OEM Report: Aerospace

Competitive landscape

By Meghan Boyer

Aerospace fabricators emphasize quality products and service to help them stand out from competitors

July/August 2011 - Other industries have struggled with the recession more than aerospace, but having less difficulty does not mean the sector’s fabricators have not faced challenges. Competition concerns, margin compression and lingering market unease have kept many metalworking companies continually focused on keeping their businesses secure.

“We’re the only major manufacturing industry on the planet that actually grew through the recession,” says Richard Aboulafia, vice president of analysis at Teal Group Corp., Fairfax, Va. “But, of course, the overhang of uncertainty that affects government spending and the broader economy is shadowing this industry, too.”

Ultimately, the trouble felt in the larger economy and other sectors has had an effect on many companies serving the aerospace industry. The extent to which a business is struggling depends largely on which companies it supplies and the products it is fabricating, with some facilities experiencing little difficulty and others seeing choppy business patterns. Similarly, their outlook for the future in part depends on which sub-sector they serve—commercial or defense.

“Aerospace, of course, was affected” by the recession, says John Perrotto, president of PMF Industries Inc., a Williamsport, Penn.-based flow former that serves the aerospace industry. But the sector has returned with great vigor. “We are seeing probably more growth in that sector and more activity through the aerospace industry” than other markets are experiencing, he says.

Though business stayed comparatively good for aerospace, other industries such as automotive experienced large losses during the recession. As it became increasingly difficult to secure work in other sectors, more fabricators and manufacturers looked to diversify their businesses and branched out, with some choosing to bid on aerospace projects.

“With automotive having gone bad and the rest of the economy having gone so, so bad, there’s many new players that have come in [to the aerospace industry] that aren’t necessarily going to be here for the long run,” says Gary Bertolucci, president of WB Industries, St. Louis, which provides tooling and ground support for the aerospace industry. With an increased number of companies quoting projects, it impacts the ability for established aerospace companies to secure work at favorable margins, he says. The economy needs to strengthen overall so companies that traditionally served other sectors can go back to their original markets, says Bertolucci.

National, global competition
Competition among U.S. companies has increased overall, says Tom Brosius, general manager of Orion Aerospace, a Federal Way, Wash.-based fabrication and machine company supporting Boeing and other aerospace product lines. “I think it has become more competitive, but it’s become more competitive on performance. The expectations for quality and delivery are constantly moving up,” he says.

Aerospace companies are relying on their suppliers to act more like partners rather than just part suppliers. Suppliers are asked to contribute more resources in engineering design and prototype projects, says Ken Healy, executive vice president and director of engineering at PMF. To meet aerospace customer needs and increased requirements, some businesses like PMF needed to hire additional engineering staff and acquire aerospace certifications in special processes. “The industry wants cost reductions, but by adding additional requirements on to the suppliers, it ultimately affects overhead cost and profit margins. Somehow you need to absorb these additional costs,” says Healy.

Indeed, the available work often comes with high demands and shorter lead times. “It’s very demanding,” says Bertolucci. “We have to really jump through hoops.”

Some companies are competing not only with U.S. fabricators but also with global businesses. “We are always in competition with other areas of growth, especially technical countries such as India or Poland who have a very good technical workforce,” says Healy. “Their costs are a lot less than they are here in the United States.”

The concern regarding global competition is real, says John Baker, president of General A&E Mfg. Co. Inc., Hackensack, N.J. “I think a lot of us have kidded ourselves into thinking that this market segment will never go overseas. A lot of Americans kid themselves into saying the Chinese quality can never be as good as ours. But it’s not true,” he says, noting General A&E has served the aerospace segment since 1954.

Overcoming national and global competition requires creating and executing a business plan, says Gary Burdette, engineering and quality manager at PITCO Aerospace Inc., Dayton, Ohio. “If you go into this business thinking everything is fine, you are going to have some problems,” he says. “We sat down strategically and we said, ‘This is what we are going to do.’ And we have done it. There have been no excuses, and there have been no regrets so far.”

PITCO, which fabricates spinners and bulkheads for the aviation industry, decided to diversify into other sectors because of the downturn in the sector. “We have always done Nadcap heat treat and multi-axis machining and waterjet cutting, but we found it necessary because of the downturn in the general aviation business to start going after more OEM-driven business, such as more high-tech components,” says Burdette. The company now is making parts for helicopters and jet components, which it had not fabricated in the past, he says.

General A&E has focused on making itself as marketable as possible by gaining additional certifications and adopting new technology, says Baker. “We made a commitment to try and go more heavily after both military and those customers who wanted higher-quality systems,” he says. As a result, the company retained customers and gained new ones, says Baker.

Orion is watching the change in aircraft construction techniques. It’s likely more aircraft will include composite materials in the future, says Brosius. “That’s something we are watching closely and deciding if there is going to be a time when we are going to want to make a shift and adapt our products so that either they are involved with composites or in some other industry, depending on how it goes.”

