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Aftermarket Pushing 10% Growth Rate, Survey Suggests

Pressure evident in parts, engine-overhaul businesses.

The aftermarket, driven by strong global airline demand, is pushing year-over-year growth in the high single digits, but pressure from several sources--notably struggling supply chains requiring extra resources and a lack of used parts due to low retirement rates--is presenting headwinds, a new Canaccord Genuity survey reveals.

Canvassing more than 40 aftermarket providers, Canaccord found that second-quarter (2Q) MRO-services sales were up 9%, and parts-purchasing increased by "a similar level," analyst Ken Herbert wrote. Such feedback prompted Canaccord to boost its 2018 second-half, year-over-year outlook to an 8% increase, or double what its fourth-quarter 2017 survey produced. 

"The results from our Q2/18 MRO survey point to some of the strongest trends in the market we have seen," Herbert wrote, noting particularly strong activity in the heavy-airframe and components areas.

The engine business, driven by narrowbody overhauls, remains strong, but challenges affecting all three OEMs are diverting resources that otherwise could help support a surging aftermarket. Rolls-Royce is scrambling to support grounded Boeing 787s powered by its Trent 1000 engines with both refurbished and redesigned parts. Both GE, via its CFM joint venture with Safran, and Pratt & Whitney are still playing catch-up on CFM Leap and PW1000G geared turbofan production issues that led to delivery bottlenecks and in-service issues.

Meanwhile, retirements continue to be down, which is a mixed blessing for the aftermarket. Keeping older aircraft in service longer means more MRO demand, but it also takes material out of the vital used-parts supply chain. 

"We continue to hear about parts shortages, and the impact on turn-around times and service levels, which is consistent with the strength in parts-purchasing intentions," Herbert wrote.

Even if demand stays strong, retirements have been expected to tick up as operators integrate more 737 Max and A320neo aircraft on order. But Herbert says that there is little evidence to suggest this shift is underway.

"Retirements of the 737 and the A320 are well off their 2017 pace so far in 2018, and all indications are that retirements will remain low through [year-end]," he wrote. "Our recent conversations with the leading boneyards support this outlook."

Operators parked 56 737s and A320s in the first six months, well below 2017's pace that saw a full-year total of180 removed from the fleet, Canaccord data show.

Another possible headwind is rising fuel, which has led some carriers to make capacity-adjustments. But for the most part, passenger demand is staying strong, which is keeping MRO shops busy.

"While IATA has recently marginally lowered its forecast for airline industry profits on the back of higher fuel prices, we do not view this as a headwind for commercial [aftermarket] demand," Herbert wrote. "Freight growth has slowed as comparisons have become more challenging, but the global uncertainty around economic growth has not yet appeared to negatively impact passenger traffic trends in the aggregate."

Global revenue passenger kilometers were up 6.8% through May compared to the first five months of 2017, IATA figures show, including a 6.1% increase in May. Air freight ton kilometers increased 5.3% through May, and were up 4.2% in May.

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