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WIKI ANALYSIS
Triumph Group (NYSE: TGI) makes aircraft components for the US military, Boeing, and Airbus. The company sells the majority of its products, 55.5%, to Boeing and the US military.[1][2] Triumph has received contracts to produce components for both the Boeing Dreamliner and the Airbus A380. However, the value of these contracts depends on the future production levels of the aircraft.[3] 33% of Triumph's revenue comes from government funded contracts. Since the September 11 terrorist attacks, the US defense budget has increased by 35% and the number of contracts for military aircraft and weaponry has risen.[4]
High oil prices have increased the price of jet fuel by 53% during the first 6 months of 2008.[5] The high fuel costs have pushed large airlines out of business or forced them to lower the number of flights they offer. High oil prices have also increased the demand for smaller, lighter aircraft - by 18% since 2006 - which are more fuel efficient than commercial jets.[6]
Business Overview
Triumph makes goods that are used mostly in the commerical airline industry. It builds and designs parts that are standard across the industry, but it also competes for contracts that require the production of parts that are specific to only that airplane model. TGI generally bids as a subcontractor on a fixed fee basis. This means that it provides the parts necessary to the primary contractor. This style of contracting allows Triumph to specialize in certain production techniques, instead of forcing itself to diversify in the construction of all the parts of an aircraft.[8]
The company operates through two main segments:
- Aerospace Systems Group (79% of revenue, 84% of income):[9] Aerospace Systems Group makes and repairs gear boxes, hydraulic systems, landing gear, floor structures, and wing spanners for commercial, cargo, and military aircraft. Aerospace Systems' customers normally return systems that need to be repaired or overhauled.[10] The segment's income rose by 52% from 2006 to 2007 because of increased sales from the contract with Boeing's 787 Dreamliner.[11]
- Aftermarket Services Group (21% of revenue, 16% of income): [9] repairs and overhauls the structure, frame, and engine of aircrafts. The segment is approved by the Federal Aviation Administration (FAA) as a Designated Engineering Representative (DER) to repair and overhaul these components. This means that it is authorized to certify the safety and quality of repairs and existing parts.[12] The group also has received the necessary licenses to repair aircraft components through the European Aviation Safety Agency and the Civil Aviation Administration of China.[13] These licenses are typically difficult to procure since they involve both safety and national security.[14]
There are also two marketing groups, one for each segment, which are dedicated solely to increasing the sales to Boeing Company (BA), Spirit Aerosystems Holdings (SPR), Textron's Cessna, Bombardier (BBD-T), and Raytheon Company (RTN). Triumph's sales are heavily centered on the United States. This is primarily because the airline and defense industry is heavily focused in the US. Airbus is Triumph's largest foreign customer.[16]
| (in thousands except Profit Margin) | 2004 | 2005 | 2006 | 2007 | 2008 |
| Revenue | $602,868 | $676,557 | $749,368 | $937,327 | $1,151,090 |
| Net Income | $18,222 | $11,428 | $34,515 | $47,071 | $67,274 |
| Profit Margin | 3.0% | 1.7% | 4.6% | 5.0% | 4.5% |
In 2008, Triumph acquired B. & R. Machine & Tools Corp and in 2006, it acquired Excel Manufacturing Inc. These two purchases have allowed Triumph to refine and machine their metal products themselves. Instead of shipping specialized pieces to another contractor to be finished, Triumph is able to do the work itself. This has cut costs substantially[18] In 2008, these acquisitions consisted of 19% of Triumph's net growth in income.[19]
Trends and Forces
Triumph's revenue is linked to the success of the Boeing 787 and Airbus' A380
In 2006, Triumph was awarded a contract with Boeing Company (BA) to produce the composite floor panels for the 787 Dreamliner. Triumph also won contracts, through Saab Aerostructures, Vought Aircraft Industries, Spirit Aerosystems Holdings (SPR), and Messier Bugati, to make the cargo door, composite ducting, hydraulic tubing, side windows, and brake assembly for the 787. These contracts have an initial value of over $49 million, but the final value depends on the success of the Dreamliner.[20] As a whole, 22.5% of Triumph's 2008 sales were to Boeing.[2] Triumph was also contracted to produce the floor panels and other parts for Airbus' A380. Like the 787 contract, the A380 contact is initially worth over $38 million, but has the possibility to grow in value depending on Airbus' production level.[3]
Triumph is dependent on US Defense spending
In 2008, 33% of Triumph's revenue was from the defense market - mostly direct or indirect sales to the US Government.[1] For example, in 2005, Triumph won a four year contract to provide Lockheed Martin (LMT) components for a radar targeting system for the US military.[21] Since the September 11, 2001 terrorist attacks, the US defense spending has risen over 35%.[4] Continued growth of the US defense budget will provide Triumph with the opportunity to win more contracts.
