US aerospace industry manufacturer Rockwell Collins, a ‘Tier 1’ supplier to most airframe and engine OEMs, is pessimistic about the prospects for the surplus spares market in 2017 – in part because it expects retirements and recycling of legacy widebody aircraft to increase in the next few years.
Discussing Rockwell Collins’ 2017 first-quarter financial results in a conference call with analysts on January 20, CEO Kelly Ortberg said even though the company was reporting “a very strong quarter of operating performance with total segment margins increasing 90 basis points and adjusted earnings per share growing 17 per cent over the prior year,” its commercial-aviation aftermarket segment had performed poorly in the period.
Noting that Rockwell Collins’ commercial-aviation aftermarket revenues had fallen about 7.5 per cent in 2017’s first quarter, Ortberg attributed the company’s sluggish aftermarket performance in part to increasingly volatile conditions in the “used parts” business.
“We were down in our inter-trade [surplus spares] business in the first quarter,” affirmed Ortberg. “That’s been a growth area for us, [but] as we’ve seen a lot of this recycling [of aircraft] going on in the past couple of years, I’m not expecting to see much growth out of our inter-trade business this year.”
Ortberg then issued a note of caution regarding the surplus-spares market: “A lot of people have jumped into that segment and, you know, the whole trick here is to have a balance of supply and demand – making sure you don’t pay too much for the used parts, or you don’t buy a bunch of used parts that there’s excess [of] in the market and you can’t turn. So I’ve said we’re going to stay disciplined in this segment, and we are.”
But, he added, “Having said that, I think the market may be losing a little bit of discipline, so I don’t see it driving a lot of growth for us. We’re going to stay there, but again, I don’t see it as a growth driver for us in this fiscal year.”
Ortberg intimated that, by describing the surplus-spares market as losing discipline, he meant that new players have been entering the market and not all participants have been balancing supply and demand carefully. One reason Rockwell Collins sees the surplus-spares market as being over-exuberant is that the market for some new and used widebody aircraft types is becoming increasingly soft and retirements of older widebodies are beginning to mount, making their engines, components and parts available for the aftermarket.
Asked by a financial analyst how Rockwell Collins sees conditions in the markets for new and used aircraft, Ortberg responded: “I think we’re three years into the order cycle. We peaked back in 13-14 and we’re seeing that right now. Obviously it’s having different impacts on narrowbodies and widebodies, and the real question is, how long does the order cycle last and how does that convert to [the] delivery cycle?”
Ortberg continued: “Everybody knows that the last order cycle didn’t convert into an overall delivery cycle, because of the very strong backlogs. My feeling is, the same is going to happen – I don’t think we’re going to come out of the order cycle for a few more years. I think we’ll see that probably coincide with the 777X coming into the marketplace.”
In summary, said Ortberg, “I think narrowbodies are fine – we’re going to see [production of] the narrowbody [types], because of the strong backlog, continue to ramp up at both [Airbus and Boeing]. But I do think we’re going to see continued softness for the legacy widebodies, and we’ve seen that already: the 777 legacy aircraft, the A380 and the 747-8.”
Cautioned Ortberg: “I think that’s going to continue to be a challenge and we’ll probably continue to see higher levels of retirements of the legacy widebody aircraft as well, until we start to see the order environment uptick.”
However, initial aftermarket-provisioning conditions for the most popular new widebody types –particularly the Boeing 787 and the Airbus A350 XWB – remain strong as deliveries of new aircraft flow at high levels and Ortberg shared with financial analysts Rockwell Collins’ view of that market.
“On [the] 787, we’re really starting to enter into a normal provisioning cycle – I mean, there will be a little bit of lumpiness, but even the sparing that we were down in the first quarter [as a result of having run down stockpiled inventory] wasn’t large numbers, so it’s much more of a regular run rate.”
However, “The provisioning on [the] A350 really goes with the number of new airlines that are taking aircraft, so it’s not linear to the production-rate deliveries – it’s more focused on, is there a new-on-type airline taking deliveries? It’s a little bit lumpy and … [Rockwell Collins’] A350 provisioning isn’t as big [as for the 787] because we aren’t provisioning the cockpit.”
Ortberg also noted that Rockwell Collins is beginning to provide components for the 737 MAX family: “Now we will start to see some provisioning here this year on [the] 737 MAX and that will be a tailwind for us over the next three years.”