A New Lease on Life – How the Aerospace Sector is Changing

By Mark Odendahl and Ken Herbert
Published March 7, 2022 | 20 min listen

RBC Capital Markets' aerospace and defense analyst Ken Herbert explains how the mixed recovery is changing the Original Equipment Manufacturers (OEMs), and aftermarket sectors and looks ahead to outer space and ESG opportunities on the latest Industries in Motion podcast.

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The aerospace industry was arguably one of the sectors hardest hit by the stay-at-home orders of the COVID-19 pandemic, which grounded flights worldwide. Now the recovery is on, but the knock-on effects will be felt for some time to come.

So far, domestic travel has led the recovery, which is running at about 90% relative to pre-COVID levels, while international traffic is around 70% of pre-COVID levels. It’s also been mixed worlwide, with markets in the US and Europe leading, while some in Asia-Pacific continue to lag. Supply chain issues challenge Original Equipment Manufacturers (OEMs), and Boeing continues to have issues with aircraft. But the aftermarket is coming back; airlines look to bring older models out of retirement and catch-up on deferred maintenance.

 

Boeing vs. Airbus

As the COVID crisis took hold, Boeing’s 737 MAX was already grounded and in a challenging situation. However, deliveries have slowly ramped up since recertification in November 2020.

“Deliveries have been slow to recover as the supply chain has been gradually increasing their output and production levels. Boeing currently sits on approximately 350 MAX aircraft in inventory. We expect Boeing to work down its inventory on the MAX this year and through much of next year with an expectation this year that they get about 500 deliveries. The majority of those will come from new production, as the supply chain ramps up and ideally hits the 31-a-month production rate in the first half of 2022 that Boeing has been guiding to,” explained Herbert.

Supplier confidence in production increases from Airbus remains relatively high, but Boeing is giving mixed messaging. While the market has typically operated at a roughly 50/50 share to Boeing and Airbus, Airbus  now has an advantage in the narrowbody marketplace. Boeing has historically enjoyed an advantage in the marketplace in widebody planes due to its position in the cargo markets, but now production is lagging in this area.

“The narrowbody marketplace, which is predominantly for domestic travel, is seen as capacity-constrained right now with airlines looking to bring lift back into these markets, which incidentally is a real positive for the aftermarket.”

- Ken Herbert, Aerospace and Defense Analyst, RBC Capital Markets

 

Aftermarket boost

Much of 2020 and 2021 continued to see maintenance deferred as airlines conserved costs in a patchy recovery. But this year, Herbert is confident that the aftermarket will see more activity as airlines get more of their fleets serviced and repaired to get them back in the air.

“This year, from an MRO (maintenance, repair and overhaul) standpoint, we're looking at profit approximately, in our most recent survey, about 20% growth for calendar 2022,” said Herbert.

“In 2021, when an airline was looking to get a part repaired, considering the financial pressure they were under, they would do the absolute minimum. Now they're having to play catch-up on a lot of that deferred maintenance. We estimate the deferred maintenance was about a 10% to 15% headwind to aftermarket growth in 2021.”

As we continue to see the recovery in domestic travel, there's growing scarcity around narrowbody aircraft, leading to fewer retirements. Airlines are looking to bring lift capacity back, including older aircraft models. Delta, for example, has just put their retired 717s back into service. That's an incremental positive for the aftermarket, because these older aircraft tend to be much more important when you think about aftermarket spending.

 

New opportunities in space and ESG

With the recovery in the background, the aerospace industry is also investing significantly in alternative fuels for commercial travel. The sector represents around 2.5% of global carbon emissions and is increasingly proactive about reducing its footprint. Airbus is a strong supporter of hydrogen, while Boeing has recently invested in sustainable aviation fuel, which can run in most engines in operation today. There’s also a lot happening around electrification and battery technology, particularly for smaller aircraft.

“We think this investment will naturally increase substantially. It's been led by some of the companies out of Europe, where ESG and environmental issues have been a bigger issue for the aerospace industry. But certainly here in the United States, it's catching up, and this will be something to watch very closely over the next several years.”

- Ken Herbert, Aerospace and Defense Analyst, RBC Capital Markets

Significant investor interest is also increasing in the outer space sector. As the cost of access to space has come down with reusable rockets and the computing capacity of satellites has increased, it’s opening up a range of commercial opportunities.

“Opportunities include areas around Earth observation, when you think about predictability for weather and other observation opportunities. And then, of course, there's the whole communications marketplace, which is opening up. SpaceX’ satellite-based communications infrastructure Starlink is perhaps one of the best examples in this marketplace, which is expected to see significant growth. There's a number of companies pushing up into this area,” said Herbert.


Disclosures and Disclaimers



Aerospace and Defense IndustryKen HerbertMark OdendahlOriginal Equipment Manufacturers (OEMs)

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