2024 is the first “normal” year for commercial aviation since before the coronavirus pandemic struck, yet the fruits of the buoyant recovery—which has seen North American air traffic slightly surpass 2019 levels—are not being shared equally just yet.
Both airlines and original equipment manufacturers (OEMs) continue to grapple with a slew of headwinds—lingering pandemic induced supply chain bottlenecks, an ongoing labor shortage and increased shop visits for Pratt & Whitney geared turbofan (GTF) engines.
While the aftermarket is not immune to supply chain challenges and a tight labor market, it has a better outlook than OEMs or airlines. On Jan. 4, prior to the Boeing 737-9 grounding, investment bank Jefferies predicted in a note to clients that aftermarket revenue would reach 120% of 2019 levels in 2024 and 127% in 2025 given strong air travel demand, slowing retirements and supply constraints.
The investment bank said it continues to prefer the aftermarket more than original equipment “given the capacity-constrained market in addition to age of fleet.”
The aftermarket will directly benefit from rising maintenance costs—Delta told investors in January it expects those expenses this year to be $350 million higher than in 2023—and slowing retirements.
Jefferies estimates that there will be 348 widebody retirements from 2024-2026 due to slow production speed, compared to an earlier estimate of 402. During the same period of time, it expects 1,857 narrowbody retirements compared to a prior forecast of 2,024 due to GTF engine-induced capacity constraints.
The aftermarket’s robust health is reflected in the performances of some key market players. For instance, HEICO posted record sales of $936.5 million in its fiscal 2023 fourth quarter (Q4), an increase of 56.3% year-over-year, as it reaped the rewards of its $2.05 billion acquisition of parts supplier Wencor. In the roughly six months since the deal, HEICO’s share price has risen 9% to about $149.
For its part, Alexandria, Virginia-based VSE Corp. (VSEC), is likely well-positioned to win new distribution agreements in 2024 with its OEM focus amid the business jet and commercial transport market recoveries. In a January report, RBC Capital Markets said that investors are likely to “remain supportive of an accelerated investment strategy” by VSE, adding that the company’s margins are set to rise incrementally, supported by its 2023-2024 facility and infrastructure investments in the Aviation and Fleet segments.
Among major providers of aftermarket services, VSE’s stock has been one of the top performers, increasing 29% in the past six months to $68.90.
With regards to AAR Corp, management is confident that the acquisitions of Trax and Triumph’s Product Support Group will ultimately make it a more formidable MRO provider and profitable company.
Investors are cognizant that AAR spenty a hefty $850 million on M&A in 2023 while missing revenue expectations for its second quarter of fiscal 2024. But they appear to be looking at the bigger picture. AAR’s share price has risen more than 22% over the past year to $63.82.
Data compiled by FactSet and Melius Research show that commercial aftermarket stocks outperformed the S&P 500 by an eyebrow-raising 30% in 2023—a milestone reached just two other times (in 2003 and 2010) in the past 25 years. A similar performance seems possible in 2024 given strong market fundamentals and limited headwinds.
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