The commercial aviation aftermarket could reach 107% of 2019 levels in 2023.
The commercial aviation aftermarket performed strongly in the third quarter, several new research reports show.
The third-quarter survey of RBC Capital Markets shows that sales and parts purchased by aerospace MROs rose about 13% and 15%, respectively. While this marked a slowdown from the first half of the year in part due to supply chain challenges and delays, “we do believe the commercial AM [aftermarket] will be a source of upside in 3Q23 [2023 third quarter] results, and the near-term outlook remains positive,” RBC analysts Ken Herbert and Stephen Strackhouse said in an Oct. 22 note to clients.
Asia and engine MRO markets performed the best in Q3, while sales in Europe lagged other regions.
For its part, Jefferies pointed out in an Oct. 20 note to clients that air traffic data from the International Air Transport Association (IATA) through August and airline reports through September suggest that the steady rebound in revenue passenger kilometers (RPKs) has remained strong, while capacity is also improving—though not as quickly. “For the aftermarket, this is coupled with favorable fleet dynamics on top of price which leads to our positive stance on the AM reaching 107% of 2019 levels in 2023,” Jefferies said, adding that “there is likely further upside given these favorable levers.”
With regards to material pricing, RBC Capital Markets noted that it remains favorable for OEM [orgininal equipment manufacturers] and parts suppliers. In the July to September period, prices rose 9.4%, up slightly from 8.8% in the second quarter and in line with the roughly 9% average over the past four quarters.
“We believe pricing will remain a tailwind for many OEMs well into 2024, and we are not hearing about significant pushback from airlines on the planned 2024 OEM price increases,” Herbert and Strackhouse said, adding that they expect many OEMs to “remain aggressive on pricing” given rising costs industrywide.
In an Oct. 17 research note, Bloomberg Intelligence said that aftermarket suppliers including engine, component and aerostructure manufacturers should continue to see strong demand from high-margin maintenance work through 2024, but that OEM deliveries will increasingly dilute these profits. “Airline schedules in the strongest markets are surpassing 2019 levels of capacity, boosting the need for upkeep,” the research note said.
At the same time, given durability issues with newer engines such as the Pratt & Whitney’s geared turbo fan (GTF) and CFM International’s leading edge aviation propulsion (LEAP), older generation retirements are likely to slow. With older jets being flown longer, spare parts demand for engine and airframe makers should rise. In Q3, there were just 67 total aircraft retirements, while the number of aircraft in storage fell by more than 900 as airlines pulled narrowbody aircraft back to service.
“Engine makers are likely to gain the most as the majority of maintenance spending, while airframers like Triumph and Spirit AeroSystems will see more muted growth,” Bloomberg Intelligence said.
As for aftermarket stocks, RBC Capital Markets believes that “commercial AM stocks will continue to be viewed as a safe haven for investors.” While the 2024 outlook for air travel may be facing headwinds, supply chain disruptions are forecast to continue driving elevated aftermarket spending, pushing de-stocking and pricing risk later into 2024.
Looking ahead, the global MRO market is expected to expand steadily from 2024-2033, according to data compiled by Aviation Week Network. The market will grow at a 3% compound annual rate during that period, with total demand reaching $1.2 trillion. Engine maintenance will account for the largest swath of demand at 46%, followed by components at 23%, line maintenance at 19%, modifications at 7% and airframe heavy at 5%. By region, Asia will be the largest demand driver at 34%, followed by Europe at 24%, North America at 22%, the Middle East at 12%, Latin America at 5% and Africa at 3%.
