provide engineering, technical and program management services for the aerospace industry. DCO's domestic commercial aircraft programs include the Boeing 737NG, 747, 767, 777 and 787. Their foreign commercial aircraft programs include the Airbus A330 and A340 aircraft, Bombardier business and regional jets, and the Embraer 145 and 170/190.

Companies to Watch

1. Titanium Metals Corp. (TIE): The company has a broad array of customers across various nodes of the aerospace supply chain, including Boeing, EADS, Rolls Royce and United Technologies. The company has steadily outperformed the S&P 500 for the past three years, with the only dip being in the past three months. This was due in part to concern over the potential impact of the March Japanese earthquake on its own supply chain, which was addressed by the company.

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2. Goodrich Corp. (NYSE:GR): The company provides a variety of aerospace components, systems and services to the global commercial and defense aerospace industries. This includes actuation and landing gear systems, electronic systems, reconnaissance systems, and power supply systems. They support a strong domestic customer base as well as a strong international list of clients. They have outperformed the S&P 500 in the past 1, 2, 3 and 5 year periods respectively.

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3. Boeing Corp. (BA): Boeing has the combination of a strong pipeline of new products coming to market coupled with the prospect of new orders for enhanced versions existing products, like the work horse 737 series. What keeps Boeing in a positive light? The stock is trading for 0.79 times 2011 earnings estimates of $69 billion and 14 times 2012 estimates of $5.22 a share, both are well below the company's ten year average annual P/E of 22. Boeing has an order backlog of 3400 planes (roughly $256 billion) which will take the company over seven years to fill. Look for the stock to peak (possible with an upward spike) in late June as the Paris Air Show takes place and when the bulk of big orders are booked.

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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TIE, RTI, SPR, BA over the next 72 hours.

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