Alcoa ( AA ) recently announced the opening of a plant producing advanced third-generation aluminum-lithium alloys for the aerospace industry in Lafayette, Indiana. With the opening of the $90 million manufacturing facility, Alcoa hopes to capitalize uponincreasing aerospace demand for aluminum-lithium alloys. These alloys are less expensive than titanium and composites and their application translates into better fuel efficiency and lower maintenance costs.
The deal is the latest in a series of developments for Alcoa in the aerospace sector. Aerospace remains at the center of Alcoa's shift towards value-added products, as it looks to reduce its dependence on its commodity businesses.
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Alcoa's Increasing Focus on Aerospace
Alcoa offers a wide portfolio of aluminum-lithium products including extruded, forged and rolled parts. The company holds the market-leading position in aluminum-lithium extrusions, supplying these products for aircraft's such as the Airbus A380, Airbus A350, Boeing 787, and Gulfstream G650. The company has $100 million in aluminum-lithium revenues contracted for 2017.(( Alcoa Opens World's Largest Aluminum-Lithium Aerospace Plant in Indiana , Alcoa News Release))
Alcoa is extremely bullish on the aerospace segment. It is banking upon aerospace to drive sales of its value-added products. The company forecasts 8-9% growth for its aerospace end markets this year.The large commercial jet segment is expected to grow at 12.1% this year, driven by a strong commercial jet order book, which represents nine years of production. The strong order book is also reflected on the jet engines side with 23,000 engines on firm order. Demand for regional jets is expected to grow at 13.2% this year. For Alcoa, this represents sustained demand for its aerospace products for the medium term.Hence, it has significantly increased its exposure to the aerospace segment.(( Alcoa's Q2 2014 Earnings Presentation , Alcoa Website))
In 2014 alone, several major developments in the aerospace segment have taken place for Alcoa. The company recently announced the signing of a long-term contract worth$1 billion to supply aluminum sheet and plate products to Boeing.((Alcoa Signs Multiyear Supply Contract with Boeing Valued at More Than $1 Billion, Alcoa News Release))In July, the company announced the signing of a a 10-year agreement worth $1.1 billion to supply jet engine components to jet engine manufacturer Pratt & Whitney, a division of United Technologies Corporation (UTC). (( Alcoa Announces Jet Engine First in $1.1 Billion Supply Agreement with Pratt & Whitney, Alcoa News Release)) In June, the company announced the $2.85 billion acquisition of jet engine components maker Firth Rixson.((Alcoa's Transformation Accelerates, Will Acquire Firth Rixson To Grow Global Aerospace Portfolio, Alcoa News Release)) Prior to that, it had announced a $25 million expansion of the Alcoa Power and Propulsion facility in Hampton, Virginia.((Alcoa Boosting Aerospace Capabilities in Virginia to Meet Demand for Next-Gen Aircraft Engine Parts, Alcoa News Release)) The company had also announced the setting up of a $100 million facility in La Porte, Indiana, for the production of nickel-based superalloy jet engine parts.((Alcoa Expands in Indiana to Capture Growing Aerospace Demand for Advanced Jet Engine Parts, Alcoa News Release)) Alcoa also signed a long term agreement worth $290 million to supply aluminum sheet to Spirit AeroSystems over five years. Spirit isone of thelargest designers and manufacturers of aerostructures for commercial, military, business and regional jets in the world.
Alcoa's aerospace revenue of $4 billion in 2013 accounted for around 17% of its total revenue for the year.((Alcoa's 2013 10-K, SEC)) With several recent developments in the aerospace segment, its share of the company's revenue is set to grow at a rapid pace.
Strategic Shift Towards Value-added Products
Alcoa's aerospace push is central to its shift towards its value-added products, as it looks to reduce its dependence on its commodity businesses. The sale of aluminum and alumina constitutes Alcoa's upstream commodity businesses. Demand for these commodities is broadly correlated with economic growth.These commodities suffered a steep decline in prices as theEuropean debt crisis and slowing Chinese growth contributed to weakness in aluminum demand over the last few years.((LME Aluminum Prices, LME))
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Alcoa Maintains Aerospace Push With Opening Of New Aluminum-Lithium Alloy Manufacturing Facility