Analysis
Iberia 2 engine shop

MRO consolidation

As formerly competitive airlines merge to create the world's biggest carriers, the MRO industry inevitably feels the effects and must be ready to adapt to the changing maintenance landscape. Nick Rice reports on MRO consolidation.

The aviation industry is constantly adapting to new circumstances, searching for new improvements and alternatives, innovating to reach new goals and struggling to improve painfully low profit margins whilst building a sustainable, safe and prosperous future. Not to mention the constant aim of enhancing customer experience and promoting brand loyalty.


The challenges are incredibly complex. It's an enormous task with myriad decisions and a multitude of ramifications, all accompanied by large servings of external unpredictability and doubt. Yet amid all this flux, one thing is certain: the number of aircraft in the skies is going to increase. And more aircraft means more maintenance, repair and overhaul (MRO).

The number of aircraft operating globally has entered a phase of unprecedented growth. According to Boeing, the world's commercial fleet currently stands at 20,310 aircraft, and this figure is estimated to grow to 41,240 by 2032. How the MRO industry will evolve is intrinsically linked to how the airlines it serves develop, and the biggest continuing trend of recent years is airline mergers.

Consolidation and change

Consolidation between the airlines is creating the same need for mergers in the MRO sector. This presents many difficulties, such as technical compatibility and cultural differences - but the benefits are numerous if all goes to plan.

With more than 30 years of experience in the industry, R. Thakur, a chief manager at Air India, offers an insight into how MROs are feeling the impact of airline mergers: "The MRO market is witnessing a lot of changes; mergers of airlines is certainly one of them. The cost-cutting initiatives of the airlines continue unabated due to pressures on the margins. As a result, MROs must find new ways to stay afloat. For mature airline markets like North America and Western Europe, consolidation offers economies of scale".

Increasingly though, the changes engendered by the airlines are rebounding and posing operational questions. Just as the airlines spark the need for change, so too are they affected by it. As the MRO sector evolves, the airlines must evaluate all the maintenance possibilities on the table. With the introduction of next-generation aircraft, there is a marked encroachment of OEMs in the aftermarket, providing more choice for the airlines and putting more pressure on MROs. As Thakur explains: "A merged airline is in a better position to optimally utilise the aircraft and negotiate better terms with the vendors and MROs, but it can offer the MROs the chance to lock in a consistent revenue stream."

Airlines may consider all-inclusive service agreements on a "power-by-the-hour" basis, allowing for financial planning security. This can result in contract volumes going up, giving airlines an increased negotiating power with their suppliers. The OEMs can respond by offering aftermarket support deals with equipment sales, gaining them further ground in the MRO sector. Added to this, OEMs can also restrict third party access to engineering data and repair manuals for new-generation equipment - a powerful hand to be sitting on.

Independent MRO providers have responded by offering comparable full-service contracts, but these types of deals require sufficient scale in the MRO's business to handle the risks that are implicit with offering technical services at flat rates over long periods. This is where consolidation becomes a viable, if not attractive proposition.

David Marcontell, president and COO of aviation and business innovation consulting firm TeamSAI, points out: "As demand for aircraft - and hence maintenance - from the developing world grows, then we can expect more joint enterprises as countries and companies seek to gain the skills and technology of maintenance. MRO joint ventures continue to be used as trading beads by both the OEMs and major independents."

David Hygate, a director at TeamSAI, notes that MRO consolidation offers good prospects. "Mergers where complimentary products, services and customers are delivered are clearly positive since they offer good opportunities for growth," he says. "Where one company has excellent lean processes in place and can transfer these to a less efficient partner then, again, positive outcomes should flow. From an airline's perspective, MRO consolidation can be a good thing as well. Consolidation results in stronger suppliers, with greater depth and scope of services and capabilities."

With respect to the merger of British Airways (BA) and Iberia, Hygate adds: "Airline mergers also present opportunities for airlines to consolidate and grow their own MRO operations as they each feed the other and provide a better platform for winning third party work - BA/Iberia is a good example of this."

Hygate's comments are confirmed in an interview with British Airways. A company spokesman says: "We have already achieved a high degree of integration with Iberia, and are realising the synergy benefits this closer relationship promised. Third party customers are also benefitting from the greater reach and capabilities this relationship provides, and we are already delivering joint MRO services to a number of customers."

Operating in the Eurozone means there is a constant pressure to keep costs low and maximise cost efficiency, so the relationship with British Airways Engineering and Iberia Maintenance is vital for both parties, as the BA spokesman states: "Our relationship offers more mutual benefits to each side. For instance, by working in partnership we can maximise the use of our inventory, pay only when we consume stock, increase volume in our workshops, ensure better reliability and keep our cost-base down. Together we are better equipped to deal with external pressures coming out of the Eurozone."

Jose Luis Quiros, commercial and business SVP at Iberia Maintenance & Engineering, also praises the union of British Airways Engineering and Iberia Maintenance. "Both MROs are basically complementary, with a minimum overlap regarding capabilities, so we are adding services to the customers of each of the two MROs that they didn't have prior the merger," he says. "It might appear that with MRO companies merging, the airlines will have less options as competition reduces. On the contrary, merging MRO will allow us to gain efficiency by increasing workload volume, with added value because of the greater leverage at the time when prices and conditions are discussed with suppliers and OEMs. And the benefits will ultimately be transferred to the end customer - the airlines."

