KEY POINTS
- Global demand for air travel has bounced back strongly since the pandemic, with domestic traffic returning to 2019 levels.
- The challenge for OEMs like Boeing and Airbus is scaling up their supply chains to meet this rising demand, though production is beginning to normalize.
- Since Boeing’s 737 MAX was grounded in 2019-2020 most units have returned to service, with the possible resumption of deliveries into China on the horizon.
- Challenges on the supply side and buoyant demand for engines and parts have translated into stronger than expected performance for the aftermarket.
Despite being hit hard by pandemic-era disruption, a major recovery in passenger travel is providing a boost for the domestic aerospace industry as pent-up demand translates into stronger than expected performance for the sector.
“Global domestic travel is effectively back to 2019 levels. And in some regions, notably in the United States, we’re even ahead of where we were in 2019,” says Ken Herbert, Aerospace and Defense Analyst, RBC Capital Markets.
“International travel has seen a real acceleration in the last six-to-nine months, as we’ve finally seen a lot of borders opening up and a lot of travel restrictions lifting. We are still seeing slower growth in parts of Asia, in particular in China. But we're continuing to be surprised by the strength of traffic that's coming back and that's translated to extremely strong backlogs,” adds Herbert.
“Many airlines have better balance sheets than we would have imagined due to the amount of stimulus that the industry received and the strength of traffic and air fares, and other fundamental indicators. We also saw really strong order activity coming out of India, which has become a very strong emerging market for the industry. Many believe it’s almost replacing China in terms of the outlook for air travel in that particular region.”
Overcoming supply chain and capacity issues
With strong demand returning to the industry, the main challenge is building up capacity on the supply side to meet this demand. The aerospace sector has longer supply chains than other sectors due to the complex nature of the production process. As a result, supply chain disruption and ongoing geopolitical issues have meant a delayed recovery for OEMs.
The industry is also still recovering from a drain on key talent as the pandemic caused elements of the workforce to retire or move on to other sectors such as defense. With a younger, less experienced workforce a greater emphasis is having to be placed on training and ensuring appropriate levels of productivity and efficiency. “The industry lost a number of people and it's really struggled with pulling them back,” says Herbert. “But the consistent commentary coming out of the industry is that the sector is now staffed to support higher production rates,” he adds.
When it comes to increasing production to meet demand, Airbus is in a stronger position than Boeing. The European corporation entered the pandemic in a better position and has had more success scaling up its supply chain since the industry opened up. However, both companies face similar supply-side pressures. “Airbus is currently producing and delivering approximately 50 aircraft a month compared to Boeing, which is in the low 30s on a monthly basis,” says Herbert. “Neither company is talking about producing a new aircraft in the near future. So the focus remains very much on the A320 family for Airbus and the 737 MAX for Boeing.”
Return of the MAX
Since Boeing’s 737 MAX was grounded in several jurisdictions between 2019 and 2020, the fate of the American manufacturer’s flagship narrow-body aircraft has been a significant topic in the investment community. But utilization of the MAX has started picking up; notably in China, despite a slow recovery in that country. “Of the 100 aircraft grounded in China, approximately 80% of those aircraft have in fact returned to service,” says Herbert. “In the last six months we've seen a nice uptick in the utilization of the MAX aircraft, despite a patchy recovery in China.”
However, Boeing is yet to resume delivery of its MAX aircraft into China. “Heading into the pandemic Boeing had approximately 140 aircraft and inventory slated for Chinese airlines,” says Herbert. “Boeing has successfully remarketed approximately 50% of these. We are optimistic that as geopolitical issues continue to improve between the United States and China, we could see a resumption of MAX deliveries into China at some point in 2023. It's important to keep in mind that because the recovery in China has been very inconsistent there hasn't been as much demand for the MAX as we’ve seen in the United States and Western Europe.”
Upside for the aftermarket
While the OEM side of the aerospace industry has suffered from a delayed supply chain recovery, the aftermarket – which generates the bulk of aerospace profits – is in a much healthier position, having benefitted from upwards pressure on prices. “Traffic has continued to surprise to the upside and be stronger than expected,” says Herbert. “We've seen really strong demand for engine spending and increased demand for spare parts and maintenance and repair services to meet that rising demand.
“Our most recent quarterly survey pointed to around 23% growth in MRO (maintenance, repair, and overhaul) spending in the second quarter of 2023, which is very strong. And the outlook for the second half of 2023 was about 500 basis points better than our first quarter survey indicated. The disruptions on the supply side continue to equate to very good opportunities and a very positive outlook for the aftermarket.”
