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In the aerospace, maintenance, and aftermarket worlds, there is only one currency that really matters – aircraft usage.

The pandemic has shown how weak the aviation ecosystem is when those revenues are turned off. Aircraft in the air equate to the dollars poured into flight timetables for engine manufacturers and many others, a constant demand for airframe exams and visits to engine stores, and a relatively predictable demand for new, repaired, and used parts.

This demand and predictability has collapsed along with the volume of traffic. As a result, there is a sad aftermarket sector that is wavering from its evaporating source of income.

“Currently, airlines are not spending a dollar on MRO,” said Dick Forsberg, a leading aviation finance expert and advisor to PwC Ireland, in a recent Cirium webinar.

After the initial shock at the aviation impact of the pandemic, the airlines “went into survival mode and quickly worked on staying afloat,” said David Stewart, partner in MRO advisory at Oliver Wyman.

A Raytheon Technologies 2020 results financial file, which outlined the impact of the crisis on subsidiary Pratt & Whitney, summarized what all airlines have requested: hours and aircraft usage, requesting extended payment terms, postponing the delivery of new aircraft and replacement engines and requesting engine maintenance discounts. “

GROWTH TRAFFIC

As the new year 2020 came, such tactics were unimaginable. The aviation aftermarket industry had been evolving before the pandemic due to a decade of strong traffic growth. The two major aircraft manufacturers had targeted a larger portion of this market through their burgeoning service businesses, either for aircraft life maintenance and parts support, or with digital services and products aimed at operational efficiency.

For years, the big engine manufacturers had tirelessly searched for a dominant part of the service market for their self-built models.

The biggest got bigger. On March 23, 2020, the Chairman of Lufthansa Technik, Johannes Bussmann, reported bumper results with record sales and earnings.

At that time, Bussmann knew the crisis was going to get bad, just not how bad.

“The full extent will hit us with a delay, which means there is no forecast right now, but the initial impact is massive,” he said.

A year later, at Lufthansa Technik’s 2021 results presentation, Bussmann reported a 43% drop in revenue to EUR 3.7 billion (USD 4.4 billion) in 2020, and the largest airline in the industry, MRO, posted a loss of 383 Million EUR.

Similar incredible sales declines and losses have been seen across the industry. Oliver Wyman predicts that the global commercial aviation MRO market will experience a combined decline in demand of more than $ 60 billion in 2020 and 2021. This is evident from the forecast for the global fleet and MRO market 2021-2031. This is a 33% decrease from pre-pandemic projections.

The business model has been shaken for the engine manufacturers and others doing maintenance contracts based on flight hours, says Phil Seymour, chairman of IBA, the global industry advisor and valuation firm. “For them, the problem is how quickly the flight comes back – and whether it comes back at all.”

The enormous financial impact on engine manufacturers is evident in their dismal 2020 numbers. Total Pratt & Whitney sales decreased 20% to $ 16.8 billion in 2020. The organic sales decline of $ 4.1 billion in 2020 compared to 2019, according to US financial reports, “mainly reflects lower sales in the commercial aftermarket of US $ 3.8 billion, which is due to a significant decrease in store visits and the associated sales Spare parts sales is due “.

Rolls-Royce reported that large engine flight hours decreased 57% in 2020, contributing to a pre-tax loss of £ 2.9 billion ($ 4 billion) for the year. Rolls-Royce recorded a one-time charge of £ 1.3 billion, including a £ 974 million impact of “catching up” on service contracts due to a projected reduction in flight hourly revenue.

GE Aviation recorded “$ 1.1 billion net adverse change in estimated profitability” in its long-term service agreements, as detailed in its 2020 annual report.

When flight returns, the engine manufacturers remain confident that they can make up for the lost ground. “The service portfolio in 2020 was stable despite the effects of Covid. As travel expenses recover and occupancy increases, we expect much of this late spending to be captured, ”GEAviation CEO John Slattery told an investor update in March.

