Editor’s Note: This week, John Persinos interviewed Mike Stengel, partner at AeroDynamic Advisory, a global aerospace consultancy. Mike also is an FAA-certified commercial pilot. The following is a transcript condensed for concision, with questions in bold.
Mike Stengel, partner at AeroDynamic Advisory, a global aerospace consultancy. (Photo: AeroDynamic Advisory)
How are escalating geopolitical tensions in the Middle East affecting global airline route planning, fuel costs, and widebody aircraft demand? If the Iran war drags on, what will be the consequences for global aviation?
The latest Middle East conflict and the blockade of the Strait of Hormuz has of course led to much higher jet fuel prices that have grown faster than gasoline or diesel prices due to a widening crack spread. This widening spread is the result of refineries that were damaged or taken offline.
The tricky part about the crack spread is that many hedging agreements don’t cover it, so even airlines that thought they were protected still need to raise fares to cover the difference.
Flight activity among Middle East airlines is still down more than 40% compared to the beginning of the year, and carriers in other parts of the world are also trimming unprofitable flights to adjust to the new fuel environment.
One silver lining is that some airlines in Europe and Asia Pacific are capitalizing on the disruption at the Gulf hubs and stepping into the vacuum created by the absence of the “Middle East Big Three”.
With the Strait remaining closed, what’s unique about this conflict is the prospect of jet fuel shortages in some parts of the world, particularly in Europe and Asia that were the largest customers of Persian Gulf crude and jet fuel. The longer the Strait stays closed, more trouble grows on the horizon particularly for jet fuel stocks and summer airline schedules.
Which segments of the commercial aerospace aftermarket are showing the strongest growth right now, and how are supply chain disruptions influencing maintenance, repair, and overhaul (MRO) activity?
The engine segment of the MRO sector continues to be the driving force, buoyed by continued strong demand for thrust and compounded by a lack of new deliveries that have forced airlines to retain older assets for longer.
After being bludgeoned during the COVID days, even demand for widebody assets has also been quite strong and showing similar signs of strain as the narrowbody world, at least leading up to the latest Middle East conflict.
What are the biggest production bottlenecks facing Airbus and Boeing today, and how do you expect those constraints to impact aircraft delivery schedules through the remainder of the decade?
Two areas are especially strong production bottlenecks: engines and cabins. Within engines, we continue to see constraints for special processes like casting and forging, although we’re slightly more encouraged by recently announced capacity expansions at the likes of Howmet and Pratt & Whitney.
In cabins, seating and certification continues to be a constraint, and we expect this to continue for the near-term especially as production of widebodies with more highly customized interiors continues.
Are airlines shifting their fleet strategies in response to Middle East instability and ongoing engine availability issues, particularly regarding older aircraft retention and leasing activity?
While there have been no widespread announcements regarding delivery deferrals or accelerated retirements, eyes are certainly on the widebody-heavy Middle East backlog which faces heightened risks should the conflict last longer as airlines at some point adjust their fleet plans.
In the event of an extended conflict and closure of the Strait, delivery deferrals elsewhere may become a possibility too.
What key indicators should investors and industry stakeholders currently watch to gauge the health of the commercial aircraft production cycle and the broader aerospace aftermarket?
All eyes should be on jet fuel prices and availability for the foreseeable future, and the trajectory of these are determined by how quickly the current conflict is resolved.
Unfortunately, the events that have taken place seem to lead to fuel prices that are higher for longer, putting pressure on already thin airline margins and possibly leading to a reshuffling of the backlog.
In a twisted way, since the industry was so supply-constrained leading up to the conflict, this could lead to the sort of demand correction needed for supply to catch up.
John Persinos is the editor-in-chief of Aircraft Value Intelligence.
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