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Boeing 777 Aftermarket Will Hold Its Own

Although the Boeing 777 production rate is slowing, analysts see plenty of aftermarket work for MRO providers.

The Boeing 777 aftermarket outlook resembles the consensus forecast for the new-production side—general strength and stability, with a dash of uncertainty.

Earlier this year, Boeing, seeking to ensure a smooth transition to the 777X, confirmed it will throttle back 777 production rates. The cut, from 8.3 per month to seven per month starting next year, was expected. But some insist it is not enough.

“Although Boeing has finally conceded to a weaker than hoped demand environment and cut the 777-300 rate to seven per month, there is concern that there could be further downside,” RBC Capital Markets noted soon after the change was announced. RBC projects that Boeing still needs to sell about 140 777s to bridge the gap to full 777X production. “Based on expectations that Boeing is likely to continue to struggle to sell the plane, we have cut our projections for 777 deliveries going forward. We now assume that the rate is cut to six per month in 2018, and then five per month in 2019, with the model ceasing production and deliveries in 2021,” RBC says. 

The near-term production uncertainty will do little to destabilize what is a strong program. Aviation Week fleet data showed 1,295 777s in commercial service at the end of January. Add in Boeing’s backlog of 218 of the twin jets, and the original 777 family’s success is indisputable, even with a rate cut or two between now and the end of production.

The program’s MRO prospects offer similar long-term promise. Demand for 777 work in 2016 is expected to account for about 13% of the $63.2 billion in global MRO demand, Aviation Week 2016 Commercial Fleet and MRO Forecast figures show. In 2025—some four years after the last 777 rolls off the line—the model’s demand will still account for about 13% of the global market’s $90.5 billion MRO total.

[CHARTBEAT:3]

Shorter-term, there are questions. Delta CEO Richard Anderson jangled some nerves in October when he said the carrier is “seeing a huge bubble in excess widebody aircraft,” pegging values of 9-10-year-old 777s at “about $10 million.” Boeing and some other aircraft owners disputed the valuation, calling any aircraft in that price range an outlier.

“Any 10-year-old used 777-200ER you could buy for $10 million, which by the way we have not seen in the marketplace, would be in run-out condition, would need engine overhauls, landing-gear overhauls, major airframe checks, interior, inflight and entertainment replacement,” said John Plueger, CEO of lessor Air Castle. “All that stuff could cost $30-40 million to complete.”

Plueger says data from “nine or 10 different appraisers” and marketplace transactions put the value of a “normal” 777-200ER at $45-70 million. “The fact of the matter is that today, with sustained lower fuel prices, the 777-200ER offers a pretty good value to the airlines,” he says.

Still, airlines are using a record 40% of new deliveries to replace older aircraft, meaning something has to be parked. As 787s, Airbus A350s and even new 777-300ERs take their places in the global fleet, older 777s are among those being retired. Analysts at Canaccord Genuity peg the 777 as one of the three platforms—along with the IAE V2500 and GE90 engines—poised to see a flood of used parts hit the market soon.

The impact of a used-parts rush is difficult to quantify, though it is sure to drive down new-parts sales and could eat into the lucrative component market. It will not be enough to turn the 777 aftermarket into a bad bet, however.

Demand for 777 MRO is expected to total $8.3 billion in 2016, including engine work, which makes up about 45% of the total. Aviation Week’s forecast projects that figure to rise steadily over the next decade to $11.8 billion in 2025, a compound annual growth rate (CAGR) of 3.6%. Total forecast demand for the period is $103.7 billion, the analysis projects.

A deeper dive into the figures shows line maintenance as the second-largest demand category, expected to grow from $1.8 billion in 2016 to $2.4 billion in 2025, a 3% CAGR, and account for 22% of total MRO demand during the decade.

Component work is expected to generate $1.4 billion in demand in 2016, growing to $1.9 billion by the end of the decade, a 3% CAGR. The $22 billion in component work will make up 21% of 777 MRO demand, the forecast indicates.

Airframe work is the smallest but fastest-growing category, expected to rise from about $550 million this year to $860 million in 2025, a notable 4.6% CAGR. Airframe work will generate about 7% of 777 MRO demand through 2025, Aviation Week figures project.

The remaining demand is forecast to come from modifications and upgrades. The market will fluctuate over the decade, starting out at about $900 million this year and topping out at $1.5 billion in 2021, and total demand will top $12.6 billion through 2025, according to Aviation Week’s forecast. 

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