The bullish outlook exhibited earlier this year among maintenance, repair, and overhaul (MRO) providers has tempered a bit as many airlines continue to squeeze maintenance budgets and delay work in search of cost-savings, a Canaccord Genuity aftermarket industry survey indicates.
“While the commercial aftermarket recovery continues, we expect a deceleration” in second-quarter growth, Canaccord analyst Ken Herbert said in the latest version of the firm’s commercial MRO survey, compiled quarterly just prior to earnings releases.
Responses from more than 60 MRO providers revealed that each major global region reported slower year-over-year growth in the second quarter than in the first. Industry wide, growth was 3.4% compared to 2013, vs. 6.2% in the first quarter.
“Many firms appeared to be doing well, while others were down relative to last year,” Herbert wrote. “Recent issues such as used surplus material, deferred maintenance, inventory corrections and geographic competition are not as impactful in the near-term as is the general perception that airlines continue to watch maintenance spending.”
MRO providers cited several factors as revenue drags, including more reliable parts that help airlines minimize workscopes during airframe and engine shop visits. Airlines’ continued focus on “cash and working capital” is also contributing to leaner MRO backlogs, which rose last quarter, but at a slower rate than the previous two quarters.
“While we continue to hear about many shops being oversold on the heavy [airframe] side, there is still over-capacity in the narrowbody engine market, which is also a headwind for the backlogs,” Herbert noted.
Despite the slowdown, the commercial aftermarket is moving in the right direction. A quarter of respondents said their 2014 business is ahead of plan—down from 44% last quarter—while 45% are on pace to meet their established business goals.
As MRO providers navigate choppy waters created by cost-conscious carriers, two related and potentially strong storms are forming on the horizon. Higher production rates will almost surely put downward pressure on aftermarket budgets for existing aircraft, and more used parts on key platforms will cut into component sales and some shop visit revenues.
“[A]sand continue to push up delivery rates, the impact on the aftermarket will continue to be felt as it contributes to the airlines’ reluctance to invest in older platforms, while the availability of newer aircraft is expected to increase,” Herbert wrote.
Meanwhile, as surplus parts make their mark, demand is not being met on three popular models: theand its engines, the Airbus , and the .
Used parts for the widebodies have been hard to come by, but that should change as more airframes age and the 777X and A330neo move from the paper-airplane stage to the production lines.
While used 737NG material has hit the market, much of it has little useful life left, Herbert noted. He expects this to change as the Boeing 737MAX’s planned entry into service, slated for 2017, gets closer, and aircraft with a higher concentration of significant green-time parts are broken up.