Podcast: Boeing Perspective on Outlook for Aftermarket

As the aviation industry tracks fleet status daily for signs of recovery, Wendy Sowers, Boeing’s director, commercial market forecasting and analysis, talks with Aviation Week’s Lee Ann Shay about commercial aviation trends, what aftermarket segments should recover first (and last) and predictions for what the MRO market could look like post-pandemic.

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Below is a rush transcript of Aviation Week's MRO podcast.

Lee Ann Shay:             Welcome to the MRO Network Podcast. This is Lee Ann Shay, Chief Editor MRO with aviation week. And I'm here speaking with Wendy Sowers, who is Boeing's Director Commercial Market Forecasting and Analysis. And we're doing this in advance of MRO Trans Atlantic, so we can get some good insights. Wendy, it's so nice to be speaking with you.

Wendy Sowers:           Oh, thank you so much. I really appreciate the opportunity to be here.

Lee Ann Shay:            Thank you. I know Boeing just came out with its forecast recently. Can you talk about some of the noticeable trends that you're seeing in commercial aviation now, including parked aircraft before we start looking at the future?

Wendy Sowers:           Yes, definitely. It's certainly something that my team has been spending a lot of time doing the last six months, no doubt, given how dynamic and disrupted our market is right now. I think for me, the top three things that we've been watching and that I think about, both in terms of all across the commercial market, whether it's airplanes or the fleet and after market or anything like that, it's kind of back to the basics from my perspective. Which is first of all, where we are with passenger traffic. I know everybody knows the statistics well. The latest statistics, we're at about 50% of operations, but traffic is only at about 25%. And so I know folks know those statistics well, because we're all watching it live in real time. But I think going down a level from that, it's also important to understand the dynamics underneath those top line numbers.

                                     And as I'm sure you've seen and the folks are talking about, the split of the traffic that we're seeing with domestic markets coming back earlier than long haul markets, is playing a big role both in terms of airplanes, as well as where we go with aftermarket. In August we had about 50% of traffic on the domestic side. But it was only about 12% international. And that's really playing a big role downstream in a lot of the dynamics we're seeing both in fleet and airplane. The second piece is what's going on with air cargo. One of the aftereffects or side-effects shall we say of what's going on in the passenger markets, particularly on the long haul side, is that we've lost a lot of our air cargo capacity in the belly of passenger wide-body airplanes. And so, while the overall statistics in terms of cargo traffic year-to-date we're down about 14%, but it really has been driving off of the fact that we've lost so much capacity.

                                    And relatively speaking, air cargo has been a bright spot as a result because even though traffic is down, revenues are way up because when you constrain capacity, but you've still got the demand, it's been a positive for those airlines that are flying freighters today. And it has really boosted the utilization and the usage of the dedicated freighters that are out there in our fleet.

                                    And I think the third thing, and you touched on it in the question as well is really what's going on with the fleet itself in terms of parking and utilization. And I think one of the interesting things for us in looking at the market right now is what I would almost call the definition of parking. Typically, we'd go to our fleet databases and look and see what's parked. And right now with the market being so dynamic and watching what the airlines are doing in terms of how they're managing their fleet with the market being so disrupted, I think maybe the definition of parking is a little bit more fluid now than it would be in normal time.

                                     But what we're seeing today, I think is about 70% of the fleet is parked ... Or excuse me, is in-service. So we've got about 30% parked. That's up from the low back when we were in the April may timeframe where about half the fleet was parked, but I think the other side of that coin is what's going on with utilization. So even if an airplane is in-service, the other piece of that is that the airplanes that are being flown are being flown less than they would be in normal time. And once again, we have that short haul/long haul disparity there. So, utilization on the single aisle is a bit higher, maybe down a quarter or so. Where on the twin aisle side, it's more like a third to maybe a little bit more. On the twin aisle side or the wide-body side there's a little bit of ... How would I say it, maybe blurriness because we have a lot of airlines, we're using their passenger airplane to fly cargo-only flights.

                                     So we have craters, what we're calling craters where people have dumped craters out there in the marketplace. And for those airlines that have those airplanes, it's once again been a small bright spot, and an opportunity to bring in cash. I think the final element of that parking and utilization I'd bring up is I think we're seeing what we would typically see in a downturn, in any downturn, [inaudible 00:04:44] one of the dimensions that we've got today, which is the newer technology airplanes are the ones that are tending to be in-service and less parked. We can certainly see some of the older technology types if we look at the suite that's not flying today. If it's not a current technology type, it's well below 50% in some cases. So I think that's pretty typical.


