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Aerospace Full Review

Products

GKN Aerospace is a global first tier provider of airframe and engine structures, components, assemblies, transparencies and engineering services to a wide range of aircraft and engine prime contractors and other first tier suppliers. It operates in three main product areas: aerostructures, propusion systems and special products.

In 2008 approximately 52% of the division’s revenues were aerostructures (2007 – 53%), 36% propulsion systems (2007 – 33%) and 12% special products (2007 – 14%). The aftermarket business spans all three sectors and continues to account for approximately 15% of total Aerospace revenues.

GKN Aerospace is recognised as a market leader in the design and manufacture of advanced composites, transparencies and complex metal structures at the component, assembly and system level. GKN supplies all the major airframe and engine original equipment manufacturers. The business is focused on the creation of value through technological and design excellence in composite technologies (22% of sales), lightweight highly stressed metallic components (42% of sales), integrated systems and aftermarket services (36% of sales). It operates primarily in the US and Western Europe, supported by recently established low cost manufacturing facilities in Mexico, South America and South East Asia.

The customer base is relatively concentrated, with the top three customers (Boeing, Airbus and United Technologies Corporation) representing around 50% of divisional sales, although the division supplies all aircraft and engine prime contractors. Current annualised sales are approximately 58% to defence and 42% to civil customers, with 66% of total sales originating from the US.

The division has a very strong position on current and all major new aircraft programmes and is recognised as a technology leader in the high growth composite and titanium structure segments.

Markets

The overall aerospace market was strong in 2008 with significant growth in both the civil and defence sectors. During 2008, Airbus delivered 483 aircraft, an increase of 30 on the prior year, and Boeing delivered 375 aircraft, a reduction of 66 on the prior year primarily due to industrial action in the fourth quarter. Despite programme delays on new platforms, such as the Boeing 787 and Airbus A380 and A400M, airline order books remain strong for these products.

The civil market however started to soften in the final quarter of 2008, with business jet volumes weakening, together with cancellations in orders for some larger aircraft. Looking forward, the industry is facing a number of headwinds in the form of shortage of financing for new aircraft, together with significant reductions in both passenger and freight traffic. Further aircraft cancellations and softening of demand are expected during 2009 and 2010. 

Civil Aircraft Market 2007-2009 Military Aircraft Market 2007-2009

US defence programmes maintained or increased demand for both current and future requirements. Funding and commitment for new programmes, such as the Joint Strike Fighter (JSF) and CH-53K, remain strong and was supplemented with further multi-year contracts on existing platforms such as F-18, C-130J and V22 Osprey. Demand in the defence sector is expected to remain robust throughout 2009.

Whilst the price of oil has reduced from its peak of $147 per barrel in July 2008, there is increasing pressure within the aerospace industry to invest and develop lightweight innovative design solutions to improve not only fuel efficiency but the environmental impact of aviation. GKN Aerospace is well positioned to meet these challenges.

Divisional strategy

GKN Aerospace’s strategic priorities are to:

  • continue to grow market share on secured original equipment programmes and increase aftermarket penetration through organic growth, programme investment and acquisitions;
  • establish meaningful positions on future defence and commercial platforms with particular focus on the next generation single aisle (NGSA) aircraft; and
  • maintain technology leadership in composite and complex metal structures.

2008 Performance

GKN Aerospace sales increased 22% in 2008 to £1,002 million (2007 – £820 million) including a £50 million translational currency benefit and £46 million from a full year of trading from the Teleflex acquisition, completed in June 2007.

The underlying sales growth in the first half was 12% which reduced in the second half to 8% primarily as a result of the Boeing strike, giving a full year organic growth rate of 10% (£86 million). The rotorcraft market was particularly strong with increased activity on both development and production programmes, including the Black Hawk, CH-53K, Chinook VH71 and Future Lynx.

Trading profit rose to £106 million from £83 million in 2007. Currency translation was £5 million favourable while there was a £6 million benefit from 2007 acquisitions, leaving an underlying improvement of £12 million (14%). The divisional operating margin improved in 2008 by 0.5% to 10.6% (2007 – 10.1%). Return on invested capital was 17.5% (2007 – 15.3%).

Capital expenditure on tangible assets in 2008 amounted to £31 million (2007 – £28 million) which represents 1.2 times depreciation (2007 – 1.2 times).

GKN investment in non-recurring programme costs was £9 million (2007 – £16 million) including those associated with the Airbus A350 XWB and the Boeing 767 winglet.

Aerospace sales by market
Aerospace sales by region of origin

In 2008, GKN Aerospace secured a number of new programmes and achieved a number of significant milestones including:

  • selection to supply the integrated nacelle system for the Embraer MST and MLJ programme. This nacelle system is the third derivative application of the Honeywell HTF7000 engine that is already in service with Bombardier and in development for a future Gulfstream platform;
  • conclusion of a 60 aircraft multi-year supply contract for the Lockheed Martin C-130J nacelle system;
  • commencing delivery of Boeing 767 winglet sets to Aviation Partners; and
  • establishing the composite fan blade joint venture agreement with Rolls-Royce. Research and applied development operations have commenced with activities focused on the development of an advance composite fan blade for application in NGSA engines.

Following EU regulatory approval, the transfer of ownership and operational control of the former Airbus UK Filton wing component and sub-assembly plant took place on 5 January 2009. The facility has lifetime agreements for A320 derivatives, A330, A340, A380 and A400M wing trailing and leading edges and wing system components. In addition, Airbus awarded GKN a life of programme contract on the A350 XWB including rear spar and wing trailing edge assembly, which is expected to generate revenues of $2 billion.

As a result of the softening in the civil aviation market in the fourth quarter of 2008, GKN Aerospace initiated the first elements of its restructuring activities in December. Restructuring charges were taken amounting to £3 million which was predominantly impairment of assets. Further restructuring will be carried out in 2009.

Prototype Combat Aircraft

In December, Northrop Grumman rolled out its first prototype carrier-capable unmanned combat aircraft. GKN produces the composite skins, covers and doors and is responsible for the design and manufacture of the outboard wing and centre fuselage section — around 80% of the total aircraft structure.