Pulse of the Aircraft Parts Market
Aviation demand patterns, labor trends, and other factors are impacting the used serviceable materials market.
The pandemic caused unparalleled disruption to commercial aviation: passenger demand declined by 65.9% in 2020 versus 2019. Due to this sharp and sustained decline in global air traffic, more than 60% of the global commercial airplane fleet was parked and stored. This year, passenger demand has recovered toward pre-COVID levels, but as of April, traffic remains depressed by about 65% compared to April 2019, and an estimated 30% of the global fleet remains parked. Also, the aircraft being flown are underutilized with below-average daily utilization rates and well-below-normal passenger load factors. Airlines are practicing “green time management,” flying aircraft with significant time remaining prior to a heavy maintenance event (such as c-check, d-check, or an engine overhaul) and generally deferring shop visits—made possible by excess capacities.
Demand recovery patterns
The recovery in passenger demand has been far from uniform thus far. Certain large domestic travel markets (such as the United States, China, and Russia) have seen material progress toward recovering pre-COVID levels of passenger demand, but other sectors (such as long haul and regional international travel) remain around 70% below pre-pandemic peaks. As stated in Riveron’s aviation outlook, domestic travel recovery has been driven by successful mass vaccination programs in certain countries using high-efficacy vaccines. International travel recovery has been stymied by complex and constantly changing travel restrictions, testing requirements, and quarantine procedures imposed by virtually every country in the world. Looking forward, global travel will likely return to pre-pandemic levels around 2025 (domestic travel is likely to recover earliest, with international travel possibly lagging by a year or more).
Demand implications for aircraft types and cargo
Current conditions favor certain types and sizes of aircraft over others, which will probably continue for four to five years. Newer narrow-body aircraft (e.g., A320 and B737 series) are used to support domestic travel and have seen utilization rise proportionally to the recovery in passenger demand in domestic travel market. The use of narrow-body aircraft remains depressed for regional international travel (e.g., in the European Union). Meanwhile, sustained depression in long-haul international travel coupled with relatively lower levels of domestic travel has caused wide-body aircraft to fall out of favor (for models such as A380, A340, A330, B747, B767, and B777), and many of those models are being parked in large numbers or retired.
In normal times, more than 60% of the world’s air cargo is carried in the belly of wide-body passenger aircraft, but—with so many global passenger routes shut down—main deck freighters are seeing record demand. In freighter configurations, this creates demand for limited-life parts and maintenance activities for certain aircraft types (including the B767 and B747) but is likely a temporary trend. Belly cargo has a favorable cost structure and will resume its leadership position when international travel resumes.
Outlook for the used serviceable materials market
Looking at the demand for maintenance and used serviceable materials (USM), levels have remained well below pre-pandemic levels. Many industry forecasters expect demand to increase markedly for maintenance limited-life components in 2022 and 2023 as airlines run out of green time and are forced to resume maintenance activities. Due to deferred maintenance, the upturn in this sector of the market is expected to be robust.
In times of industry stress or oversupply, operators commonly abandon the operations of older aircraft, and the demand for those parts can disappear quickly. This occurred in 2002 and 2003 with the 727, 737-200 and DC-9 generation aircraft, typical examples of older aircraft types being abandoned. In the post-pandemic downturn, domestic travel has led the recovery and narrow-body aircraft have been more prevalent; but a large parts supply remains available regardless. Assuming international travel will take years to recover, many older types of larger passenger aircraft will remain parked and used for parts. Some have already been converted to freighter aircraft, and the increased utilization creates higher demand for engine parts for those models.
Pricing and demand patterns for used aircraft parts
Aircraft parts can have high value and generally have discounted prices relative to original equipment manufacturer (OEM) pricing for the same part number. For parts with life limits, the discount to an OEM price is further adjusted for the number of cycles left (less a “stub” lifespan because it is rare to use all the parts in an engine to zero remaining lifespan). This pattern of value holds until the retirements of the aircraft or engine type start to extend to 20% or more of the existing fleet. At that time, the amount of used serviceable material in the market relative to the demand starts to impact value, and it determines which parts get reused. As the ratio of active to retired aircraft evolves, the commonly replaced parts retain value, but other parts with more supply than demand do not retain value. Once the active fleet is small relative to the original fleet, a few parts might get used, but few new aircraft exist that require used parts, at which point the value of those used parts drops to zero. Periodically, someone operating an old aircraft in a non-passenger role (freighter, firefighting water bomber, military etc.) will have a need for parts, and parts that have been sitting for years get used, but that is uncommon.
What’s ahead: key considerations for the aircraft parts market
- Demand recovery patterns vary by aircraft purpose. Newer single-aisle airframe and engine components should see very strong demand in 2022 and 2023 as maintenance visits climb above normal levels with the forecasted recovery in domestic travel activity in the United States, China, and elsewhere in the world. By contrast, demand for wide-body engine and airframe components will be subdued for several years due to expected continued weak long haul passenger demand and associated poor airframe utilization. Demand for freighter componentry should be above normal for the next several years as main deck freighters will make up for lost belly capacity due to weak market conditions for the international long-haul market. This trend should subside proportionally as long-haul traffic returns over the next four to five years.
- Labor constraints may cause bottlenecks for aircraft servicing. Labor shortages will likely cause delays in shop visits because most organizations responsible for aircraft maintenance, repair, and overhaul (MROs) now have significantly reduced staffing due to a pandemic-related downturn. In many cases, skilled workers such as airframe and powerplant (A&P) mechanics and aircraft maintenance technicians (AMTs) have moved on to other skilled positions which has created a bottleneck in the MRO community. It is challenging to address this problem, since it takes years for workers to develop necessary skills to conduct these jobs efficiently. The labor bottleneck is going to be an ongoing concern in the industry and might force airlines to look beyond domestic options for suppliers.
- Possible inventory obsolescence should be anticipated by aircraft owners, aircraft maintenance parties, and parts suppliers. For components related to certain aircraft types, inventory might become obsolete. Specifically, obsolescence issues will probably affect inventory for the following aircraft models: A300; A340; B747-200 and -400; B767; B777-200; CRJ-200; and MD-80, -88, and -90. Before purchasing such models or using as collateral, the inventory valuations should be considered critically. Buyers should maintain an informed position and use extreme caution when encountering enticingly low pricing to prevent exposure issues related to lack of salability or lower-than-expected value.