Sales of certain spare parts and other short-cycle commercial aftermarket activity face near-term risks from the Iran war.
However, more widespread effects, such as an uptick in retirements, would require a protracted stand-off, an RBC Capital Markets analysis concludes.
“We do not believe the current surge in crude prices will impact aircraft retirements unless the conflict, or higher crude prices, persists for months,” analyst Ken Herbert wrote in a March 17 analysis. “However, cash pressure on airlines can result in delays to supplier payments, some deferred maintenance, and select inventory destocking (which we believe is already happening with select Middle Eastern airlines).”
The most vulnerable inventory are non-serialized or other common parts airlines and repair stations keep in stock. Higher-value material, such as parts for engine overhauls, is unlikely to see a dip in sales unless fundamental changes cut into maintenance demand.
“[We] believe that if the conflict is over in the next 2-3 weeks, there will be very little fundamental market impact,” Herbert wrote. “Considering the state of engine shop visit [turnaround times], and ongoing asset scarcity, we see very little risk to the engine and heavy MRO outlook, and we believe risks to [new-order] backlogs are also very limited.”
The most likely big-picture driver would be an uptick in retirements in response to a slowdown in demand. But industry’s lingering under-supply of lift means the dip would have to be both substantial and prolonged to trigger significant capacity reductions.
An RBC analysis of 17 previous West Texas Intermediate or Brent Crude price surges since 1990 shows the current environment started with both the highest average passenger load factor, 84%, and average fleet age, at 14.6 years. The figures underscore “the significant under-supply of new aircraft today,” Herbert wrote. “[We] believe airlines will be more reluctant to accelerate retirements in the short-term.”
Most of the changes so far stem from the war’s geographic footprint. Middle East carriers are leaning on targeted, tactical changes in response to the conflict’s risks an related travel demand changes. Some carriers, such as British Airways, have added new long-haul capacity to capture passengers that typically would have connected in one of the major Middle East hubs.
However, if jet fuel prices stay high, all airlines will be vulnerable.
“The industry is heavily supply-constrained for new aircraft and engine material today, which is supporting the strength in demand for the legacy aircraft fleet,” Herbert wrote. “However, the risk is that a material slowdown in travel demand could ease the market tightness and warrant taking out traffic capacity, resulting in lower MRO spend and greater retirements.”
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