Airlines large and small struggled to cope when demand roared back after the pandemic. But their problems have been a boon for the $110bn industry that keeps the world’s aircraft in the skies.
A shortage of new planes caused by supply chain issues and a jump in labour costs has led to airlines spending more on maintenance and repairs than ever before as they keep their existing aircraft in the air for longer.
“The [maintenance] market is incredibly strong,” said Eric Mendelson, co-president of Heico, a Florida-based company that is one of the world’s leading independent suppliers of replacement parts. “I’ve been at the company for 34 years and I have never seen a demand environment like we are in today.”
Labour and raw material shortages have hampered the large manufacturers Airbus and Boeing and their plans to meet demand for new planes, while problems on some engines have added to the challenges in the supply chain.
Maintenance spending had historically been 8 per cent to 10 per cent of an airline’s cost structure, said Kevin Michaels, head of Michigan-based consultancy AeroDynamic Advisory.
This year, however, he estimated that the world’s airlines would spend more than $110bn on maintenance, including labour and material, or about 14 per cent of total revenues. “It’s the highest we’ve seen it.”
Michaels said three factors were driving the higher spend: airlines investing in discretionary maintenance that had been deferred during the Covid-19 pandemic; older aircraft due for retirement having to fly longer than expected given issues with new generations of engines, as well as supply chain constraints; and inflation as the cost of labour and parts had risen.
While most of the supply chain crisis had been “about the manufacturing side of things this is the first time we’ve had a supply chain crisis that is really impacting the whole after-market in maintenance, repair and overhaul”, Michaels said. “It’s new territory.”
Airlines, already facing higher fuel and labour costs, have had to further increase spending. Delta Air Lines, United Airlines and American Airlines collectively spent $2.2bn on maintenance in the third quarter, a 45 per cent increase on the same period in 2019, according to a recent note by Sheila Kahyaoglu of Jefferies. Trailing 12-month spend by the three is tracking 38 per cent above 2019 levels.
When Mike Leskinen, the new chief financial officer at United, spoke about costs during the airline’s earnings call earlier this month, he cited the “increased need for spare parts” when repairing aircraft as well as engines.
“Some of that is related to supply chain, and it’s difficult to see when that ends,” he said.
Judson Rollins, senior consultant at aerospace consultancy and news site Leeham, said labour shortages and supply chain bottlenecks were also hitting the maintenance sector, driving prices for services higher.
“Any maintenance, repair and overhaul provider right now can push through 15 or 20 per cent increases year over year. What are the airlines going to do? The next provider on the block has no greater capacity than the current provider.”
The maintenance and overhaul market is dominated by the original equipment manufacturers. Airbus, Boeing and engine makers Rolls-Royce, Safran, Pratt & Whitney and General Electric all provide services and sell spare parts. The engine makers make the bulk of their profits from servicing their engines rather than from the original sale, and operate large global networks of repair shops.
Significant players also include operations affiliated with airlines but that now generate a greater share of revenues from servicing other carriers, such as market leader Lufthansa Technik. Germany’s Lufthansa has been looking to sell a stake in its maintenance subsidiary. There are also large independent specialists such as Illinois-based AAR.
Heico is among those that makes the same products and components as original equipment manufacturers but less expensive, similar to generic medicines.
Airlines historically resisted buying alternative spare parts but Heico sends out thousands of components a day from distribution hubs across the globe. Mendelson said carriers had “benefited as a result of having an alternative source of supply both in terms of parts availability and quality and pricing”.
Heico, which is in the process of buying rival Wencor for just over $2bn, reported record sales of $722.9mn in the third quarter ended July 31, while operating income jumped 16 per cent to $149.4mn.
GE reported last week that it sold $42.4mn worth of spare parts a day during the third quarter — up 44 per cent from this period last year. The company told analysts that “given the pace of demand for both after-market services and new engine deliveries” it needed “to do more as do our suppliers”.
France’s Safran on Friday raised its forecast for “civil after-market sales” after a similarly strong quarter.
The engine segment of the market remains particularly strained. US group Pratt & Whitney said in July that more than a thousand of its geared turbofan engines would need to be inspected earlier than expected after a manufacturing flaw emerged.
P&W owner RTX has warned that the additional inspections and potential replacements of engines is creating more work for the company’s maintenance, repair and overhaul network, which is under strain because of problems getting materials.
RTX told analysts last week that “it’s a challenging time for the customers, there will be a fair amount of the aircraft on the ground, we’ve got to accelerate [maintenance and repair] output and the key part of that is capacity and material flow”.
The suspected sale of falsely documented parts which has affected a small portion of older engines sold by CFM, the GE-Safran joint venture, has added to the challenges for engine makers.
Industry experts expect conditions in the maintenance market to remain constrained for some time, with lack of workers and the availability of parts cited among the biggest challenges by executives, according to Adil Slimani, director of after-market advisory and appraisal at IBA Group. “There are price wars for lead times,” he added.
Iván González Vallejo, director of strategy and supply chain at Iberia Maintenance, said the industry would remain constrained for some time yet. “The supply chain constraint will still be with us for another two years . . . Demand will not go down.”
Source: Economy - ft.com
