In his latest City Insider article for Aviation Business News, Kevin Gould, managing director of Alderman & Company, sets out the five likely impacts of supply constraints in the aviation sector 

Disruptions in the aerospace industry can often lead to increased M&A activity, as participants sense either opportunity (buyers) or risk (sellers) on the horizon.

Last month, I said we will likely see an increase in refurbishment of older commercial airframes due to the FAA limiting Boeing’s output of 737s to 38 units per month.

This month I’m saying that refurbishments alone won’t be sufficient to backfill the resulting shortage in Available Seat Miles (ASMs); the mandated limit on Boeing’s aircraft production rates will have surprisingly broad impacts across the aviation industry which will likely spur additional M&A activity throughout the A&D sector.

Ticket Prices

The FAA’s constraints on Boeing production (which may well extend beyond just the 737) will create a net shortage in available lift; more people will want to fly than there are airline seats available.

We all know when demand exceeds supply, prices rise, and thus we can expect the relative cost of airline tickets to increase significantly over the next 3-5 years.

This will impact individual airlines differently – those that are able to meet their lift capacity plans will benefit from increased margins on expected ASMs.

Airlines whose capacity falls somewhat short of plan may end up net neutral on profitability as higher ticket prices offset lower ASM’s.

But carriers whose lift capacity falls significantly below planned levels will suffer as they simply can’t get enough planes in the air to respond to unmet demand.

A further factor will tend to push up ticket prices: those airlines who are able to secure new aircraft production positions will probably not be able to negotiate the volume price reductions from OEMs as they typically have in the past.

These higher capital equipment costs inevitably will find their way into the airlines’ pricing policies.  Overall, airlines will increase ticket prices in light of the supply/demand imbalance.

Fuel Costs

The complex global infrastructure that produces jet aviation fuel is finely balanced to make just the right amount of product based on expected demand in both the short and long terms.

With considerable lead times for jet fuel production facility planning and construction, activities are already underway to meet the expected jet fuel needs well into the future.

Over the coming quarters, as airline lift capacity falls short of prior expectations, there is likely to be excess jet fuel in the system, and producers may need to cut prices in an effort to keep their product moving.

Although the situation is unlikely to be as sudden or dire as that experienced during the pandemic (when aircraft basically stopped flying and prices fell through the floor), we believe a material reduction in jet fuel prices for a prolonged period of time is possible.

For airlines that have sufficient aircraft to meet their plans, the lower fuel costs will further increase their profit margins.

But for Fixed Base Operations (FBOs) and contract fuel providers whose pricing is calculated as a fixed percent markup on fuel cost, their profits will suffer.

Business Aviation

On a related note, we see a reduction in the cost of jet fuel potentially having a dramatic impact on business aviation.

Lower fuel prices would allow charter operators to reduce their prices just as airlines are potentially raising theirs.

For ultra-premium airline customers who were considering a switch to private charter flights, the choice could be made easier, and many may be likely to make the move.

If this happens, look for significant increases in charter and other business aviation-related services like MRO facilities, and especially FBO activity, where the increase in business will be a welcome offset to margin losses on fuel sales.

As a follow on, we could see increased refurbishment activity in business aviation as operators seek to extend the useful lives of existing airframes since business jet OEMs will be unable to ramp production fast enough to meet increased demand for private jets.

Just as with commercial airliners, older business aviation airframes have plenty of physical life left in them.

With good maintenance, new paint, new interiors, and modern cabin amenities like high speed wifi, few charter customers would know or care that they are flying on a 20-plus year old airplane.

And assuming lower fuel prices, the operating cost disadvantages of older, less efficient business jet engines becomes far less significant.

With updated avionics and cockpit systems, these older business jets can meet all of the current regulations  and pilots can take advantage of the newest approaches, departures and flight paths.

Additionally, if the above all holds true, we would also expect to see values of business aircraft recover from their recent softening.

M&A Impacts

As a result of the factors described above, the following is likely:

• As described in last month’s article, airliner service providers (MRO and spares) may see increased M&A activity as earnings and values rise and strategic buyers seek additional capacity to meet rising demand.
• Acquisitions of charter operators may increase as that segment experiences new customer inflows and revenue and profit expansion.
• Further FBO consolidation is possible, when gallons pumped climb as charter activity picks up, even at lower fuel prices.
• Maintenance facilities (Part 145 repair stations) that focus on business aviation may command premium prices as their revenues increase and valuations rise.
• Ground Service Equipment manufacturers and other companies that provide direct support to airline operations may suffer as the volume of commercial flights stagnates. We may even witness distressed sales in this segment.

As we often see in the M&A industry, market disruptions can lead to increased activity.  The ripple effects of FAA limits on Boeing production are likely to result in just that throughout the aviation industry.

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About The Author

Kevin Gould is a Managing Director with Alderman & Company, M&A bankers exclusively serving middle market sellers of companies in the Aerospace and Defence market. He has more than 30 years of experience in the aerospace industry, including M&A, strategy, and executive leadership. Kevin started his career in the electrical business unit of Boeing in 1988. After 12 years at Boeing, he went on to become the CEO of Piper Aircraft and then President of the Bendix/King division of Honeywell. Prior to his business career, Kevin was an attorney with McCutchen Black Vergler & Shea. Kevin holds a JD from the University of Southern California, an MS from Stanford University, and an MBA from Harvard Business School. Kevin has over 1,000 hours as a private pilot, with instrument and complex ratings.