As a result of the impact from COVID, air traffic fell nearly 60% in 2020, but has now recovered a significant amount of that downturn. As of March 2023, total revenue passenger kilometers (RPK) traveled, as reported by the International Air Transport Association (IATA), were 12% below 2019 levels while domestic RPK’s are only down 1.1% from 2019. In response to this normalizing of air travel demand, along with a desire to modernize fleets, airlines are placing new purchase orders and returning parked aircraft to the active fleet. The combined backlog of Boeing and Airbus is now over 12,000 aircraft with delivery slots sold-out for the 737 and 787 through 2026 and the A320 through 2028. Additionally, parked aircraft, shown in Exhibit 1, are estimated by Jefferies to be around 16% of the current fleet which is down over 50% from levels in April 2020.

Exhibit 1: Aircraft in Storage

Source: Morgan Stanley

While this seems like a strong demand scenario, trends have been bumpy due to supply chain issues. Shortages of various components, along with elevated labor attrition resulting in a less experienced labor base, have constrained the ability of original equipment manufacturers (OEM) to produce aircraft. These delays in the supply chain will likely cause older aircraft to be used in service for longer periods and parked aircraft to continue to be used for spare parts. Commentary from some aerospace suppliers indicate airlines are continuing to burn through engine “green time” at elevated rates. Eventually the supply chain will catch up and the pace of new aircraft deliveries will increase, but we believe the current dynamic could extend the cycle as retirements increase due to older aircraft flying longer as new deliveries are delayed. Jefferies estimates nearly 40% of parked aircraft are over 20 years old which compares to a retirement age of 20-25 years for a typical passenger aircraft.

We see a potential positive scenario for aerospace due to normalizing air traffic demand post-COVID, ramping airline aircraft orders due to travel demand and a desire to modernize fleets, and a parked fleet of aircraft that continues to decrease in size and increase in age. We see opportunity in companies exposed to aftermarket, spare parts, and leasing space in the near-term and companies exposed to new aircraft deliveries in the medium-term as supply chains ease. As a result, we are actively searching for investment opportunities within aerospace subsegments we believe can benefit.