Will the early retirement trend cause deflation in the spare parts market?

Aug 26th, 2013

The introduction of new cost efficient generation of aircraft to the aviation market has had its impact on all of its segments. From the carriers’ point of view it has created the circumstances under which fast fleet renewal became one of the key factors of staying in the game. Naturally, this process had to be accompanied by the symmetrical aircraft retirement trend, which has currently reached unprecedented scale thus creating new business opportunities in the aftermarket. However, the positive aspects of such a trend might be slightly exaggerated.

Introduction of new generation aircraft is reviving the aviation industry

It might seem that the on-going fleet renewal process spells good news for all of the industry players. Firstly, it may help the struggling airlines to save significant amounts of money on fuel, which accounts for almost 38% of all operating expenses and, according to TeamSAI, is not likely to cost less in the upcoming few years. Moreover, it creates new opportunities for MRO providers, since the rapid growth of the emerging markets calls for respective expansion of maintenance networks, despite the fact that the new aircraft generation will require less maintenance than the aging one. And then there are thousands of job openings for pilots to consider.

The fleet renewal race results in early retirement trend

Nevertheless, switching to new aircraft is not an easy process. According to Boeing’s long-term forecast, almost 41% of new aircraft are expected to replace the older ones, leaving only 5,960 of the latter in operation until 2032. This means that approximately 14.350 of “current generation” models will have to retire during the next 20 years, and some industry players might find it attractive to speed-up the inevitable process. After all, considering the cost-savings associated with the new aircraft, it comes as no surprise that many carriers don’t want to be left behind in the fleet renewal race, since it could decrease their competitiveness. Moreover, the wave of fleet renewals drive the manufacturing process, so such giants as Boeing are even introducing buybacks of their own aircraft in order to promote the newer models. As a result, according to AWIN data, the aircraft retirement age has dropped significantly and reached the lowest level in more than two decades.

Aftermarket business may suffer from surplus of spare parts

“The early retirement trend in the aviation market has definitely created opportunities for players in the aftermarket business. The dropping age of retired aircraft means more teardowns, since spare parts and components are still needed for maintaining older generation planes. Carriers are especially interested in acquiring such parts from surplus dealers that offer stocks accumulated from retired parted-out aircraft. As fast as the fleet renewal process may be, the older models are still operating and the importance of an extra part in case of an emergency MRO situation cannot be overestimated. For example, even some of the relatively new B737NGs have already been parted-out, which means that the demand for their spare parts justifies the investments into teardowns. Still, the growing number of spares, accompanied by the retirement of older generation aircraft, creates a danger of flooding the market and thus lowering the financial value of a part-out plane below the rational point. Not to mention the difficulties the OEMs might face, since competing with such a market of used spare parts would definitely prove to be a challenge,” says Zilvinas Sadauskas, the CEO of Locatory.com.

The probability of pessimistic scenario may be relatively low

Then again, the assumed scope of such a trend might in fact contradict with the actual state of affairs. Generally speaking, any commercial activity must remain beneficial to all of the parties involved and it seems that the speed of the processes mentioned may be moderated naturally. Ultimately, airlines cannot switch to new fleets faster than the new generation of aircraft is being manufactured, and the issues with the new products of key market players keep the older generation in the air. Moreover, some of the older models, operated by carriers, are still relatively young, and while disposing of the oldest aircraft is financially viable, it might not be true in case of the former ones. Regardless of the market scenario, the upcoming decade promises to be especially interesting for the aircraft MRO business.

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