Scrap Metals Supplement--Cruising Altitude

FUEL FOR THOUGHT. According to the Air Transport Association of America (ATA), the number of passengers on domestic flights increased 3.6 percent from January to August of 2005 while the number of flights remained constant.

The increased cost of fuel has had a major impact on airline carriers, driving Delta—the largest domestic carrier—as well as Northwest Airlines into bankruptcy, along with U.S. Air and United Airlines, America’s four biggest carriers.

The ATA estimates that the increased cost of jet fuel—already at $97 billion in 2005—will cost U.S. airlines an additional $9.2 billion this year, accounting for most of their expected $8 billion in losses and negating all of the airlines’ cost cutting measures instituted so far.

The carriers with high "legacy" costs are all attempting to become low-cost carriers and/or concentrating on overseas flights to avoid competition from the low-cost carriers. I doubt that they will be successful in the future, as their low-cost rivals will continue to eat into their market shares and will eventually get into the overseas markets, as well.

The European airlines are not faring much better. The International Air Transport Association (IATA) estimates that the European carriers, which reported a collective profit of $1.4 billion in 2004, will only break even in 2005. IATA also predicts that profitability in the Asian-Pacific markets will fall 63 percent in 2005 to $1 billion. Credit insurance provider Euler Hermes, based in Paris, predicts that three major European airlines—Sky Team, Star Alliance and OneWorld—will have a combined loss in 2005 of $2.4 billion because of higher fuel costs, despite a 7 percent increase in revenue.

The demise of the carriers with high "legacy" costs is taking longer than I predicted because of U.S. bankruptcy laws, their financial supporters and engine manufacturers’ desire for the airlines to continue operations as well as the wants of investors looking for high yield investments. However, new markets for aircraft have developed in the interim, including in China and in India, and the overall market for very light jets is also growing, which will keep production strong for many years to come.

SMALLER WORLD. The light jets market is a brand new market for small, inexpensive jet planes operated by carriers who are hoping to make on-demand chartering of a jet virtually the same as calling a taxi. (Companies such as Utility Jet are trying this idea.) The small jets are also used by traditional airlines to provide smaller cities with some type of regular commercial services to specific destinations.

These jets typically carry four to six passengers and have the ability of flying at above 40,000 feet for a distance of 600 miles or more. These twin-engine jets are powered by Williams International, Pratt & Whitney and Honda engines and are manufactured by companies such as Cessna Aircraft, Eclipse Aviation, American Honda, Adam Aircraft, Grob Aerospace in Europe and Embraer of Brazil. The Embraer jet will be slightly larger and aimed for the lower end of the current charter jet market and as a replacement for twin-engine prop planes.

These planes are expected to receive FAA approvals in late 2006. Adams Aircraft claims to have orders for more than 125 planes, while Eclipse Aviation claims to have orders for more than 2,200 planes and plans to begin production early in 2006. The planes are being quoted at $1.2 million on the low end to Embraer models ranging from $2.75 million to $6.65 million. The FAA predicts a delivery rate of 500 planes per year, while Honeywell estimates the pace could be considerably higher.

The market for commercial airplanes overall in Asia (India and China, in particular) will create a tremendous demand for commercial aircraft for at least 15 years. India has a middle-class population of 200 million people, representing only 20 percent of the population in an economy that is currently growing at 8.2 percent per year.

This increase in disposable income of the middle class is expected to create a market for commercial aircraft that will outstrip even China’s. The relaxed regulations in India have prompted the establishment of four new discount airlines to service the 17-percent increase in Indian air travel. Thirteen Indian airlines have 337 planes on order with Embraer, Boeing and Airbus. The two major problems that could curtail these airlines buying more planes in the near future are the lack of an adequate airport infrastructure and a major shortage of pilots.

Both Boeing and Airbus are considering ramping up their respective production capacities to meet the current and expected future demands for aircraft.

As of October, Boeing had a backlog of 605 planes, which includes military and commercial aircraft valued at $170 billion. The company has 266 orders for its new 787 from 21 customers, which will make Boeing fully booked through 2010, unless it can increase its manufacturing capacity. Boeing expects to deliver 375 commercial planes in 2005 and 385 in 2006 and has already sold 85 percent of its production capacity for 2006.

Boeing increased its demand for titanium by as much as 50 percent in 2005 as it entered into production of the 787 model, which is 15 percent titanium by weight—double the percentage found in its 777 model.

Airbus is experiencing the same production restraints as Boeing on its A-350 and A-380 models, which are already behind in promised deliveries. The company is also looking at increasing its manufacturing capacity. Airbus has 95 orders for its A-350 wide-body jetliner, and the company predicted it would have as many as 200 orders by year-end. [In December, Airbus reportedly agreed to locate an assembly plant in China to help fill orders for that nation’s airlines.]

GETTING DEFENSIVE. The titanium markets in 2005 were again led by the demand for ferro-titanium. The year started out with 6/4 ferro turnings in the $4 range, with this grade reaching a peak of more than $7, with multiple swings in between.