Aftermarket providers are purchasing fewer used parts than at any time since the global traffic downturn started in early 2020, a sign that the aircraft-retirement stalemate is affecting used serviceable material (USM) supply, a Canaccord Genuity analysis found.
Respondents to Canaccord’s most recent quarterly aftermarket survey, conducted in early July, reported sourcing 13% of their parts from the USM market in the 2021 second quarter (Q2). The figure matches the first quarter (Q1) of 2018 and Q2 2019 for the lowest posted in more than three years and is a 10% drop from Q1 2021.
“We believe that the drop in USM purchasing points more to the lack of supply rather than a slowdown in demand,” Canaccord analyst Ken Herbert wrote in a July 22 research note. “In fact, we believe purchasing of alternative material”—including both parts manufacturer approval (PMA) material and USM—”will accelerate faster than [original equipment] parts purchasing as the recovery gains traction.”
Before new coronavirus strains triggered additional headwinds, a steady increase in flight activity in many regions had aftermarket providers confident that recovery was underway. Honeywell on July 23 reported a 12% sequential improvement in commercial aftermarket sales for Q2, supporting optimism of an ongoing recovery. Parts purchasing volume was ramping up as well, but a lack of retirements means many high-demand used parts—think narrowbodies or life-limited parts (LLPs) for recent-generation engines—remain scarce.
“There’s a high expectation among our customers that used serviceable material will be available in huge amounts, which is true for tier three and tier four material,” SR Technics SVP of business development Caroline Vandedrinck said during the recent Aviation Week AeroEngines Americas conference. “But if you look at [high-pressure turbine] blades or used LLPs with decent life left, those are not very voluminous.”
The scenario has led to higher volumes for OEMs, which captured 81% of the parts purchasing business by companies in Canaccord’s survey—a figure not seen since the beginning of 2018. The remaining share of 6% last quarter went to PMA providers.
As airlines firm up their fleets to match post-downturn demand and manufacturers ramp up production, retirements should increase. Retirements lagged during the first five months of the year, however, suggesting that the USM glut will be around for at least several more quarters when factoring in the lead time needed from official retirement to generating airworthy parts via a teardown.
“Throughout the pandemic, one of the consistent aerospace debates has focused on the outlook for aircraft retirements,” Herbert wrote. “Considering the number of aircraft that the airlines have indicated will not return to service, we continue to believe an eventual step up in official aircraft retirements is inevitable.”