Lee Ann Shay:             Wendy, you raise a lot of points. I could ask you about 10 questions for each of those, but especially with the parked aircraft. You're right, the definition is very different. They can be flying just once a week, twice a week, who knows.

Wendy Sowers:           Right.

Lee Ann Shay:             But that affects the maintenance program. So what kind of requests are Boeing getting from that, from those quasi-parked, parked aircraft?

Wendy Sowers:           That's a really interesting question. To me, this gets back to I guess how the airlines are trying to operate and manage through this crisis. There's two pieces of it. There's, what are they going to operate in their fleet or in their networks, number one. And then number two, how are they going to best manage the business side of what's going on? And I think in my conversations with customers and other folks in the industry, there's a real, real focus on conserving cash at this point, right? And you can certainly see it in the airline profitability announcements we've seen just over the last couple weeks, and for second quarter as well. So in those cases where airlines can defer maintenance in any way, shape or form, they're going to do that because that's cash out the door.

                                     One of the things I think that's interesting about that as we move through what we're facing right now and move through the crisis, I think it's going to be interesting in terms of the recovery, because longer term we see the strengths in the market, but also in some ways, if all that maintenance is deferred, once we start to see the upturns and we are already, in some markets we're seeing as upturns. You potentially could have a big wave of deferred maintenance that needs to be addressed for those airlines to start really bringing capacity into the market. So we could find ourselves in a bit of a surge situation as we have markets bounce back. Say for instance we're seeing domestic China right now is pretty much back to where it was before the crisis. So, those recoveries are out there once we get past the health piece of it. And if there is a lot of deferred maintenance, like we're seeing now for cash reasons, we could see quite a surge when we get there.

Lee Ann Shay:             I like the word, recovery. We're all looking forward to that. And even if we had a surge, that would be a blessing. Which segments of the commercial aviation aftermarket do you expect to recover first, and which are going to be last?

Wendy Sowers:            Well, from our perspective, I think I touched a little bit already on cargo and the strengths of the main deck freighters, because we've lost a lot of belly capacity. And I think that's the thing that's right in front of us. But it's not just the wide-body capacity shortage, it's also around feedstock availability. And we're certainly seeing that from our leasing customers. One of the things that we saw over the last decade, passenger traffic grew at about six and a half percent in the last decade since the last downturn. The longterm average is about five. So we've had above average passenger traffic growth over the last decade. And one of the side effects of that I guess I would say is that airlines weren't necessarily letting go of some of their airplanes that maybe in a normal market would have flowed into the freighter conversion market.

                                     And so there are definitely some spots now, given the fact that we've had such a shock to the market, and certainly this wouldn't be the way we would've wanted it to happen. But for instance older 767s that airlines were still flying, they're now available for us to turn into converted freighters and really support the strength that we're seeing in the cargo market in general, but particularly in express markets, given the fact that many of us are now shopping from home and have lots of packages being delivered to us, the express market is really surging. So that's definitely one place. I think another place where we're seeing relative strengths, maybe picking up on that leasing thread. And thinking forward, maybe the next step would be transition services from one operator to another. I said, I was talking earlier about the fact that China is almost back to normal basically in the domestic markets, at least in terms of operations.

                                     While, once again, we have some pretty challenging statistics at the macro level, we are starting to see some resilience and some return and recovery in some markets. And one of the things about airplanes is that as an asset, they're a mobile asset. They can move where they're needed. And so as we think companies are looking to move their assets to the next operator and those markets where we are starting to see recovery and strength, I think that leasing ... Or excuse me, those transition services are going to be an opportunity, whether that's some interior mods to making sure the regulatory compliance has been [inaudible 00:10:01], documents, records, all those kinds of things. I think the final upside actually interestingly enough, is business aviation, which I think is interesting because typically, globally we're in a recession given everything that's happened with COVID. And typically business aviation doesn't thrive in a recession, but given the nature of this one, we're seeing flight hours almost recovered to where they were on the business aviation market.

                                     And then on the downside from my perspective, I think that's really about the businesses that are tied to the operations that we were talking about earlier. So, MRO is really challenged right now in terms because operations are way down. And then what we were talking about earlier with airlines, really trying to make sure they're keeping as much cash as possible. So deferring maintenance where they are. And I think the other segment there might be in terms of what maybe I would call more discretionary or maybe even passenger-facing modifications in the cabin. Once again, given where the industry is financially right now, we're going to want to see the financials come back a bit before airlines start making discretionary investments in some of their say interiors or some of their passenger-facing parts of their businesses. Short of the things that they're doing today to make sure that everyone feels very comfortable and safe on the airplane and those kinds of things.

