Aftermarket-services providers have no doubt that low fuel prices will lead to increased airline spending, but are less certain about when the effects will become visible in backlogs and balance sheets.
So far, there is little evidence that the 50% drop in fuel prices since mid-2014—and the cash it is putting into airlines’ hands—is changing spending patterns in MRO hangars. But major aftermarket providers say this is bound to change, for several reasons. The most obvious one is life extensions for older aircraft that were less cost-efficient when fuel was more expensive. Several carriers have said they plan to keep flying at least a few aircraft that not long ago were earmarked for retirement, which creates MRO demand, and more could soon join them (Aviation Daily, Jan. 26).
“Consistently, no one has seen any increased MRO or aftermarket activity yet as a result of the lower crude prices . . . but there are discussions ongoing, and the consensus is that we will start to see a positive impact later in 2015,” Canaccord Genuity analysts wrote in a research report this week. “For example, we hear that many firms are now looking to extend leases on older assets (both engines and aircraft), and specifically it seems the 767 is being discussed often for increased use or extensions.”
A less visible but more significant shift could come in engine-overhaul shops. In the aftermath of the 2008-2009 economic downturn, carriers sought to defer as much maintenance as possible as part of broader cost-cutting efforts. Reducing engine MRO outlays—which encompass 40% of the annual global commercial-MRO total—was a primary focus.
One result: a drop in content used per engine overhaul, as any unnecessary work was pushed to a subsequent shop visit.
The trend began to reverse in the second half of 2013, as airline profits bounced back (Aviation Daily, Jan. 28, 2014). The rebound, which was evident in late 2013 spares-sales figures, made for tough year-over-year comparisons in 2014. This helps explain Pratt & Whitney’s (P&W) reported 8% drop in large commercial spares sales in the most recent quarter.
Executives at P&W-parent United Technologies Corp (UTC) are confident engine-spares demand will rise, with cash banked from lower fuel prices providing a boost. The key, they say, is airline planning catching up to market conditions. The fuel price drop happened over the last half of 2014, meaning airlines have had little time to make even short-term strategy shifts. If prices stay low and airlines can plan for them, aftermarket providers should soon begin to reap benefits.
“With the airline profitability being what it is, we would hope for a little more content per visit when the engines actually come back, and perhaps a little bit more provisioning and inventory build-up at the airlines,” UTC CEO Greg Hayes said during a recent earnings call. “We do expect some benefit from the oil price reduction, but it’s not yet showing in our numbers.”
Rockwell Collins executives said they began to detect more demand for aftermarket upgrades before fuel prices fell. Part of the demand is driven by regulatory mandates, such as Europe’s December 2015 deadline for TCAS II 7.1 installations. That demand could rise if older aircraft earmarked for retirement before the deadline continue to fly.
“The one big positive, and probably the earliest positive impact we would see associated with low oil prices, would be in the aftermarket,” Rockwell Collins CEO Kelly Ortberg said on a recent earnings calls, adding that airlines’ fuel-hedging positions, which led some to pay above-market prices for fuel as prices dropped, likely “muted” the near-term impact. “So the windfall will be over time.”
Ortberg said that low fuel prices could help the company land more customers for its 757/767 flight deck display retrofit. Two operators—FedEx and an unnamed carrier—have signed up so far, and Ortberg says more are interested.
“Even before fuel was what it is today, we were seeing strong interest from customers who are going to fly those aircraft for a lot longer to go ahead and do the mods,” he said. “[Low fuel prices] should be a net good news for that product-line offering.”