Tariff Uncertainty Hangs Over Aftermarket
Aviation companies tend to say two things when asked to predict the impact of tariffs: first, that they don’t know because of the considerable uncertainty about U.S. trade policy; second, that they either hope or expect for aviation ultimately to be exempted from any tariffs due to the net trade surplus it generates for the U.S.
Aviation companies tend to say two things when asked to predict the impact of tariffs: first, that they don’t know because of the considerable uncertainty about U.S. trade policy; second, that they either hope or expect for aviation ultimately to be exempted from any tariffs due to the net trade surplus it generates for the U.S.
However, no exemption has been granted yet, apart from the U.S. pledging that Rolls-Royce engines will avoid the 10% baseline tariff on the UK under a proposed trade deal, so it is worth considering potential impacts on the MRO sector.
One is that it will ratchet up the price of parts that move across borders, potentially causing MRO providers to build up inventories to avoid this.
At present the U.S. maintains a 10% tariff on EU-manufactured parts and aircraft, although Airbus operators have some leeway since the European OEM has manufacturing, engineering and materials facilities in the U.S. Boeing operators in Europe, however, may suffer more if the EU chooses to retaliate with reciprocal tariffs.
However, there could be an upside for maintenance companies if tariffs persist and airlines reject new aircraft deliveries as a result, instead choosing to keep their existing fleets in service for longer.
Rejection of Boeing deliveries due to tariffs has already occurred in China, while Ryanair’s CFO said on a recent earnings call that “we reserve our right to cancel if we saw a significant increase in the cost of our aircraft.”
In a recent research note, Kroll Bond Rating Agency (KBRA) analysts said tariffs could drive strategic shifts in fleet planning, such as extending the useful life of older aircraft or incentivizing airlines to lease or acquire aircraft already domiciled within their domestic market to avoid cross-border duties.
But KBRA also pointed out that the wider macroeconomic fallout from a prolonged tariff war would be bad for airlines and passenger demand—ultimately, that would feed through to maintenance demand, making tariffs a dubious proposition for the aftermarket.
