One of the positive characteristics of the MRO sector is its perceived lack of cyclicality compared to aircraft production.
Yet over the last decade, MRO has experienced two distinct downturns. The first was in 2009-10, in the wake of the Great Recession, as airlines parked aircraft, burned inventory and slashed discretionary spending to conserve cash. The second downturn, albeit milder, occurred in 2012 and was caused by a record wave of 774 jetliner retirements brought on by a fuel-price spike. These retirements drove a large surge of used serviceable material (USM) supply, which enabled operators to reduce maintenance spending but caught OEMs by surprise when many missed their aftermarket financial targets.
Fast-forward to today, and the MRO sector is in a period of robust growth. Global air travel growth averaged 7% over the last two years, aircraft retirements are down, MRO spending is strong, and—in contrast to 2012—there are spot shortages of USM. Yet there is a storm cloud on the horizon that could drive the next MRO downturn.
Alton Aviation Consultancy and AeroDynamic Advisory forecast an unprecedented number of aircraft retirements—some 8,000—over the next decade that will begin to be felt by MRO suppliers in the next three years. The primary cause of the forthcoming retirement tsunami is fleet demographics. Large jetliners have a typical retirement age of 23-27 years, while regional jets typically exit service between 18-22 years. It is therefore instructive to look at jetliner production history in the 1990s to understand the outlook for retirements.
The 1990s’ production profile was “U” shaped. The decade got off to a strong start, with an average of 822 jetliners produced in 1991 and 1992. This gave way to an industry recession during which production rates were cut by more than 30%, to an average of 561 over the 1993-97 timeframe. The global economy caught fire in the late 1990s, which led to a surge of deliveries, including more than 600 regional jets. An average of 1,046 jetliners were delivered in 1998–2000.
Combining this production profile with typical retirement ages paints an interesting picture. Today’s pool of retirement-eligible aircraft is derived from the mid-1990s production bust. Not surprisingly, there were fewer than 350 retirements in 2017. Over the next 2-3 years, aircraft from the late-1990s production surge will reach retirement age; retirements will more than double, to nearly 800 by 2022 and could exceed 1,000 by 2027.
The upshot is that the supply of USM is set to expand considerably. Today’s scarcity of jetliners to part out will soon transition to abundance. Which aircraft models will experience the greatest increase in USM inventory? Not surprisingly, the Airbus A320 (1,652) and Boeing 737NG (985) and 737 Classic (399) will experience the most retirements through 2027. Regional jets will also experience significant attrition, with more than 1,300 leaving service. For twin-aisles, the Boeing 777 (347) and 767 (323) and Airbus A330/340 (289) will lead the way. This means the availability of aero-engine USM, particularly for the V2500 and CFM56-7, will also grow.
What are the implications of the retirement tsunami for stakeholders? Clearly, this is a major positive for airlines seeking to contain maintenance expenditures. A growing number of airlines are integrating USM into their maintenance cost-reduction strategies, most recently airlines in the Middle East and Asia. It will also enable independent MRO suppliers to reduce material purchases and lessen dependence on OEMs. USM traders are another obvious winner.
For OEMs, the tsunami will create headwinds for aftermarket revenues, much like the 2012 downturn, although the magnitude will be greater this time around. Some $4 billion in USM is consumed annually, which equates to ~15% market share of spending on aftermarket parts and line replaceable units. This could reach $6 billion or more in the next decade, which means OEMs must double down on MRO value propositions aimed at mature aircraft. Some OEMs are now selling USM parts alongside new parts and/or incorporating USM parts into their repairs. Moog Aircraft, for example, has leveraged USM piece parts to reduce repair prices and turntimes for actuator MRO on mature aircraft.
The MRO sector is currently bathed in blue skies and experiencing calm seas. Forward-thinking stakeholders would do well to prepare for a retirement tsunami that will arrive in the early 2020s.
Kevin Michaels is managing director of AeroDynamic Advisory in Ann Arbor, Michigan.