Alantra at the 2023 Paris Air Show

Alantra’s global Aerospace team attended the 2023 Paris Air Show, which was attended by more than 300,000 investors and operators at Le Bourget, France. With experts declaring this the strongest aviation market in 35 years, all sub-segments of the industry: commercial aviation; defense; general aviation; and space, are continuing to develop new equipment and technologies and push the supply base and support this exceptional growth.

Airbus and Boeing recently unveiled orders for more than 1,100 jets,[1] adding to an already robust backlog that will fuel the sector for the next decade. As a result of the rapid recovery from the Covid pandemic and returns to record high RPKs, we are seeing OEMs pushing the supply chain to achieve and exceed pre-pandemic monthly production and delivery levels. Analysts continue to forecast that the global fleet will refresh the entire existing fleet and double, by 2042 to 46,880 aircraft.[2] For suppliers, this growth in commercial aviation is on top of substantial defense content that was won during the pandemic. With the current geopolitical environment, ongoing conflicts, and the US Department of Defense budget soon to reach $1tr,[3] defense opportunities remain robust. As a result, suppliers across the sector were raving about how productive they found their week in France.

Growth in OEM new build

Both Airbus and Boeing are pushing their post-Covid, fully recovered supply chains to achieve and exceed its post-Covid build rates. Approximately 75% of commercial aircraft fleet is and will continue to be narrowbody aircraft[4] and Airbus is forecasted to raise its percentage market share of in-service narrow-body Aircraft from 53% to 58% over the next 20 years.[5] This makes exposure to Airbus content for structural component suppliers key to maintaining market growth and provides an advantage to European structural component suppliers who sit in that market. Boeing, which has struggled with the 737Max grounding followed by Covid,[6] looks to be finally through its challenges. Despite losing a certain amount of market share, its aircraft production is once again healthy and Boeing-centric suppliers have a record orderbook.

Equally we are seeing – consistent with the exceptional number of aircrafts that are due to be built in the next 20 years – engine component suppliers experiencing record backlog and growth that goes beyond the aircraft OEM growth rates. This is the result of nextgen engines burning hotter, having larger bypass ratios and more turbo machinery than previous generations of engines (more airfoils, more disks, and more cooling holes). This means each new nextgen engine has a magnifying effect and restricts supplier capacity. Backlogs are not just robust, and they are falling behind demand. Therefore, suppliers who are able to scale capacity and deliver product stands to win significant market share in the coming years.

It is also worth noting, the widebody build rate and orderbook is finally starting to show signs of recovery, despite being two years behind the narrow-body recovery. Long-range, international travel has now returned to the ‘normal levels’ experienced pre-pandemic and this is filling the backlog of suppliers that have historically been exposed to twin-aisle aircraft production.

As a result of 1) the rapid recovery throughout the commercial aviation industry, 2) we are seeing many suppliers rushed to fill their available capacity with defense content to offset commercial reductions during Covid, and 3) ongoing labor and raw material shortages, the supply chain is constrained. We believe delivery is and will continue to be the most important factor in winning more work. We believe consolidation through M&A continues to be active and remains a key tool for suppliers to complement capabilities and offering to customers while also diversifying the work statement. Further, European suppliers in the Airbus and Safran supply chain are starting to seek US investors (PE or strategic) as there appears to be a belief that acquiring into the European supply chain provides access to the largest share of the narrowbody fleet.

Growth in the aftermarket

With suppliers to the OEM new build struggling to achieve the desired production rates, older aircraft are remaining in service for longer than previously predicted. The older aircraft require more parts and maintenance and so are driving a considerable amount of demand to the distributors, MROs, and component repair firms. Magnifying the aftermarket growth in demand is the first generation of nextgen aircraft, which entered the market in higher than historically normal production rates as a result of the efficiency brought on by re-engining vs redesign of the aircraft, are entering their first major overhaul cycle and are starting to demand more frequent aftermarket attention. We expect this means that there is less capacity available to properly service the legacy fleet which is driving extensive opportunities in the aftermarket. Therefore, it is likely that investors are seeing this trend and are seeking opportunities to make aftermarket investments to capture the growth opportunity.

ESG

Environmental, social, and corporate governance (ESG) was the overwhelming theme of the 2023 Paris Air Show. Companies throughout the show were eager to show how they were reducing their carbon footprint.  Illustrating that the industry’s net zero carbon commitment by 2050 is clearly being taken seriously. At the Paris airshow, this was made clear through the presence of eVtol companies, hydrogen power and new aviation jet fuel, as well as the push to reset the existing aircraft fleet with more efficient aircraft. From a business standpoint, ESG concerns are leading the OEMs and tier 1s to favor vertically integrated suppliers that could complete a component in-house and reduce the amount of travel time necessary for components to receive each approved process. We believe suppliers are seeing an increased willingness to – on the part of OEMs – re-qualify existing processes and qualify new processes to have make suppliers a one-stop-shop and thus, reducing the supply chain and making it more efficient.

Summary

It is a great time for the aviation market. Having recovered from disruption caused by the pandemic, the supply chain is operating well. Equally, order books are at record levels and groups that are able to scale stand to win a significant share. From an M&A perspective, valuation and transaction volumes are high and top companies are consistently and likely will continue to trade at double digit EBITDA multiples, making the deal environment for business owners contemplating a sale of their company favorable. With this backdrop, compared to the overall economy, aviation’s tailwinds suggest meaningful runway in the coming years.

[1] New orders and supply chain progress as Paris Airshow grapples with pandemic aftermath | Reuters

[2] Global aircraft fleet needs to double by 2042 to keep up with demand, report concludes (irishexaminer.com)

[3] Department of Defense (DOD) | Spending Profile | USAspending

[4] Boeing predicts demand for 42,600 new jets in next 20 years (aerotime.aero)

[5] Airbus to Strengthen Narrow-Body Jet Dominance, Boeing Stays Atop in Wide-Body Market (airlinerwatch.com)

[6] Pandemic heaps fresh pressure on Boeing as 737 Max grounding continues | Analysis | Flight Global