                                    You raised a lot of good points, and I know no one has an accurate crystal ball, right? But how do you think the aftermarket could function differently after the pandemic is over? Do you see any changes that maybe are starting to happen now that will continue, or a big shift that could be happening?

                                    Yeah, that's a really interesting question. It's one honestly we ask ourselves across commercial market, whether it's airplanes or on the services side. And I think that's from my perspective one of the big learnings, particularly coming out of the 9/11 crisis, but also in terms of the financial crisis. So when the industry goes through a downturn or it has this kind of really big impact to it, coming out the other side, we tend to see innovation in this industry. We've seen it from the airlines. We see it from all the players in the industry because we learn something new and we figure out how to compete as we come out of it. So I think you're seeing some examples of it today in terms of how airlines were approaching the market, in terms of how different players in the aftermarket are thinking about how they structure their businesses, their contracts, their offerings to take ... Not to take advantage, but to really meet what the markets need, but also make sure that their businesses are going to be viable in the long run.

                                     So for instances as an example, a power by the hour contract for engines right now, is pretty tough given what's going on with the hours. So what are some of the things we can think about going forward about how we structure this and make sure it works for both the airline as well as the service provider. And I think, I guess the other piece I would hit on there just in general is maybe that, that innovation has driven to resilience in the industry overall. I think that's the other thing for us to keep in mind here. At least I'm trying to keep it in mind these days, because the industry has seen crises before. 9/11, the great financial crisis was certainly a challenge as well. And when we were at the depths of post-9/11, and then we had SARS, they were certainly very, very challenging times, not unlike we're seeing today, but the industry has really demonstrated resilience. So I have every confidence that we'll get back there, and innovation is going to help lead us there.

Lee Ann Shay:             That is an excellent point. And we will recover for this. And you bring up a good point that companies really do need to be focused on the now, but the future too. And innovate and make sure that you're poised to come out stronger in the recovery. What role does the digital acceleration have in this? We've seen lots of examples in the aftermarket of how companies are accelerating efforts that they might've been thinking about, or even starting, and now they're off and running.

Wendy Sowers:            Yeah, no, it's actually, for me it's a really exciting thing to watch I think because sometimes ... Perhaps one of the side effects of having a really strong passenger market in some ways is things are growing, things are going really well. And so maybe in some cases, it wasn't the first focus. And how can we improve with digital? And to some extent, we're being really forced to think about that today, not just because of the downturn in the industry, but stepping back and thinking more broadly about just what's happening as a result of COVID more broadly in our societies and everything. I think for aviation in general, I've been kind of thinking about it in two phases. And in terms of, I think there's some very here and now things that the airlines can do and are doing. Working things remotely. On a passenger-facing side, there's a lot of touchless technology, those kinds of things. But also you can see airlines right now, their networks have been totally disrupted. 

So one of the things they need to do to maybe operate differently than they did before they came in. So just taking something fairly simple like crew training ... Excuse me, crew scheduling. That's when you have a set network and you know where everyone's going to fly. That's one thing. But now we're in a market where your network is completely disrupted. How do you make sure your crews are where they need to be and they're getting around? So, I know we have software that helps airlines do that, right? So the folks are thinking about that. I think the second piece of it is, with all of the replacement ... Replacement is typically accelerating the downturn. And we're certainly seeing that this time. In fact, we may have even had some pent up demand given how strong the growth has been the last decade. But as a result, we're going to have a lot of new technology airplanes coming into the market.

The forecast we just released has about 10000 airplanes coming into the market for replacement over the next 10 years. And those airplanes are going to be E-enabled. So we're going to have a lot more data available to us. And I think that's really going to play a role into maybe the second phase, which is as the airlines, as we do come out and recover, the airlines are going to be focusing on efficiency and optimization as we come out of this. And so things like, for instance, predictive maintenance and really understanding, hey, with my new fleets I can track them better. I can understand where the maintenance is going to need to be. I can try to minimize unplanned events, those kinds of things. It's going to make those operations just that much more efficient and help the airline move back to a place of profitability.

Lee Ann Shay:             I agree. And efficiencies will be the name of the game, right?

Wendy Sowers:           Most definitely.

Lee Ann Shay:             Well Wendy, thank you so much for taking the time to speak with me and sharing your insights. Listeners, if you have any comments, please feel free to contact me at mroataviationweek.com. And you can subscribe and download MRO network podcasts on iTunes. Thank you for joining us, and Wendy, thank you.

Wendy Sowers:          Thank you so much.


Lee Ann Shay

As executive editor of MRO and business aviation, Lee Ann Shay directs Aviation Week's coverage of maintenance, repair and overhaul (MRO), including Inside MRO, and business aviation, including BCA.