However, there will be dislocations. In its report Covid-19: Outlook on the fleet and effects on lessors and MROs, the global consulting firm ICF says: “In the short to medium term, airlines will question the concept of hourly flight contracts. You will want to steer clear of guarantees of minimum flight hours in contracts given the significant uncertainty surrounding demand. “

One market characteristic that is believed not to have changed is the annual price increase for OEM parts – an annual ritual that airlines obviously dislike but have little control over. According to industry information, the pandemic has not given the airlines any relief. Over the past year, prices rose 6% to 7% as manufacturers tried to make up for the backlog in sales.

Since all players suffer from balance sheet problems, the aerospace industry has to be restarted as a matter of priority – but when? “The industry was in a kind of stasis, with enough money to survive, but with a limited ability to better rebuild,” says Stewart of Oliver Wyman.

The restart activity is intense and Christopher Whiteside, general manager of global parts and repairs specialist AJW, sums up the frustration for many. “I have 200 deals in play right now, from Peru to Pakistan, but the airlines say, ‘We’re not flying yet,’ so the contract has not actually been signed.”

So what’s next? And what are the recovery scenarios and strategic steps in the industry? The most obvious impact is that for an industry that has stalled there will be overcapacity and some MRO players will either fail or downsize.

“Airlines may face some disruption challenges as the supplier base in certain markets or regions is under pressure,” said Stewart.

AJW, which has an extensive parts inventory valued at $ 500 million, has fallen to 65% of its pre-pandemic revenue base but has restructured its diversified portfolio and weighed heavily alongside customers of airlines weathering the storm. “There will be a cull of people in our business who have no contracted services, military or cargo deals,” says Whiteside.

Those who survive will be more interested than ever in doing whatever they can to win. “During the crisis, we dealt even more with our customer base as a partner – it’s about avoiding unnecessary expenses,” says Martin Friis-Petersen, Senior Vice President MRO Programs at MTU Aero Engines.

CREDITABLE PARTNERS

Strong, creditworthy airlines have found suppliers willing to take advantage of flexible payment terms, discounts on shop visits, and the use of so-called “green time” engines – engines whose life stays on the clock. Airlines with higher risk are not always offered such flexible terms.

Airlines have been outsourcing their MRO services for years, and this trend could pick up again. The aim is to move from high fixed costs such as internal MRO companies to a more variable cost base. “The boardrooms will again ask the question: why do we want the infrastructure?” says Stewart.

Some may find it attractive to view partial sales of their MRO assets as a mechanism for raising capital. Selling a 30-40% stake in an airline’s MRO would be an attractive prospect for private equity, a sovereign wealth fund, or a pension fund looking to secure a stream of income while the airline maintains operational control.

There may be a need for Airbus and Boeing to soften aftermarket ambitions as they solve bigger problems for the time being.

“We have to concentrate on the core business again and return to a stable state. And there is the fact that the service business is more competitive than ever because everyone is struggling to survive, ”says Yann Cambier, aviation director at ICF.

While the desire for more aftermarket business remains, the trend could be away from capital-intensive services and towards higher-margin activities such as data services for predictive maintenance or through acquisitions of specialized service providers to achieve scalability.

The expected increase in failures, aircraft failures and the availability of environmentally friendly engines for a number of years has an impact on supply and demand throughout the service ecosystem. Non-OEM spare parts manufacturers, who airlines may prefer because they are cheaper than those bought from the original equipment manufacturer, should be as well positioned as companies that specialize in repairing parts.

MTU is active in all of these areas and, in addition to used materials (USM) and green-time engines, also offers the ability to carry out parts repairs in-house. “The wave of retirements expected from mid-2020 has not materialized, but will come,” says Friss-Petersen. “We will be an active player who we see value in.”

PURCHASE OPTIONS

A troubled industry brings money and willpower opportunity, and the environment is ripe for mergers, acquisitions, and consolidations. Cambier says that with excessive MRO supply, ICF “expects investors to buy some suppliers with poor cash positions.”

Oliver Wyman’s Stewart agrees, “There are private equity investors looking for good business in a market with long-term growth prospects.” There’s a lot of interest, especially from those involved in end-of-life services, wealth management and serviceable material used.

How the aftermarket will develop in the coming years depends entirely on the speed and type of traffic recovery. Looking back at past growth patterns could result in the aftermarket arena appearing tarnished and hurt, but basically unchanged.

Analysts are still cautious about predicting changes in wholesale, but the underlying feeling is that some business models have changed for good.