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Further Air Travel Slowdown Could Put Aftermarket Spending at Risk, RBC Says

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Further Air Travel Slowdown Could Put Aftermarket Spending at Risk, RBC Says

A further deceleration in global air travel demand could put aftermarket spending at risk if airlines opt to slash capacity amid the ongoing Middle East conflict, RBC Capital Markets said in a note e-mailed Friday.

The International Air Transport Association said Thursday that global passenger demand fell 3.4% year over year in April, marking the first annual contraction since the post-pandemic recovery.

Excluding the Middle East, which saw a nearly 47% slump, overall demand rose 1.2% last month. Total capacity dropped 2.9%, according to the IATA report.

The IATA expects global scheduled seat capacity to fall 1.1% year over year this month, compared with a 0.8% drop seen in April. Middle East capacity is seen tumbling 27% in May, according to the report.

Despite some airlines flagging capacity cuts amid elevated oil prices, overall views on the demand backdrop have been "relatively robust," RBC analyst Ken Herbert said in a note to clients.

"We believe the key focus for investors remains the durability of travel demand as airfares increase, as a further deceleration in demand poses a risk to aftermarket spending if more meaningful capacity cuts materialize," Herbert wrote.

Overall, the brokerage continues to be "bullish" on the commercial aftermarket industry this year. RBC continues to recommend FTAI Aviation (FTAI), Heico (HEI), Loar (LOAR) and VSE (VSEC) as "high conviction" stocks for aftermarket exposure, particularly engine maintenance, repair, and overhaul, or MRO, according to the note.

"We expect more upside potential in engine MRO as we expect it to continue outpacing component MRO growth in 2026, but we appreciate that focus is shifting to 2027," Herbert said. Air carriers are expected to be cautious in retiring legacy engines amid factors such as a lack of new supply, according to the note.

"We continue to see a tight engine (aftermarket), limited retirements/(used serviceable material), and an unprecedented concentration of value in the engine (aftermarket) relative to the broader aero market," Herbert said. "We remain focused on any potential (aftermarket) parts de-stocking from airlines in 2026, as we have not seen significant de-stocking through 2025."

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