Commercial aftermarket outlook remains high as sales rose 23% in Q2

The commercial aftermarket outlook remains highly favorable as total sales rose 23% year-on-year in the 2023 second quarter (Q2), according to a recent report by RBC Capital Markets.
Chiefly driving the better-than-expected expansion were engine MRO sales—up 30% in Q2 compared to 18% in the first quarter (Q1)—while the outlook for full-year sales growth has now risen to 18%.
“With industry fundamentals remaining strong, we believe the outlook for [the second half of 2023] is encouraging. We believe the results will support the continued bullish view on the commercial aftermarket,” analysts Ken Herbert and Stephen Strackhouse said in the report.
RBC Capital Markets expects the pricing environment to remain favorable for original equipment manufacturers (OEMs). In Q2, the average spare part and material was just below 9%, down slightly from the Q1 peak of more than 9%. However, based on recent distributor checks, the ability of OEMs to pass on higher prices continues; heading into 2024, they are likely to hike the prices of spare parts. The companies set to benefit the most from rising spare parts prices include TDG Aerospace, General Electric, and RTX Technologies.
Looking ahead, if passenger traffic trends remain strong and supply chains pressured, the factors for a strong aftermarket should endure—though OEM pricing is likely to normalize at some point in 2024.
At the same time, as supply chains continue to normalize, and MRO turnaround times improve, airlines are likely to lower inventory levels. In the next six months, the outlook for parts purchasing is lagging MRO sales by more than 400 basis points, the highest since the pandemic.
Meanwhile, the outlook for engines generally remains robust, buoyed by resilient demand for legacy narrowbody engine MRO activity (CFM56-5B/7B and V2500), while the demand for widebody engine MRO should accelerate into 2024. Current high utilization on many widebody aircraft, such as the Boeing 787 and the Airbus A350, is limiting the engine spend today.
However, more than 70% of MROs see the aircraft-on-the-ground (AOG) issue because of the Pratt & Whitney geared turbofan (GTF) engine delays peaking in the fourth quarter or later.
Overall, Herbert and Strackhouse say that Q2 results “continue to support the thesis that the aftermarket remains a ‘safe’ place for investors,” adding that “we believe investors remain concerned about the pace of growth in aircraft production at Airbus and Boeing, and the strong traffic trends provide continued support for aftermarket spending.”