Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Hexcel Builds a Moat on Aerospace Composites
Transcript
- Lucas: If these conversations have ever nudged your thinking on a business problem or helped you frame a strategy question at work, there is a tiny way you can keep them coming. Buy me a coffee dot com slash fexingo — a couple of bucks a month genuinely makes a difference. No perks, no pressure. Luna: Yeah, it is genuinely small amounts adding up. And we stay ad-free because of it. Lucas: Alright — so today I want to talk about Hexcel. It is not a name most people know, but if you have ever flown on an Airbus A350 or a Boeing 787, you have flown on Hexcel parts. Luna: Hexcel — the carbon fiber company, right? I know them from the aerospace supply chain. Lucas: Exactly. Hexcel makes the carbon fiber that goes into the wings, fuselage, and tail sections of those planes. But the moat is not just the material — it is the certification process. Luna: Walk me through that. What makes certification such a barrier? Lucas: So, an aerospace-grade carbon fiber composite is not just one material. It is a layered system of fibers, resins, and pre-preg — pre-impregnated sheets. Hexcel does proprietary chemistry on the resin and proprietary weaving on the fiber. Airbus and Boeing then spend years testing that exact combination of fiber, resin, and layup schedule. They run fatigue tests, thermal cycling, lightning strike tests. Once they certify a specific Hexcel part number, switching to a different supplier means recertifying the whole aircraft structure. Luna: Recertifying a whole aircraft? That sounds like a decade-long process. Lucas: It can be. The A350 started development around 2006, entered service in 2015. Hexcel was on it from the start. Once that supply chain is locked in, it stays locked in for the production lifetime — 20, 30 years. And because Hexcel is the sole source on most of those parts, they have enormous pricing power. Luna: Sole source? Not just preferred supplier? Lucas: Sole source. On the A350, Hexcel is the sole supplier of carbon fiber for the wing spars, the fuselage panels, the tail section. Boeing's 787 is similar. That is not typical in aerospace. Usually you have dual sourcing for risk management. But with advanced composites, the certification cost is so high that dual sourcing doesn't make economic sense. Luna: So Hexcel basically owns the installed base. What about new entrants? Could a carbon fiber startup break in? Lucas: Toray — a Japanese company — is the other big player. Toray supplies the 787 program as well. So it is a duopoly, not a monopoly. But a new entrant would need to build a production line capable of aerospace tolerances — which means zero defects per million parts — and then get a part certified. That certification alone can cost hundreds of millions of dollars and take five to seven years. And even then, the aircraft maker has to redesign the part to use the new material. It is almost not worth it. Luna: So the moat is not technology per se, but the cost and time of qualification. Lucas: Right. The technology is hard — Hexcel has over a thousand patents — but the bigger barrier is the certification infrastructure. Hexcel has been doing this since the 1940s, first for aerospace metals, then composites. They have relationships with every certification body — the FAA, EASA, and the manufacturers' own internal test labs. That institutional knowledge cannot be bought. Luna: What about the financial side? How does that moat show up in the numbers? Lucas: Hexcel's gross margins are consistently above 30 percent, even in down cycles. Their operating margins are in the mid-teens. And their revenue is about 70 percent long-term sole-source contracts. That gives them visibility three to five years out. They also have a defense and space business — about 25 percent of revenue — which is even stickier because it is classified and often sole-source. Luna: And the risk — what could break the moat? Lucas: Demand concentration is the biggest. Hexcel's top three customers — Airbus, Boeing, and the US Department of Defense — account for over half of revenue. If Boeing has another major production halt, Hexcel feels it. Also, composites are being challenged by advanced metals — aluminum lithium alloys, for example — in next-generation aircraft. The next single-aisle plane from Airbus or Boeing, due around the mid-2030s, might not use as much composite. That could shrink Hexcel's addressable market. Luna: That is a real risk. But is Hexcel diversifying? Lucas: They are expanding into space — rocket structures, satellite components. And into industrial — wind turbine blades, automotive. But those are small. Aerospace remains the core. I think the moat holds as long as Airbus and Boeing keep building wide-body aircraft with composite wings. But if the next generation goes back to metal, the moat narrows. Luna: So Hexcel is a bet on the composite trajectory of air travel. And on the difficulty of recertification. Lucas: Exactly. It is a quiet, high-barrier business. Not flashy, but deep.