Before production of Boeing’s 737 MAX was halted and the aircraft type grounded, aerospace manufacturing had only one real bogeyman: investment casting, the metal-forming for engine blades and other aircraft parts.
A casual search on YouTube finds numerous videos showing the complexities of castings, whether using the investment or sand processes. The practices require skilled labor experienced both in the science of the 5,000-year-old process as well as the art of applying it to new aerospace programs such as next-generation engine programs.
The learning curve is enormous. On a mature product line, even a high-performing process can see 5% of a production yield thrown away. On new programs, it is not unheard of for half to be discarded in the beginning.
Barriers to entry in the business are high, and industrial capacity remains limited due in part to capital-investment demands. Castings have been a well-known choke point for growth in commercial aircraft manufacturing and the aftermarket business for years. Some industry executives and advisors have thought that with the MAX slowdown, there might be some relief from recent casting issues. So what has happened?
“Those challenges remain,” says Glenn McDonald, a senior associate at AeroDynamic Advisory, a consulting firm focused on the global aerospace and aviation industries. “It does seem to still be an issue.” Relief for the rest of the industry is not expected in the near term; in fact, the situation might become harder for casting customers.
The aerospace casting sector, a roughly $10 billion industry, is dominated by two leading providers: Arconic and Precision Castparts (PCC). There are smaller companies, one of which-Consolidated Precision Products (CPP)- is seen as an up-and-comer. But each has had its own issues, according to industry sources, and are expected to continue to face challenges in meeting demand. At the same time, they are also enjoying their oligopoly positions and raising prices.
For one thing, industry sources say public communication from market leaders Arconic and PCC has become almost nonexistent in recent years. “The communications have shut down on both companies,” says one industry advisor. “It’s hard to get anything.”
PCC was acquired by Berkshire Hathaway, the giant investment group led by Warren Buffett, in January 2016, essentially turning it from a publicly traded and publicly accountable company to a private asset.
Arconic, meanwhile, has been suffering corporate turmoil. In November 2016, Arconic split off from Alcoa but then saw three CEOs in as many years due to disappointing financial results, in part from a failed acquisition, as well as a spat with an activist investor and continued divestitures and restructuring. On Jan. 27, Arconic announced it expects to split into two companies on April 1, an aluminum rolling company and a mostly aerospace-focused business to be called Howmet Aerospace, an homage to the former Howmet Castings bought by Alcoa in 2000.
Yet additional layoffs are possible because of the MAX production halt, according to Arconic Chairman and CEO John Plant. “My expectation is that we will actually be reducing headcount,” he told an earnings teleconference, also citing other actions such as partially paid vacation for workers and production shift changes. More information is likely to be forthcoming at a Feb. 25 investor briefing for the new Howmet and Arconic.
Indeed, according to AeroDynamic Managing Director Kevin Michaels, Tier 4 raw material and forging and casting suppliers all will be affected by the MAX halt. Moody’s Investors Service surmised PCC derives more than 10% of its revenue from the MAX.