In-house maintenance could become another key differentiator for airlines able to navigate through challenges including higher fuel prices and ongoing delivery delays, according to a new credit agency report.
In “Airline Credit Divergence: Fuel Costs and Capacity Constraints Test Resilience,” Morningstar DBRS points to a widening gap between stronger and weaker airlines.
This is partly down to fuel price hedging positions and the ability to pass on higher costs through fare increases, although Morningstar warns of limits to these strategies as hedges unwind and consumers tighten their belts.
“While many airlines have thus far been able to pass higher fuel costs on to consumers through fare increases and surcharges, the sustainability of this pricing power remains uncertain in a weaker economic or demand environment,” the agency stated.
It also noted that even if fuel prices moderate and passenger demand holds up, airlines will still have to grapple with elevated maintenance costs—due to rising engine parts prices and an aging fleet—and aircraft delivery delays.
“In our view, airlines with in-house maintenance, repair, and overhaul (MRO) units have more control over maintenance costs and aircraft turnaround times and are therefore better positioned to manage current engine reliability issues and aircraft delivery delays,” the Morningstar report said.
Since in-house maintenance tends to belong to airlines with long-haul networks and premium revenues, which are both more resilient to fuel price pressure, the implication is that having a technical arm will compound their advantage over smaller operators.
And while economic uncertainty and cost-of-living pressures could push passengers toward budget airlines, Morningstar warns that deteriorating consumer confidence is likely to “have a more pronounced impact on discretionary leisure travel and price-sensitive customer segments” than on business and long-haul revenues.
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