The shrinking percentage of older aircraft in the world’s fleet is likely playing a key but often-overlooked role in the sluggish aftermarket performance during the current upcycle, analysts suggest.
Last year’s aftermarket growth was around 5%, well shy of the 15% range hit during the last sustained upcycle a decade ago, an RBC Capital Markets research note points out. While the cause is not fully clear, many analysts cite several factors as likely drivers, including the prevalence of used material driving down new-parts sales and general improvements in airline MRO efficiency such as carrying smaller spares inventories (Aviation Daily, Jan. 21).
One logical factor that receives less attention than used parts and more efficient airline practices is the declining percentage of older aircraft in the fleet. An analysis by consultancy Roland Berger shows that about 15% of the 2014 fleet was at least 20 years old, including 3% over 30. A decade prior, just as the last boom period was hitting its stride, these figures were 17% and 6%, respectively.
While the 2-point drop to 15% from 17% may sound trivial, it equates to about 600 aircraft out of of today’s 30,000-aircraft fleet. This shift has helped drive the average fleet age down steadily, falling 12% to 11.1 years in 2014 from 12.6 in 1999.
Given the dynamics of aftermarket revenue, in which the highest demand for work comes in the last quarter of a 20-25-year useful life, having a lower percentage of older aircraft equates to lost opportunity for many MRO providers, especially in the engine market.
“If airlines choose to retire these old aircraft before the aftermarket ‘sweet spot’ or even fly them less, this has a direct impact on the long-term service revenues for the engine OEMs—and potentially the overall business case that the engine OEMs have assumed for the operating life of the assets,” RBC says in a research note based in part on the Roland Berger data.
While long-term agreements have never been more popular, they are most prevalent in the first half of an asset’s life. Engine MRO providers have been working to address mature-engine aftermarket needs, using programs such as custom workscoping and more flexible time-and-materials arrangements to keep customers happy—and aftermarket revenue flowing.
Retirements were trending downward in 2015—a positive short-term sign for aftermarket providers likely linked to low fuel prices (Aviation Daily, Jan. 21). However, if steady but not stellar aftermarket growth becomes the norm, RBC cautions, it could have a ripple effect felt far up the commercial aircraft supply chain.
“These issues are impacting aftermarket revenues for many suppliers, and these suppliers, like the engine manufacturers, have probably not anticipated these lower-than-expected spares volumes and service activity,” RBC added. “To date, aero supplier margins have generally held up well, but these structural aftermarket headwinds could limit the progress from here and the willingness of suppliers to sign up to new programs if the business case is in question.”