High oil prices hurt the airline industry
Jet fuel is a key cost for airline operations. In 2008, jet fuel made up approximately 34% of an airline's costs, as opposed to 13% in 2002.[5] For airlines which offer less expensive tickets, such as Jet Blue and AirTran, fuel constitutes nearly 50% of their total costs.[22] The rise in fuel costs has been very drastic just in the first six months of 2008. At the start of 2008, jet fuel cost $850 a metric ton. In June, the cost was approximately $1300 a ton.[5] Jet fuel is extremely correlated with spot petroleum prices, which have risen significantly over the past several years. This increased financial pressure on airlines also hurts Triumph since it manufactures parts for the industry.
The decrease in major airlines gives room to small aircraft
The cutback of flights and layoffs of major Airlines like Continental Airlines (CAL), Delta Air Lines Inc. (DAL), and JetBlue Airways (JBLU) has hurt large airline manufacturers such as Boeing Company (BA) and Airbus, while the demand for smaller aircrafts has increased. Because small, light airplanes are more fuel efficient and easy to maintain, businesses and high level personnel have elevated their demand for such aircraft.[23] Sales of private jets increased by 18% in 2006 and increased by 185% since 10 years ago.[6]
Competition
Because most of Triumph's revenue comes from contracts with the US Government, Boeing, and Airbus, it has an interesting relationship with its competitors. It must compete with many of the companies for a given contract, but it also must work with or is asked to supply the same company. For example, Triumph supplies Spirit Aerosystems with the window mountings for the new 787.[20]
- Spirit Aerosystems Holdings (SPR): makes fuselage sections, wing components, and structural parts for the airline industry that compete against Triumph. Spirit also competes for similar contracts from the US military, Boeing and Airbus.[24]
- Heico (HEI): produces aircraft engines, components, and replacement parts that compete with Triumph. Unlike Triumph, Heico is heavily involved in electronic and telecommunication equipment for the aviation, space, and communication industries.[25]
- Kreisler Manufacturing (KRSL): makes turbine engines and manifolds for military and commercial use which are in competition with Triumph. Kreisler is much smaller than Triumph and does not produce other aircraft components than engines.[26]
- Goodrich Corporation (GR): competes with Triumph for aircraft parts such as landing gear, brakes, and wing components. Similar to Triumph, 43% of Goodrich's sales is from the US Government, Airbus, and Boeing.[27]
References
- ↑ 1.0 1.1 TGI 10-K 2008 Item 1A "Risk Factors" p.19
- ↑ 2.0 2.1 TGI 10-K 2008 "Backlog" p.14
- ↑ 3.0 3.1 BNet - Business Services Industry "Triumph Group Selected to Provide Airbus A380F Floor Panel System" 12 Jan 2005
- ↑ 4.0 4.1 The Christian Science Monitor: "Record U.S. Defense Spending, But Future Budgets May Decline" 6 Feb 2008
- ↑ 5.0 5.1 5.2 Wall Street Journal "More Fuel Surcharges Could Curb Air Travel" 3 June 2008
- ↑ 6.0 6.1 Business Week- Business "Best-Selling Private Jets: As the rich get richer, private jet travel is bigger than ever. Which planes are most popular with today’s tycoons?" 2 July 2007
- ↑ TGI 10-K 2008 "Business Segment Performance" p.33
- ↑ TGI 10-K 2008 "Sales, Marketing and Engineering" p.14
- ↑ 9.0 9.1 TGI 10-K 2008 "Segments" p.77
- ↑ TGI 10-K 2008 "Aerospace Systems Group" p.3
- ↑ TGI 10-K 2008 "Business Segment Performance" p.33
- ↑ TGI 10-K 2008 "Aftermarket Services Group" p.4
- ↑ TGI 10-K 2008 "Government Regulation and Inudstry Oversight" p.16
- ↑ TGI 10-K 2008 "Government Regulation and Inudstry Oversight" p.15
- ↑ TGI 10-K 2008 "United States and International Operations" p.15
- ↑ TGI 10-K 2008 "United States and International Operations" p.15
- ↑ TGI 10-K 2008 Item 6 "Selected Financial Data" p.27
- ↑ TGI 10-K 2008 "Liquidity and Capital Resources" p.35
- ↑ TGI 10-K 2008 item 7. "Overview" p.28
- ↑ 20.0 20.1 BNet - Business Services Industry "Triumph Group Selected to Provide Boeing 787 Floor Panel System" 11 Oct 2006
- ↑ BNet - Business Services Industry "Triumph Group Signs Four Year Contract with Lockheed Martin" 13 Jan 2005
- ↑ International Herald Tribune - Business with Reuters "High Oil Prices Hit Low-cost Carriers Especially Hard" 3 June 2008
- ↑ Seeking Alpha: "Airline Troubles Means More Demand for Private Jets" 6 June 2008
- ↑ Reuters - Full Description "Spirit Aerosystems Holdings Inc (New York Stock Exchange)"
- ↑ Google Finance "Heico Corporation"
- ↑ Google Finance "Kreisler Manufacturing"
- ↑ Reuters - Business & Finance "Goodrich Corp (New York Stock Exchange)"
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