ANALYSIS: Alcoa's Firth Rixon move is the latest engine sector transformation

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When GKN bought Volvo Aero in 2012 for £633 million ($1 billion), the UK-headquartered Tier 1 firm described the deal as transformational – a word it has gone on to use repeatedly to underscore the impact of an acquisition that, at a stroke, made the company one of the largest players in the market for jet engine components.

Indeed, by turning its relatively small engine components business into a global player, with 2013 turnover of around $1.75 billion, GKN came to rival industry leaders like MTU Aero Engines and Italy's Avio – which has since been acquired by GE.

A similarly dramatic shift in the aero engines business was initiated with Alcoa’s late June agreement to buy Sheffield-based forgings specialist Firth Rixson from its private equity owner, Oak Hill Capital.

In 2013, Alcoa’s $4 billion aerospace revenue already included more than $1 billion in sales of engine components – particularly in hot-section aerofoils, including exotic single-crystal and nickel alloy blades capable of surviving temperatures in excess of their melting points.

Aerospace sales also include aluminium sheet, plate and extrusions, along with structural castings – including in nickel and titanium – and fasteners.

But it is on the engines side that the Firth Rixson acquisition will cause the rest of the industry to take note. Alcoa claims its target – the $2.85 billion deal, including $2.35 billion in cash and $500 million in shares is expected to close this year – is the global leader in the seamless rings which support engine bearings and overall structure.

Firth Rixson also produces a full range of nickel, titanium, steel and aluminium engine forgings. In engine disks – to which Alcoa-made blades are often fitted – Firth Rixson is also a leader. Of its $1 billion 2013 turnover, some 75% came from aerospace.

And, as Alcoa chief executive Klaus Kleinfeld briefed analysts on the acquisition, Firth Rixson’s revenue is expected to grow to $1.6 billion in 2016 and $2 billion in 2019 – a compound annual growth rate of 12%, or twice that expected of the aerospace market as a whole. That period will see the delivery of some 23,000 civil aircraft engines and, stresses Kleinfeld, Firth Rixson’s growth forecast is 70% underpinned by long-term supply contracts.

The company has also been investing in hot component capabilities. In 2011, Firth Rixson initiated installation of a 19,500t isothermal press for hot-die forging and a 33,000t conventional forge press for other large aerospace components in Savannah, Georgia.

As for its impact on Alcoa, the acquisition stands out for doubling its average engine content on just about every major programme. This includes the Rolls-Royce Trent 900 (for the Airbus A380), 1000 (Boeing 787) and XWB (Airbus A350). Also included is the Engine Alliance GP700 (Airbus A380), GE90 (Boeing 777), GEnx 1B and 2B (Boeing 787, 747), Pratt & Whitney PW1100G (Airbus A320neo), International Aero Engines V2500 (Airbus A320) and CFM International CFM56 (Boeing 737, A320).

Kleinfeld describes the two businesses as “highly complementary with limited product overlap”. He also expects Alcoa to be able to realise dramatic savings in process productivity.

The company believes it can help Firth Rixson cut material usage and machining costs by about one-fifth. Also, in procurement, Alcoa purchases $18 billion worth of material and supplies annually – and pulling Firth Rixson into its standard payment terms regime, for example, should realise major savings.

All of that, with the overhead cost savings in areas like finance and human resources that go with most acquisitions, should save more than $100 million yearly by year five, predicts Kleinfeld.

Eric Roegner, chief operating officer at Alcoa’s investment castings, forgings and extrusions business, notes that the two businesses deal with every major engine manufacturer, and he believes combining the two will result in “unparalleled” strength of relations with these customers.

The acquisition lets Alcoa supply not only the hot parts of the engine from its existing business, but most of the structural components too. Few pieces of any typical aero engine fall outside the combined companies’ competence.

And, he says, the Firth Rixson deal emphasises a company truth. Alcoa may be the old Aluminum Corporation of America – which got its start by devising the original aluminium production process, and made its move into aerospace by achieving the world’s first aluminium casting, of the Wright Flyer’s engine block – but one metal no longer defines the company.

Since the 1980s, Alcoa has been diversifying beyond aluminium. Today, says Roegner, about one-third of its $4 billion aerospace revenue comes from investment castings, where there is little aluminium.

Single-crystal blades, 3D printing and performance coatings make the running. Another one-third of the aero business is in fastening systems, again with little aluminium – and also a business entered by the acquisition of Fairchild Fasteners for $657 million in 2002. The other third is structures, including aluminium sheet and plate. Forged parts in titanium and nickel alloys also figure in.

Firth Rixson, Roegner says, fits into this broad product strategy “like hand in glove”. Alcoa’s key strategy, he says, is to be “the world leader in high-performance lightweight solutions”.

That push to be a solutions company not reliant on its historical commodity aluminium business is one of Kleinfeld’s top priorities, and he says the Firth Rixson deal is a transformation “milestone”.

Despite soaring demand from aerospace, automotive and other industries, aluminium prices have been low for years – depressed in part by Chinese and Russian supplies coming to market. So, Alcoa’s transformation strategy looks to “focus on what we can control” by building added-value product lines like aerospace components, while making use of Alcoa’s scale and experience advantage to “deliver upstream performance in a tough market environment”.

Whether Alcoa can turn its commodity business around remains to be seen, but clearly it has a long row to hoe.

In 2013, the company lost nearly $2.25 billion on sales of $23 billion, despite the 21.5% operating profit (EBITDA) earned by its Engineered Products and Solutions division.

Clearly, getting bigger and better in the high-growth, high-margin and high-technology aero engines market is the sort of transformation Alcoa is looking for.