Daily Memo: Widebodies, Supply Chain Hold Keys To Continued MRO Recovery
Passenger and cargo demand being served by narrowbody and freighter flying is helping commercial maintenance, repair, and overhaul (MRO) providers climb out of the downturn and toward pre-pandemic business levels.
But completing that journey in the next 1-2 years, as many project will happen, depends on calm air in a few areas that could easily produce enough headwinds to slow the recovery.
First, the good news. MRO spending is clearly on the rise—not just year-over-year, where the comparisons remain relatively easy—but sequentially as well.
GE Aviation executives said during their recent earnings call that fourth-quarter (Q4) 2021 shop visits were up in the mid-single digit range compared to the 2021 third quarter. Work scopes improved sequentially as well.
Raytheon reported that overall MRO business, including its Collins Aerospace and Pratt & Whitney units, was up 10% in Q4, citing strong parts and repair sales. Pratt’s aftermarket sales alone jumped 17%.
On many balance sheets, first-quarter (Q1) 2022 revenues will be stagnant or even decline—but that’s not necessarily a bad sign. Why? Because in normal times, a lot of MRO activity slows in Q1, as it’s sandwiched between the year-end push to buy new parts before prices go up and prep for peak summer-season flying.
“As usual, we expect activity to decline significantly in the first quarter,” GE CEO Larry Culp said.
Overall, GE is expecting a 20% increase in shop visits this year compared to 2021. Raytheon sees steady growth at Pratt following a Q1 dip, while Collins unit growth should be in the low- to mid-single digits throughout the year.
The accuracy of those forecasts depends largely on two factors: widebody flying and supply chain reliability.
Raytheon executives estimate that 75% of 2021’s uptick in available seat miles flown by its products and related aftermarket spending improvement was linked to domestic narrowbody flying.
“This year, we’re expecting about 80% of the growth to be driven by international long haul and about 50% of that driven by long-haul routes,” Raytheon CFO Neil Mitchill said. “It’s going to be a really important factor as we look at the year. If you think about how that translates to the aftermarket sales assumptions, the comparisons are getting a little bit more difficult sequentially given where we ended the  fourth quarter.”
While long-haul flying is lagging in every market, Asia-Pacific’s fortunes are seen as the key to an international recovery. Global international passenger demand was down 76% in 2021 compared to 2019, IATA figures show; in Asia-Pacific, it was off an eye-watering 93%, on an 85% drop in capacity.
Recent figures are not much better—December 2021’s Asia-Pacific passenger demand was down 88%. But the reopening of a few long-closed markets such as Australia and New Zealand offers hope that fuller skies are ahead.
“We have seen reopenings of some international borders ... and that’s encouraging,” Mitchill said. “The key ... is Asia Pacific opening up and the long-haul routes coming back in earnest as we get towards the end of the year here. So, we’ll have to wait and see. But certainly, sometime in the March and April time frame is when we would expect to see an uptick that would drive the ranges that we’re predicting here, for Collins in particular.”
Supply-chain steadiness offers more potential uncertainty. Shipping capacity remains constrained “with bottlenecks at key hubs,” IATA said.
Labor is another issue, especially as MRO shops see demand spike as airlines stop deferring maintenance. The Asia-Pacific region could be particularly vulnerable because of the downturn’s effects on traffic in the region.
Parts suppliers, challenged with both new-production ramp-ups and rising demand for spare parts, could also be sources of supply-chain hold-ups.
“We see some labor shortages with skilled positions,” Raytheon CEO Greg Hayes said. “Probably the most important one right now is in the castings, where we see a shortage of welders. We’re working with our suppliers to make sure that we can get supply back up to demand.”
While questions about supply chain resilience have placed the issue on C-suite watch lists, it is not yet in the crisis category.
“Just to put it in perspective, we’ve got about 13,000 product suppliers,” Hayes said. “We are monitoring the supply chain on a daily basis. There are less than 100 ... giving us real concern. But it only takes one to make us miss a shipment.”