Aviation Industry Could Face Headwinds In 2017

The Year Aviation Blinked

Expect the airline and MRO industry to face some headwinds this year. Jonathan Berger, ICF’s vice president of aerospace and MRO advisory, expects “2017 to be the year aviation and aerospace blinked.”

To understand why, first look at the past year. Airlines posted record profits, $35.6 billion, in 2016 and invested in three main areas: labor (profit-sharing and wage increases), capital improvements (fleet renewal, cabin upgrades) and balance sheets (stock buy-backs and debt repayment). Capital expenditures used 38% of the profits.

A piece of that, cabin modifications, is projected to drive the highest growth in the MRO forecast over the next decade. But you don’t have to wait, because “aviation is experiencing a golden age of aircraft cabin interiors,” says Berger.

And that should last, because over the next decade, ICF projects the modifications market will grow faster than any other MRO segment. ICF’s latest forecast predicts the air transport MRO market will grow from $67.6 billion now to more than $100.6 billion in a decade, with an overall compound annual growth rate (CAGR) of 4.1%—and the modifications market will climb at a higher 5.2% CAGR over the period.

Middle East carriers set new expectations for interiors, but now Wi-Fi is no longer an anomaly—nor are lie-flat seats in premium classes. Meanwhile, cabin densification is proceeding as everything becomes “slim.”

This is a hot market, which drove Safran on Jan. 19 to announce plans to acquire Zodiac Aerospace. Rockwell Collins on Oct. 23 had announced plans to acquire B/E Aerospace.

So while carriers are investing and the OEM backlog remains high (about 14,000 aircraft), Berger sees headwinds coming in 2017. Parts prices could increase due to fewer aircraft retirements, which could be good for distributors and OEMs but increase material costs for operators.

Overall, Berger sees four major external macroeconomic factors that will drive the market. The first is higher fuel prices. The second is increasing interest rates, which could slow down the financing of new hangars and aircraft. The growth of nationalism and the impact that is having on trade—from Brexit to renegotiating NAFTA to changes to the Trans-Pacific Partnership—is the third. And lastly, the stronger U.S. dollar could make any transaction in that currency more expensive.

“Fuel costs will put stress on the airlines, but wage increases also will stress the system, so profitability will be harder” to attain, says Berger. He expects aircraft delivery deferrals as a consequence. “For the first time, Emirates just deferred an [Airbus] A380. This is a big deal,” he says.

While Berger predicts global airline profits for most regions, he thinks Middle Eastern carriers will only see a 0.7% EBIT margin in 2017, and in Africa these will plummet to -3.6%.

As Frederico Curado, former Embraer CEO points out in his Viewpoint (MRO34), startups and leading-edge technology are reshaping competition, so blink, but keep your eyes open. 

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