Aluminum lithium is another material that likely will hit the industry more significantly in the future. “We are also watching the more advanced materials, such as the titaniums and Inconels, that are becoming part of those composite  airplanes,” he says. “We have adapted. We didn’t use to touch titanium or Inconel. Now with the [Boeing] 787, we are doing a bit of work with that.”

Looking ahead
The future looks at once optimistic and uncertain for aerospace fabricators. “We’re looking at record numbers, but there is a lot of fear and uncertainty about the coming years,” says Aboulafia. “Everyone is mindful that if there is any kind of softening in the recovery or any kind of economic damage from global instability, whether it’s in Japan or the Middle East, then it is going to hit this industry.”

The commercial aerospace segment is experiencing an upswing in production. Companies such as Airbus and Boeing have released optimistic forecasts for the coming years. “Commercial aircraft manufacturing activity is expected to reach a seven-year moving average production rate of 1,000 aircraft per year in the next two to three years, which is twice what it was as recently as 1991,” according to the “2011 Midyear Outlook for the Global Aerospace and Defense Sector” by Deloitte Touche Tohmatsu Ltd., New York. “This level of production represents a promising market environment for manufacturers of commercial aero structures, electronics, engines and components and other suppliers to this segment of the industry.”

Though commercial forecasts largely look promising, proposed changes to military budgets are causing concern among some fabricators that serve the defense sector. “What we are seeing on the defense side is that you had better be concerned a little bit,” says Bertolucci. The deficit challenges the U.S. government is facing could result in decreased defense spending, he notes.

The U.S. Department of Defense projects a $78 billion budget reduction over the next five years, according to Deloitte. “Defense contractors may therefore see a reduction in addressable spend,” states the Deloitte report.

The impact of reduced defense spending will not be seen immediately, notes Aboulafia. “It takes a few years for the defense budget to filter down to the companies that receive the cash,” he says, noting companies still are working off of near-record defense spending budgets.

Despite lingering concerns, optimism remains.

“Within the next five years, I could see PMF doubling its sales due to the increase in aerospace business,” says Healy. “I feel there’s a lot of potential, specifically in aerospace. Because of PMF’s unique methods of manufacturing, we bring much added value to components than traditional manufacturing methods. [Companies] definitely want to do things differently and make things better and less expensive.”  FFJ

Aerospace forecast
Aircraft production likely will increase in the coming years, as a need for newer airplane models in mature markets and demand from emerging markets such as China and India will fuel growth. <p>Between 26,000 and 30,000 new aircraft will be produced in the next 20 years to meet growing demand for commercial, leisure and freight traffic and to replace older models, according to the “2011 Midyear Outlook for the Global Aerospace and Defense Sector” by Deloitte Touche Tohmatsu Ltd., New York. <p>
Air travel is expected to grow overall, with an estimated 1 billion passengers expected to take flight in 2021, according to the Federal Aviation Administration’s Aerospace Forecast. Growth in the next five years will average 3.7 percent per year, according to the FAA.

“The world market has recovered and now is expanding at a significant rate,” Randy Tinseth, vice president of marketing for Boeing Commercial Airplanes, said in a press release. “Not only is there a strong demand for air travel and new airplanes today, but the fundamental drivers of air travel—including economic growth, world trade and liberalization—all point to a healthy long-term demand.”

Boeing forecasts a $4 trillion market for new aircraft in the next 20 years with a significant increase in forecasted deliveries. The company foresees a market for 33,500 new passenger airplanes and freighters between 2011 and 2030. Asia Pacific is expected to require the most new airplanes in the next 20 years and will represent the largest market by value of deliveries at more than $1.5 trillion, according to Boeing.

Airbus also expects increased demand. The company foresees demand for nearly 26,000 passenger and freighter aircraft valued at $3.2 trillion between 2010 and 2029. “The recovery is stronger than predicted and reinforces both the resilience of the sector to downturns and that people want and need to fly,” John Leahy, chief operating officer, customers, for Airbus, said in a press release.
Focus on efficiency
Growing demand for fuel efficiency is shaping aircraft needs, with more companies focusing on the single-aisle market. Fleet composition will change by 2030, Boeing estimates. Large aircraft will decrease to 3 percent of fleets while single-aisle airplanes will account for 70 percent. Large aircraft represented 4 percent of fleets in 2010 and single-aisle comprised 62 percent, according to Boeing.

The market outlook for single-aisle jetliners is strong, Jim Albaugh, Boeing Commercial Airplanes president and CEO, said in a press release. “Customers are demanding our Next-Generation 737 at an unprecedented rate,” he said. Boeing intends to increase the production rate for the airplane to 42 per month. Once implemented in the first half of 2014, the 737 program expects to build on average two 737s each workday and nearly 500 airplanes each year.

Additionally, Airbus intends to increase the production rate of its A320 Family of single-aisle aircraft to 42 per month in the fourth quarter of 2012. The company as of May was producing 36 A320 Family aircraft each month. “With a backlog of over 2,300 A320 Family aircraft to deliver, we need to increase production to accommodate continuing strong customer demand for these new eco-efficient aircraft,” Tom Williams, executive vice president, Programmes, said in a press release.

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