Alcoa Cozies Up With China Plane Manufacturer With Fasteners Deal

by Trefis Team
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Alcoa Fastening Systems (AFS), a unit of Alcoa (NYSE:AA), has announced a new agreement for strategic technology and commercial cooperation with Commercial Aircraft of China Ltd. (COMAC). COMAC is a manufacturer of large passenger aircraft in China and has ambitions of competing with Boeing and Airbus. The deal will help Alcoa gain a stronger foothold in the Chinese aerospace market, which is one of the world’s fastest growing markets.

Under the new agreement, AFS will provide COMAC with technical assistance in fastener and assembly tooling selection, joint design consideration and quality system management. The technical assistance will include engineering, design and training. In return, COMAC will purchase a significant chunk of its requirement for fasteners from AFS. These fasteners will be used in the production of COMAC’s C919 aircraft. AFS already has a prior technology cooperation agreement with COMAC which was signed in 2009. It aimed at examining advanced aluminum structural concepts, designs and alloys for the C919 aircraft. [1]

The deal is good news for Alcoa as AFS is part of its Engineered Products and Solutions division which focuses on value-added products to generate higher margins for the company. Building specialization in niche segments will help the company stay ahead of competition and mitigate the adverse effects of pricing volatility in the aluminum market.

See Full Analysis for Alcoa Here

Alcoa’s total revenues for 2012 were $23.7 billion, of which $5.5 billion were contributed by the Engineering Products and Solutions division. Although total revenues declined in 2012 from the previous year’s figure of $24.9 billion, revenues of the Engineered Products division rose from $5.3 billion in 2011. Not only that, adjusted EBITDA margins for the division reached an all-time high of 19% in 2012. ((Q4 2012 Earnings Presentation, Alcoa Website))

While this limited data doesn’t reveal a trend by itself, it does show the division’s ability for resilience in the face of adverse market conditions. We say so because the prices of aluminum in 2012 fell drastically from their 2011 levels. ((LME Aluminum Price Graph, LME))

In 2011, the Fastening Systems business accounted for $1.3 billion of total revenues of $5.3 billion for the Engineering Products and Solutions division. We expect the figures for 2012 to be available soon. [2]

Fasteners for the aerospace business in China will be manufactured at Alcoa’s facility located in Suzhou. Among other products, this facility produces fasteners of two kinds: panel and pin. [3]

The COMAC deal will help Alcoa meet its 2013 targeted revenues of $6.2 billion in the Engineered Products division. In the most recent conference call with analysts, Alcoa’s management stressed on research, innovation, and specialized products to drive future growth for the company. Also, in the company’s Investor Day presentation in November, new generation fastening systems were identified as one of the areas to drive future organic growth. [4]

We have a Trefis price estimate for Alcoa of $8 after the fourth quarter earnings results.

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Notes:
  1. Alcoa Fastening Systems Enters Strategic Partnership with COMAC, Alcoa Press Release []
  2. Alcoa Investor Day Presentation, Alcoa Website []
  3. Aerospace Products Brochure, Alcoa Website []
  4. Q4 2012 Earnings Conference Call Transcript, Seeking Alpha []
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