In the prior Supply Chain Matters commentary, we reflected on some current commercial aircraft industry developments from the lens of product demand reflected by the building voice of the industry’s most influential customers. In this commentary, we focus on the strategic supply aspects of aerospace supply chains and provide background to this week’s news regarding another strategic acquisition announcement from Alcoa.
Earlier this week, this aluminum producer announced its intent to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. According to business media reports, RTI’s business focuses is centered on long-term supply of titanium fabricated parts that make-up landing gears engines and airframes for both Airbus and Boeing aircraft. The Wall Street Journal reported that as much as 80 percent of RTI’s 2014 revenues originated from the aerospace and defense sector.
The RTI acquisition follows last year’s acquisition of Germany based titanium and aluminum castings producer Tital, and U.K. jet-engine parts maker Firth-Rixson.
Titanium is a very essential and critical commodity and component aspect for aerospace and commercial aircraft design and production. The country of Ukraine currently is a prime source of the concentrates used for the fabrication of titanium. During the recent building political tensions among Russia, the United States and Europe over hostilities in Ukraine, Boeing and United Technologies augmented safety stocks of this key metal provided by VSMPO-Avisma, which has a parent company with direct ties to the government of Russia. Last August’s report indicated that Boeing and UT had amassed upwards of six month’s supply of safety stock of highly customized titanium forgings.
Another rather important strategic commodity for newer, lighter and more efficient aircraft is that of carbon fiber. So much so, that in November of last year, Boeing initiated an $8.6 billion long-term supply agreement with Japan based Toray Industries. The ten year supply agreement was initiated to support Boeing’s ongoing 787 Dreamliner production program along with provisions to supply wing structures for the new 777x aircraft development and production program.
Strategic sourcing teams for both Airbus and Boeing have to further consider mitigation of global supply risk and must practice a balanced component sourcing strategies to avoid too much dependency on a single region or suppler.
With current huge multi-year order backlogs, Alcoa’s strategic moves into key strategic commodity areas of commercial aircraft production assure a faster and perhaps more profitable growth prospect. The metals producer is also positioning itself to be a more strategic supplier to the global automotive industry, helping to pave the way for use of lighter metals in automobile product design and functionality.
In July of 2010, Boeing’s CEO candidly admitted that industry-wide growth was highly dependent and/or constrained by many of the key suppliers to this industry. Six years later, with even heavier order backlogs that supplier dependency remains, particularly when it concerns key commodities and fabricated components. Thus, Alcoa’s strategic moves to tap into the key component needs of this industry may prove to be rather interesting in the months to come, with prospects for additional high dollar multi-year supply agreements.
As the pressure mounts on Airbus and Boeing to step up delivery volumes for vast backlogs of newly designed commercial aircraft, strategic suppliers of key commodities and advanced components will ultimately be the linchpins for successful customer fulfillment.
It should therefore be no surprise that other global producers are positioning to harvest some of the benefits.