By Christopher Hinton, MarketWatch
NEW YORK (MarketWatch) — Airlines, wrestling with record-high fuel prices and a recession, have put off non-essential aircraft maintenance for almost three years. According to the industry, that’s about to change.
As airlines enter what is shaping up to be a second consecutive year of profitability, orders for maintenance, retrofitting and overhauls, known as the “aftermarket,” have climbed sharply. And though fuel prices are still high, the bills haven’t dampened pent-up demand.
“The spike in fuel prices caused some tightening in the more discretionary-type items, but it was not so much cancelling as a ‘we’ll wait and see’; but that’s freed back up now, and we continue to see a very robust aftermarket,” said Kent Statler, Rockwell Collins Corp.’s chief operating officer.
Sneak peek inside Boeing's 747-8
Boeing's latest 747 jumbo jet looks like a spiffy new jetliner. But inside it's still a work in progress. Image courtesy of Getty Images.
At Rockwell Collins, revenue from aftermarket services is up 15% to 20% from a year ago, when the sector showed the first signs of recovering from the 2007-2008 recession, said Statler.
It should be a banner year for the entire industry, with double-digit revenue gains built on a global increase in air travel, according to Gleacher & Co. analyst Peter Arment.
“It is clear that 2011 should exceed initial aftermarket growth targets,” he said.
That’s good news for manufacturers such as Boeing Co. and EADS /zigman2/quotes/203769874/delayed EADSF -1.40% unit Airbus, which service the aircraft they sell. It should also be a boon for engine suppliers General Electric Co. /zigman2/quotes/208495069/composite GE -0.82% , Safran SA /zigman2/quotes/206963350/delayed FR:SAF -3.40% /zigman2/quotes/203875901/delayed SAFRY -2.34% , Rolls-Royce Holdings , and United Technologies Corp. unit Pratt & Whitney.
Then there’s the component suppliers, the makers of cockpit equipment, landing systems and aviation electronics, which would include Rockwell Collins, Johnson Control Inc. /zigman2/quotes/203776087/composite JCI +1.44% , Spirit AeroSystems Holdings /zigman2/quotes/205043289/composite SPR +3.31% , Moog Inc. /zigman2/quotes/210100990/composite MOG.A +0.53% /zigman2/quotes/209198540/composite MOG.B -5.37% , and TransDigm Group Inc. /zigman2/quotes/203902625/composite TDG +0.07%
On Wednesday, TransDigm raised its full-year outlook for earnings before taxes, interest, depreciation, and amortization (Ebitda) to a range of $574 million to $580 million, from its prior estimate of $562 million to $572 million. Wall Street analysts had forecast TransDigm full-year Ebitda of $545.7 million, on average, according to FactSet Research.
“We believe that the raise can be attributed to a stronger commercial aftermarket,” Wedbush analyst Kenneth Herber said in a note to clients. “Guidance for the commercial aftermarket remains at up 20% for the fiscal year. We continue to believe that the company will come in closer to up 25% for the fiscal year.”
Shares of TransDigm /zigman2/quotes/203902625/composite TDG +0.07% closed at $88.86 Wednesday, but still are trading about 18 times analysts’ average earnings-per-share estimate for 2012, near the company’s historical average.
Rockwell Collins shares are trading at about 13 times its 2012 earnings estimate versus a six-year average of 17.5. The stock closed Wednesday at $60.84, up 35 cents a share.