THE TD COWEN INSIGHT
The commercial aerospace aftermarket is entering a sweet spot, with potential for above-guide gains in 2023-24. Tight traffic/capacity through 2024, a growing aircraft population, and aftermarket pricing power support an extended upswing despite climate-driven replacement demand.
TD Cowen published an Ahead Of The Curve® Series Report detailing why commercial aerospace OE & aftermarkets look poised for a healthy, extended upswing. Aftermarket prospects have improved since then and suggest an extended sweet spot with an upside to 2023-24 estimates.
COMMERCIAL AFTERMARKET MOVING INTO EXTENDED SWEET SPOT
Strong available seat mile (ASM) expansion as international markets open, coupled with heavy use of older planes/engines to fill capacity needs, is driving robust growth in aftermarket demand. We expect aftermarket vigor to be sustained through 2024, with air traffic apt to exceed the 2019 baseline next year since real GDP is projected at 11% above 2019 levels.
Pressure to replace older planes to address climate concerns is a longer-term issue. But supply chain delays limit the ramp in new deliveries, holding estimated airline capacity growth to < 3.5% in 2024. This likely will lag air traffic, suggesting a pick-up in aircraft retirements is farther out than investors fear.
Longer-term, aftermarket sales are supported by growth in the aircraft population and OEMs pricing power. Because aftermarket parts are covered by strict safety regulations, they are proprietary, and OEMs can hike annual catalog prices to fully cover inflation.
DRIVERS OF AFTERMARKET DEMAND
This report features an in-depth look at the airline traffic/capacity balance and the near and long-term drivers of aftermarket demand. We focus on the factors that augur robust near-term aftermarket results and why these are apt to persist.
The surge in aftermarket demand is reflective of airlines’ struggle to provide capacity to meet the robust recovery in traffic. Given the level of demand vigor, price hikes, and easing supply chain headwinds, we see the potential for aftermarket sales to exceed company guides. To the extent supply chain constraints limit near-term upside, they’re apt to create additional pent-up demand, extending visibility and bolstering pricing power. This reduces the risk of elevated customer inventories and destocking should macros weaken.
WHAT TO WATCH
We will continue to monitor monthly numbers on global growth in airline traffic and ASMs, as well as changes in aircraft delivery skylines and the average age of feet. The aftermarket surge is broad-based, but aftermarket sales vary as a % of total sales, degree of proprietary pricing power, and relative profitability.—
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