UBS predicts solid growth in US MRO market

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Swiss bank UBS is optimistic that the maintenance industry in the USA has better growth potential than widely anticipated over the next couple of years.

The investment researchers expect a reduction from "strong double-digit" growth in the MRO sector this year to a "mid-to-high single-digit rate" in future. However, this would still be higher than current stock evaluations of aftermarket companies are suggesting, the bank said.

The main reason for the hopeful outlook is that the fleet of young aircraft, which are still within the manufacturers' warranty period, will grow slower than in previous years, and airlines will need to fly their older aircraft more to achieve an expected increase in capacity.

Following a 4-5% increase in the fleet of aircraft aged up to five years in 2008/09, the growth rate is expected to slow to 2-3% in 2011/12. This is largely due to aircraft, which were delivered during the last upcycle in 2006/07, coming out of their warranty period. Deliveries this and next year will only partially offset this effect, the researchers said.

Aircraft aged up to five years form approximately 25% of the global fleet. Given that their utilisation is already at peak level, and taking into account the slower fleet expansion, the bank has calculated that these aircraft can only contribute about 1% to capacity growth.

UBS follows the view that airline capacity has historically outpaced GDP and expects that global GDP will stand at 2-3% during the forecast period.

Apart from a "modest" drop in utilisation rates during the economic downturn in 2008/09, operators have accommodated their increased capacity needs since 2004 through more new stock and greater utilisation, without having to increase the flying hours of their out-of-warranty aircraft, the analysts said.

This is going to change, however, with the latter's flight hours set to grow at 6.5% - as a result of more older aircraft and higher utilisation - versus a projected 2.6% flight hour increase for in-warranty aircraft.

The fleet of older aircraft should grow at 3.5% this year and 4% in 2012.

Another reason for the optimistic outlook is that airlines and suppliers will need to build up their inventories, according to UBS. While stock volumes have remained flat or even decreased in recent years, flight hours should be 12% above the last peak in early 2008, the bank said.

The service entry of the Boeing 747-8 and 787 should also add some momentum as operators and suppliers will need to acquire spares for new models.