BREAKINGVIEWS-Aircraft maintenance boom has further to fly

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Oliver Taslic

LONDON, Feb 14 (Reuters Breakingviews) - The aerospace sector is slowly righting itself. Following hits to deliveries of new planes in 2024, $140 billion Boeing BA.N and Europe’s Airbus AIR.PA should this year build lots more aircraft. But supply chain uncertainty and robust demand for flying mean the lucrative industry of keeping older planes in the air for longer – epitomised by engine specialists such as $220 billion GE Aerospace GE.N, $110 billion Safran SAF.PA and $10 billion Melrose MRON.L – will not reset overnight.

Last year Boeing and Airbus delivered around 1,100 commercial jets, far below 2018’s haul of over 1,600. At Boeing, a mid-flight door plug blowout on a 737 MAX 9 prompted stricter regulatory oversight of the company’s production line. A strike by its machinists – and supply chain issues at Airbus – further gummed the system up.

Airline trade association IATA said last month that passenger traffic hit a record in 2024, rising 10% year-on-year, and forecast another 8% bump for 2025. But delivery delays mean airlines have been unable to service some of that demand on the newest, most fuel-efficient jets. That’s led to higher maintenance costs and more fuel burn as older aircraft dodge retirement and are kept flying instead. IATA said in December that the average age of the global fleet had reached 14.8 years, compared to an average of 13.6 years between 1990 and 2024.

While certain airlines have managed to gain somewhat through their maintenance arms – such as Lufthansa’s Technik unit – ageing jets have proved a headache overall. Less so for engine specialists such as $65 billion Rolls-Royce RR.L, GE, Melrose and Safran, which reported results on Friday. Though these companies contribute to the production of new engines, “aftermarket” services such as repairs and spare parts generally carry much higher margins.

GE exemplifies the trend. The U.S. group’s greater exposure to engines has helped it outperform its joint venture partner Safran. Roughly 70% of GE’s revenue comes from aftermarket services, compared to around half at its French peer, which also does big business making items such as seats, overhead bins and landing gear for new aircraft. GE trades at a roughly one-third premium on a forward enterprise value to operating profit basis, according to LSEG data.

As such, analyst estimates compiled by Visible Alpha suggesting a sharp uptick in deliveries from Airbus and Boeing in 2025 risk being a double-edged sword. If new capacity allows airlines to retire some of their older jets, less repair work might ensue. But that’s not a near-term risk.

For one, supply chains remain uncertain, with IATA noting in December that downward revisions to expected deliveries were possible. Secondly, tight maintenance and repairs capacity– not helped by groundings of certain Pratt and Whitney engines – gives suppliers pricing power. Finally, continued strong passenger demand means airlines should be looking to pull out the stops to keep existing planes in the air. The tinkerers look set to win for a while yet.

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CONTEXT NEWS

France’s Safran reported full-year results on February 14. Adjusted revenue grew 17.8% year-on-year to 27.3 billion euros, while free cash flow rose from 2.9 billion euros to 3.2 billion euros.

Revenue in the company’s largest unit, Propulsion, whose activities include building and maintaining engines for civil and military aircraft, rose 15% on an organic basis to reach 13.7 billion euros, helped by civil aftermarket strength.

CEO Olivier Andriès said: “The operating margin grew by 150 basis points to 15.1% of sales, driven especially by strong aftermarket activity across the board, a relentless focus on operational excellence and the return to profitability of Aircraft Interiors”.

For 2025, the company raised previous outlooks for free cash flow and recurring operating income, helped by an increased forecast for growth in spare parts revenue.

GE Aerospace, Safran’s joint venture partner in engine maker CFM International, reported full-year results on January 23. Adjusted revenue rose 10% year-on-year to $35.1 billion. Its Commercial Engines and Services division grew 13%. The company forecast mid-teens growth in its CES unit in 2025.

Safran shares were up 0.5% by 0825 GMT on February 14.