A False Dawn for the Aftermarket? The USM Factor

It is conventional wisdom that commercial aerospace aftermarket activity bottomed in Q2 2020. While the Avascent team thinks this is indeed the case, a wave of used serviceable material (USM) coming online in the 2022-23 timeframe will delay the aftermarket recovery for certain aircraft and engine types.

Component and engine MRO players will need to flexibly plan for how USM could impact their business. Similarly, financial investors assessing commercial aerospace assets will have to calibrate their valuation models to the uncertainties that oversupply of USM will introduce.

Impact of COVID-19 On the Aftermarket Supply Chain

As the COVID air travel downturn set in, spare part transaction volume fell ~70%, pulling down USM demand as well. Available seat kilometers are still running roughly 50% below pre-pandemic levels, which is depressing spare parts and repair needs.

On the supply side, airlines are using greentime – engines and other components with time left on them before required maintenance – and harvesting surplus parts off their parked fleets.

Concomitantly, depressed aircraft values and a desire for fleet optionality in the face of uncertainty has resulted in only ~370 formal aircraft retirements – 80 of these were vintage McDonnell Douglas aircraft – in 2020 compared to an annual average of 534 from 2015-2019.

But USM feedstock is waiting in the wings and threatens to curb demand for OEM parts and potentially some PMA parts.

Once airlines gain more clarity on their optimal post-pandemic fleet mix and begin to make tough fleet decisions, they will likely begin retiring widebodies and some older narrowbodies as well.

Avascent currently forecasts 4,400 retirements over the next several years; while not all of these will be parted out, many will, increasing USM supply.

How Will USM Evolve Post COVID-19?

At the same time, demand for USM will eventually return. As air travel increases and airlines exhaust greentime and surplus parts, spare part transaction volume will finally begin to pick back up.

USM, which was already growing in importance prior to the pandemic, will be favored by many airlines looking for cost efficiencies in the post-COVID world.

Nonetheless, it will be another 12-18 months before USM supply begins increasing materially.

Avascent’s air traffic model currently anticipates a recovery setting in during the back half of 2021 and it will take time for USM supply to come online as well.

While many are wringing their hands over tear down capacity, Avascent believes the real supply bottleneck will be part outs actually getting underway. Airlines will have to come to grips with selling their assets on the cheap and tear down specialists will likely accumulate USM in fits and starts given uncertain forward pricing/demand dynamics.

All this points to USM availability starting to materially increase during the second half of 2022 – just as the aerospace industry begins to steady itself. This presents a challenge for OEMs, MRO shops, or investors hunting for undervalued companies, but it is also an opportunity.

How Should OEMs and Suppliers Adapt?

Not all aircraft and engine models will be affected equally, resulting in varied USM impacts across engine OEMs, MRO shops, and component suppliers.

OEM spare and repair parts for sunsetting A330s/Trent 700s ($5-7B Trent 700 parts revenue lost between 2020-2030 | Avascent), B757s, B767s, and older B777s plus their associated engines will experience USM competition from 2022 onwards.

However, some younger, widebody engine types may not be immune.

Weaker airlines could decommission older B787s (116 B787s are 7+ years old) that are approaching heavy checks and/or coming off lease. An example is Norwegian Air ending its long-haul service, thereby removing 37 B787s from its fleet. Similarly, Avascent also currently estimates that around 40 Trent 900 powered A380s are highly unlikely to ever fly again, which may lead to significant USM availability this engine type.

Narrowbodies are in higher demand and thus there will be relatively less feedstock for USM-driven part outs. However, part outs of older A320ceo and 737 NG aircraft will undoubtedly create some USM and rotables can be particularly sensitive since the market can quickly tip into oversupply.

For many firms further down the supply chain (e.g., engine component manufacturers) the first step in planning to respond to the USM impact will be a detailed analysis of the proportion of aftermarket sales residing in the company’s revenues. This type of analysis allows suppliers to more accurately forecast demand from engine and component OEMs.

And all is not lost for larger OEMs and MRO shops that do not already enjoy a footprint in USM; these companies still have time to sort out their strategy.

But the clock is ticking – the aftermarket will soon face an outward shift of the USM supply curve that will likely last for years.