The world's best-selling jet is a winner for aftermarket suppliers
Aftermarket providers looking for a solid program for potential future sales could do a lot worse than the . With nearly 5,700 in service, it is the world fleet's most common model. A backlog of 3,400 orders and the monthly production rate increasing to 42 from 38 per month next year and to 47 in 2017 means the fleet will not be shrinking soon.
Yet while the 737 aftermarket will surely benefit from increased flow of new tin, it remains to be seen whether the rise in repairs and spares will be in lock-step with fleet growth.
Two factors could suppress 737 MRO spending during the next decade or so. One is the evolution of surplus parts availability, which—predictably—is greater for the 737 than for smaller fleets as suppliers move to meet demand. When Intertrade grew its surplus business into airframe parts in 1994, it did so on the back of a 737-300 part-out. Earlier this year, the company expanded again, adding engine parts starting with spares for-7s that power the 737NG family.
Canaccord Genuity pegs surplus parts—or used serviceable material (USM)—as a $3 billion per year market. More significantly for new-parts suppliers, USM trade shaves about 1% off overall aftermarket parts growth, Canaccord calculates.
“We believe this is a structural shift in the commercial aftermarket, and the rate at which aircraft are parted out will continue to accelerate,” says Ken Herbert, a Canaccord analyst.
Factor in the impending beginning of 737 MAX production and's overall ramp-up, and the USM trend takes on added significance.
“We believe that airlines are already slowing 737 maintenance spending as rates have increased, and the useful life of the aircraft model continues to get shorter,” Herbert wrote in an October research note released just after Boeing announced the 2017 production rate jump. “This announcement will accelerate this process, especially if Boeing is able to maintain the higher 737 rate for more than just a few years.”
Canaccord is not alone.
Fitch Ratings is hardly down on 737s; it expects the family to “retain generally strong demand profiles” into the 2020s. However, the prospects of newer-generation narrowbodies has Fitch keeping a close eye on current-generation retirement trends.
“Fitch has placed increased focus on evaluating scenarios where asset useful life is less than 25 years,” the ratings agency wrote in an October aircraft finance overview. “The technological obsolescence risk to narrowbodies, combined with increased competition coming from new entrants . . . could force earlier aircraft retirements than have been observed historically.”
Market forces are already playing a role in the parking of NGs before their notional time. The Aviation Week Intelligence Network (AWIN) Fleets database shows 37 737NGs retired as of Nov. 1, at an average age of about 12 years. All but three were smaller -600s and -700s, which are proving valuable as spare- part and engine suppliers for their bigger family members.
Air Salvage International (ASI) has parted out eight NGs in the past two years. The earliest jobs, which came when fewer aircraft had been parted out, yielded about 2,000 useful parts per aircraft, says Commercial Director Bradley Gregory. But as warehouses filled and some low-demand, low-wear parts became readily available, that figure declined. The latest jobs yielded about 750 parts that ASI expects to resell, he notes.
The 737's near-ubiquity means it presents lucrative opportunities for aftermarket providers with engineering prowess. Winglet specialist Aviation Partners Boeing is arguably the best-known example, having equipped 5,000 Boeing aircraft (most of them 737s) with winglets. Ireland's Eirtech Aviation is another case. The MRO provider's kit for satisfying a global mandate for new 737NG cabin pressurization warning lights shaves 50% off the time and cost of Boeing's offering, Eirtech executives estimate.
The overall 737 fleet also means the aircraft family has a massive share of the scheduled MRO market. AWIN's 2014 Commercial MRO Forecast estimates the 2014 market at $9.5 billion, increasing to $12.3 billion a year in five years and $15.5 billion in a decade. The MAX, which is not projected to fly paying customers for another four years, will make its presence felt quickly, generating nearly $2.1 billion in annual aftermarket spending in 10 years.
One wild card to watch is the level of spares commonality between the NGs and MAX. Boeing is just beginning the deep dive into the MAX's design phase, when details such as specific part numbers will be hashed out. While some technology upgrades will render NG parts obsolete, Boeing says it will strive to maximize commonality.
“We do expect a significant portion of Next-Generation 737 spares investment to carry over to the MAX,” a Boeing spokeswoman notes.
Just how much it does will help shape a big chunk of the USM market from 2017 on, and could alter NG useful life trends.
Tap the icon in the digital edition of AW&ST for Boeing 737 MRO data from the Aviation Week Intelligence Network 2014 Commercial MRO Forecast, or go to AviationWeek.com/737mro