Rising demand will continue to significantly outpace new capacity created by aircraft deliveries for the next several years, setting many commercial aftermarket providers up for an extended run of strong growth, a new TD Cowen analysis concludes.
“Aftermarket prospects have improved since last December, and we believe commercial aerospace [original equipment and aftermarket suppliers] are poised for a healthy, extended upswing,” the company said in a March 21 research note.
Several factors are working together to drive already strong aftermarket demand even higher. Chief among them is steadily rising global traffic. While some regions, notably the U.S., are at or above 2019 available seat mile figures, others such as Europe and Asia-Pacific are still in recovery mode. Cowen sees potential of a 10% year-over-year increase in available seat miles in 2024.
“China just reopened its borders in early January, and the U.S. dropped testing for vaccinated passengers traveling from China to the U.S. As a result, China probably is two years behind the U.S. recovery,” Cowen wrote. “Latin and South America are recovering at about the same rate as U.S. domestic, with leisure travel to Mexico and the Caribbean remaining strong. Airlines are returning capacity to the market, and U.S. legacy carriers continue to take advantage of partnerships in the region.”
Higher aircraft activity translates directly to maintenance demand. Mix in higher-than-average price increases by many suppliers to help offset inflation, and aftermarket sales have strong underlying fundamentals.
One primary risk—new deliveries ramping up and bumping maintenance-hungry older models into retirement—is not seen as an imminent threat.
“While deliveries will be in a strong recovery mode in 2023-25, the 1,479 Boeing and Airbus deliveries we project for 2024 still will lag the 2015-18 average of 1,485 planes,” Cowen said. “Moreover, they will be added to a higher capacity base. As a result, we estimate that ‘rated’ available airline capacity (assumes stable utilization) will increase 3.0-3.5% in 2024, which is well below potential for 10%+ traffic growth. Moreover, even with likely higher deliveries and higher retirements in 2025, it looks like capacity growth will be under 4%, suggesting a continuing strong aftermarket pricing environment.”
Aftermarket momentum will slow once retirements inevitably pick up, “But this doesn’t look like a concern for 2024 or 2025,” Cowen said. “That’s because aircraft retirements are at an all-time low as older planes are returned to service to offset the slippage in new aircraft deliveries. This situation is unlikely to reverse near-term as traffic recovery is solid, and capacity growth should still lag the 2015-18 average.”
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