Cruising altitude: spending by commercial airlines and defense departments is creating a strong demand for specialty metals.

Considered together, the commercial airline business, military spending and the titanium markets have a considerable impact on the scrap markets.

For companies that process and trade vacuum-prepared scrap high-temperature alloys, titanium alloys and refractory metals, the health of the airline industry is a major factor in determining the strength of the scrap market.

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--SkyTeam, 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.

However, in light of a current lack of demand from steelmakers worldwide, the market is back in the doldrums again.

The demand for revert titanium scrap was constant throughout 2005 because of the demand from the military, commercial aircraft and commercial products, except in June when the ferro-titanium scrap prices took a severe downturn only to return to previous levels and then to fall again.

The revert titanium market will remain strong as demand remains strong. Titanium shipments in the second quarter of 2005 increased by almost 27 percent, with domestic mill products shipments totaling 5,910 tons, up from 4,760 tons in the second quarter of 2004, according to the U.S. Geological Survey.

Ingot production was up 16.7 percent to 13,300 tons in the second quarter of 2005. According toTim Rupert, president of titanium producer RTI, U.S. armed forces demand will represent about 25 percent of the domestic market, or about 16 million pounds of titanium product. Further, Rupert estimates a 19 percent increase in titanium consumption by the military in 2005 and another eight percent increase in 2006.

Rupert estimates a worldwide consumption increase of 40 percent to 50 percent during the next five years. The Allegheny Technologies titanium sponge plant in Albany, Ore., is due to come on stream in the first half of 2006, with an annual capacity of 7.5 million pounds per year. This affect on the supply side of the market, but the total effect will depend on the plant's production costs.

Military spending will continue to be strong through 2006 and 2007 because of the need for equipment and replacement parts for existing equipment.

The top 20 countries for military spending are scheduled to spend just shy of $1 trillion in 2005. With higher oil prices, the Middle East countries are increasing their spending, while European countries, such as the U.K., France, Germany and Italy, will be flat or slightly down.

Asian countries, such as Singapore, Taiwan and South Korea, are increasing their military spending, with Singapore purchasing 20 F-15 jets and an option for 20 more, and South Korea ordering 40 F-15 fighters. Such orders are projected to keep Boeing's production line at full capacity through 2010.

The demand for titanium and super alloys should remain strong for many years to come, with the usual price fluctuations that we normally experience.

Also, the increased cost of oil may lead to a new market for nuclear power plants. There are 103 nuclear plants in the United States today, but a new one has not been built in the United States since 1970. The Bush administration wants to revive nuclear energy and is proposing a $1.5 billon subsidy to promote new nuclear plants. The NIMBY ("not-in-my-back-yard") attitude is changing, as Entergy Corp, which runs 10 nuclear plants, now says that three states--New York, Louisiana and Mississippi--have all invited the company to build new plants there, wit

PERRYMAN BOOSTS MELT CAPACITY

Perryman Co. has begun construction on an integration project that will create melting operations using both electron beam and vacuum-arc remelt technologies.

The facility, which is being built in California, Pa., is expected to be operational by early 2007.

Perryman Co. says it made the decision to add melting capabilities for a number of reasons. A major incentive for the company is the ability to recycle 100 percent of its scrap. Currently, only about 70 percent of titanium scrap makes it back into the titanium industry. After the expansion, Perryman will be able to use all of its own scrap in its melting operations.

Despite the addition of melting facilities, Perryman does not expect to reduce the amount of titanium it purchases on the open market. Phase one of the project will encompass three buildings totaling about 85,000 square feet.

The author is president of Universal Metal Corp., an approved processor of vacuum-prepared scrap high-temp alloys, titanium alloys and refractory metals based in Worcester, Mass. He can be contacted at [e-mail]. His essay is an edited version of a presentation he made at the Fall 2005 Bureau of International Recycling convention in Milan.