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Aftermarket Too Busy For MAX-Related Bump

Some airlines are keeping older aircraft around, but not enough to offset the many missing MAXs.

Printed headline: Too Busy for a Bump

The Boeing 737 MAX fleet’s prolonged grounding has airlines and Boeing scrambling, but aftermarket providers continue to report business as usual—largely because MRO business was unusually strong before the newest Boeing narrowbody’s troubles began.

“We don’t see for the moment any impact of the grounding in terms of shop visits or even in terms of scope of the shop visit,” explained Safran Chief Financial Officer Bernard-Pierre Delpit during the company’s half-year earnings call in early September. “We are servicing engines that have been put in maintenance by the airlines some three, four, five, six months ago, so you can’t have an impact of the grounding for the moment.”

CFM56 shop visits deliver the bulk of Safran’s aftermarket revenue, and they are rising. The venerable engine model boasts some 28,000 in-service engines—most of them CFM56-5Bs and -7Bs that power some Airbus A320ceos and all Boeing 737NGs. Worldwide shop visits of the two models are approaching 3,000 and will not peak until about 2025. The International Aero Engines V2500 fleet, which shares the A320ceo platform with the CFM56-5B, is in a similar position. All of this was true before the 387-aircraft MAX fleet was grounded and deliveries were halted in mid-March.

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“We continue to hear that shops are full, with very limited capacity in the market, especially for engine MRO,” says Canaccord Genuity analyst Ken Herbert. “We have consistently heard that if an airline does not have a slot scheduled for engine MRO work, lead times are several months now, which we believe is contributing to the slower backlog growth as well.”

The situation presents challenges to MAX operators wanting to prolong the life of an older 737 or A320 to help fill the gap created by their grounded lift. Operators with short-term lease options have extended them, but not in all cases: Alaska Airlines is sticking with plans to return one Airbus A319ceo and two A320ceos by 2021 as leases expire, even though the timing of its first MAX deliveries—slated to start this past June—are up in the air.

Other airlines have modified retirement schedules of older models that the MAX is helping to replace.

American Airlines’ latest fleet plan shows that 10 of its 34 Boeing 757s pegged to retire this year will continue flying until 2021. Looking further out, four of its 48 Airbus A320ceos slated to leave the fleet in 2021 will remain as well. The carrier also has paused its Oasis cabin-reconfiguration project that is adding seats to its 737-800s and A321ceos so they match the 737-8s and A321neos. The airline expected to have 40 MAXs by year-end, including the 24 in service when the fleet was grounded.

American was not desperate enough to postpone retirement of its MD-80s, however, parking its last 23 in early September. Airline executives cited engine-overhaul costs and demand for pilots on other, newer models as reasons to retire the venerable twinjets.

Southwest Airlines’ fleet of 34 MAXs was the largest among any airline when the fleet was grounded, and it expected to take 41 more in 2019. The carrier has decided to keep seven
737-700s earmarked for retirement this year to help offset some lost MAX capacity, but will still park 11.

The result is a mixed bag for many MRO suppliers, especially ones that feed both new and aftermarket programs.

“With regard to the aftermarket and the replacement parts business, it clearly cannot hurt us,” says Eric Mendelson, Heico co-president, of the grounding and related life-extensions on some older aircraft. “But how much it is helping us is a bit confusing because we are still seeing retirements of older product lines.”

A Canaccord Genuity survey of MRO providers conducted in mid-July yielded similarly conservative viewpoints. More than half of the 40-odd respondents said business generated by the grounding “will not be a material tailwind,” Canaccord’s Herbert wrote. The one caveat is if the fleet’s grounding drags on into 2020, past when Boeing believes at least some regulators will approve the model’s return.

Herbert’s big-picture analysis based on the quarterly survey, due for an update this month, sees MRO growth in the second half of the year at about 6%. While down from 2018’s full-year figure of about 8%, it is both well above consensus long-term forecasts of 3-4% annual growth and comes against a very strong second half of 2018, when growth was about 11%.

“Even before the MAX grounding, airlines had been increasing spending on older assets, as fuel prices remained relatively low and traffic demand remained high,” Herbert says. “The demand was heightened in 2018 as many of the new aircraft [notably the A320neo and 737 MAX] faced delivery delays, and there were several other factors that negatively impacted in-service aircraft.” 

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