Possible outcomes

It seems obvious that airlines would prefer the simplification of the supply chain. In almost any business, a one-stop-shop is more convenient than having to manage multiple external suppliers. Specialists will still exist on the fringes, but the industry will increasingly favour large MRO groups that can execute all aspects of maintenance in house. The key factor for the MRO is being able to achieve the necessary economy of scale to make this new business model work.

With OEMs gaining ground in the MRO sector, MRO companies need to be vigilant. Fears of a monopolistic hold from the OEMs, due to their guarded intellectual property relating to new-generation aircraft, will likely be unfounded though, as airlines will always push for choice. Monopolies are not supported by the industry or carriers but MROs will have to look for win-win arrangements with OEMs and airlines.

One possible outcome is a division in the MRO industry, whereby a reduced number of major global MRO groups support new-generation aircraft, with a lower league of smaller MRO companies serving mid-generation and older aircraft. It all depends on whether an MRO - merged or independent - can win significant enough clients to make the economy of scale work.

Nicole Allard, senior communications specialist at Aviation Technical Services (ATS), a Washington-based MRO provider, reports that: "The two primary challenges are integration across cultures and across technology platforms. The successes can be economies of scale from a cost perspective, primarily driven by the broader absorption of overhead and indirect costs."

ATS views MRO consolidation as a direct result and reflection of airline mergers. "Even though overall MRO volume is increasing, fewer airlines mean fewer customers for MROs to target. This results in larger contracts being awarded to larger MROs - hence the MRO consolidation that has mirrored that of airlines," Allard says. Asked about future developments, she adds: "In North America, the top eight airframe MROs account for roughly 70 per cent of capacity. Looking five years ahead, the top four airframe MROs are likely to account for 80 per cent plus of capacity."

For many, this reduction in MRO numbers is an inevitable, even natural progression when considered in the context of the entire aviation industry. As TeamSAI's Marcontell succinctly puts it: "There are now only two producers of big airliners and two makers of regional jets. And there are only four major engine OEMs and a diminishing number of component makers, so why should there be tens or hundreds of MRO service providers?"

Studying the mature market of North America, it soon becomes clear that the number of airlines has shrunk since the 1970s, with most mergers occurring in the last decade. Where previously there were ten airlines vying for passengers, there is now the immediate prospect of just four airlines, should the forthcoming merger of US Airways and American Airlines go ahead later this year. If it does, as it is expected to, the four major carriers will control 85 per cent of the domestic market in the US.

The $11bn merger between formerly fierce competitors American Airlines and US Airways will result in the world's biggest airline. With successful integration, the new airline, which will retain the American Airlines branding but be managed by current US Airways CEO Doug Parker, will offer more than 6,700 daily flights.

With over 95,000 employees and 900 aircraft, the airline will serve 336 destinations in 56 countries. The two companies are slated to save $1bn a year. "The combined airline will have the scale, breadth and capabilities to compete more effectively and profitably in the global marketplace. Our combined network will provide a significantly more attractive offering to customers, ensuring that we are always able to take them where they want to go," said Parker in a statement.

The American-US Airways merger will follow the mergers of Delta Air Lines and Northwest in 2008, United Airlines and Continental in 2010, and Southwest Airlines and AirTran in 2011. Accordingly, the MRO sector is sure to see more mergers. Ultimately, the MRO industry is driven by the two main factors of airline growth and the need to make maintenance processes more efficient; with airline consolidation creating more financially viable airlines, the MRO sector will follow suit. The challenges will certainly be in managing integration and navigating an agreeable alliance between the MROs themselves and the OEMs and airlines.

Nick Godwin, managing director of aviation software specialists Commsoft, has observed the intensified monitoring of maintenance costs and also points to more MRO consolidation in mature markets, with emerging markets likely to follow. "The competition is fierce amongst the increasingly diverse MRO suppliers and, from Commsoft's experience, airlines are increasingly wanting to monitor the production costs and margins of MRO suppliers," he says. "The pressure for reduced costs and competition for choice will be relentless and will drive further consolidation in mature MRO markets such as Europe, North America and Asia. I would also expect to see pressures for growth in new third party MRO capacity in developing markets like South East Asia, Eastern Europe, Russia, Africa and India, benefitting from local cultural knowledge and lower labour rates, married to management experience."

With respect to growth, Godwin says: "Estimates vary but the total MRO market is expected to grow by about 35 per cent over the next 10 years, according to many industry sources."

The future for the MRO industry can never be truly forecast. It is clear that consolidation and mergers will continue, but the eventual results and ramifications are yet to be played out. As Quiros explains: "On one side, future airline mergers will continue pushing MRO consolidation. On the other, smaller independent MROs might be integrated into larger organisations like SR Technics or ST Aerospace, to counteract the growth of the industry leaders."

But whatever the outcome, it will be prudent for MRO companies to be alert and supple, able to adjust to fluid market realities. As Quiros concludes: "With MRO activity, even when cost is a driving factor, the environment changes vary rapidly and subsequent solutions that are valid today might not be applicable tomorrow. To gain volume and size without losing flexibility is the key to success."

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