The Boeing 737 MAX grounding is having little measurable influence on aftermarket spending, largely because demand for lift is so strong that MRO providers already had nearly-full pipelines, a Canaccord Genuity analysis concludes.
"Even before the MAX grounding, airlines had been increasing spending on older assets as fuel prices remained relatively low and traffic demand remained high,” Canaccord analyst Ken Herbert wrote in a July 22 research note. "The demand was heightened in 2018 as many of the new aircraft (notably the Airbus A320neo and Boeing 737 MAX) faced delivery delays, and there were several other factors that negatively impacted in-service aircraft.”
The aftermarket has been thriving in recent years due to generally strong traffic demand and one-off issues, including new-aircraft delays and in-service snafus such as the Rolls Royce Trent 1000 fan blade problems that grounded some Boeing 787s.
The MAX grounding, which started in March and is expected to continue until the fourth quarter, has been the most disruptive issue. Airlines lost 380 MAXs overnight when regulators grounded the fleet in mid-March. Boeing, which halted deliveries and has cut the 737 production rate to 42 per month, is expected to have another 300-325 built but undelivered MAXs ready to go when the model is cleared to return to service.
Boeing is working to upgrade MAX flight control software and develop new training to address issues spotlighted in probes of two fatal accidents in five months. The probes of both accidents, Lion Air Flight 610 last October and Ethiopian Airlines Flight 302 in March, are still ongoing. Boeing plans to deliver an update package to regulators in September, which then must be approved before the MAXs are upgraded and cleared to return to airline schedules.
Meanwhile, affected airlines are struggling to fill in for their MAXs, with strategies that include keeping older aircraft around longer and tapping the limited number of leased narrowbodies available. But the aftermarket’s already bustling state means that any work not already in the pipeline—such as overhauls needed to keep older aircraft airworthy—will take months, if not longer, to complete, limiting fleet planners’ flexibility.
"We continue to hear that shops are full, with very limited capacity in the market, especially for engine MRO,” Herbert said. "We have consistently heard that if an airline does not have a slot scheduled for engine MRO work, lead times are several months now."
While the aftermarket’s benefits from the MAX grounding may not be substantial compared to broader market trends, they could be prolonged. Even if MAX deliveries resume by yearend, Canaccord does not expect Boeing to clear its backlog until well into 2021, assuming a delivery rate of 70 aircraft per month. This, Herbert said, should be enough to push “any expected surge in [narrowbody] retirements in 2020-21.”
The timing of an increase in retirements and its effects on aftermarket work—a dip in maintenance but a rise in available used materials—depends in part on when the MAX is cleared to fly.
"Over 50% of MROs in this survey do not believe the MAX will be a material tailwind, or that it is too early still to determine,” Herbert said. "We believe that if in fact Boeing is able to hit its revised [return-to-service] targets and can ramp production back to 57/month in 2020, the overall impact of the MAX grounding on the aftermarket will be positive but limited."
Herbert’s analysis, based largely on a recent survey of some 40 aftermarket providers, 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 comes against a very strong second half of 2018, when growth was about 11%, Herbert noted.