Aircraft shortage drives demand for groups that repair older planes
Carriers forced to fly ageing jets boost aerospace suppliers such as AAR and Heico
Aerospace suppliers that maintain planes and furnish spare parts are enjoying a boom thanks to a revival in air travel and slow deliveries of new aircraft.
Strong demand for their services is evident in the Rockford, Illinois, hangars of AAR, one of the leading companies in the sector with a market value of $1.7bn. Technicians there are busy working on the planes of customers such as United Airlines and Southwest Airlines.
“We’re basically full in our hangars,” chief executive John Holmes said. “When you have people, and you have airplanes, that’s a good combination,” he later added.
Two main forces are bringing planes to AAR’s facilities, and Holmes said they are likely to persist for years.
Passenger traffic recovered dramatically last year after collapsing in the first years of the coronavirus pandemic. While global air travel is still down about 20 per cent less from 2019, in the US it has largely returned to pre-pandemic levels.
Nearly 76mn people flew in the US in October, just 3 per cent lower than the same month in 2019, according to the latest available government data. China’s reopening after strict Covid-19 lockdowns is expected to return many more flyers to the skies.
At the same time, top manufacturers Boeing and Airbus have struggled to fulfil all of airlines’ new plane orders. The result is that carriers must stick with older jets for longer and pay more for replacement parts and service.
Repair shops reported a 19 per cent increase in sales in the fourth quarter of 2022 compared with a year earlier, according to research from analyst Ken Herbert at RBC Capital Markets, while revenue for parts sellers grew by 15 per cent.
“Airlines are scrambling to keep up, which means they have to spend more on the airplanes [in their fleets],” Herbert said. “That’s been a big tailwind.”
United spent $2.2bn on parts and repairs in 2022, a 20 per cent rise compared with 2019 and a 64 per cent increase from 2021. The airline said it flew more, scheduled more engine overhauls and heavy maintenance and absorbed price increases. Delta Air Lines also reported a 13 per cent increase in parts and repair costs over 2019.
Grounding jetliners early in the pandemic had another effect. Airlines, strapped for cash, deferred maintenance. They avoided expensive engine overhauls by swapping out their oldest engines for so-called “green-time” engines that have racked up fewer flying hours.
With manufacturers’ supply of new planes bottlenecked and a dwindling pool of green-time engines, airlines “have to continue flying older, out-of-warranty aircraft that consume parts and need repairs”, said Melius Research analyst Robert Spingarn. “Commercial after-market companies [businesses that sell spare parts and accessories] are benefiting.”
Among them is Heico, a Florida-based company with a market capitalisation of almost $20bn that produces replacement parts for aircraft. Its sales of $610mn and operating income of $147mn both hit records in the quarter ended October 31, topping levels from before the pandemic in 2019.
Heico competes against businesses such as General Electric’s aerospace division, which makes spare parts for the jet engines it manufactures.
GE reported on Tuesday that it sold $32mn worth of spare parts per day in the fourth quarter, a 34 per cent increase from the same period in 2021. Boeing on Wednesday reported that its services business, which includes selling spare parts, earned $634mn in the fourth quarter of 2022, a 58 per cent increase from a year earlier.
Heico’s products are the same as the ones made by the original equipment manufacturers, but less expensive, akin to generic pharmaceuticals.
Airlines have historically resisted alternative spare parts, but Heico co-president Victor Mendelson said their stance is changing as they confront the challenge of servicing planes with fewer parts available from original equipment manufacturers.
“We already sell to just about every airline that could buy from us, but we have been selling more,” he said. “The resistance drops . . . because, one, they need the parts, and two, they like the value proposition.”
Holmes of AAR also reported increased demand for the used spare parts it sells to airlines and engine overhaul companies. But because fewer airlines are retiring older aircraft, the source of used parts, AAR has had to scour the market to find them. A total of 366 aircraft were retired in the 12 months to December, a 15 per cent decline from a year earlier.
AAR, headquartered near Chicago’s O’Hare International Airport, reported sales of $470mn in the quarter ended November 30, down by 16 per cent from the same quarter of 2019. The company’s net income of $23mn was 58 per cent higher than the same period in 2019.
While AAR’s sales volumes have not recaptured levels from prior to the pandemic, Holmes said, “we feel like we’re well on our way”.