Aircraft H. Gousse/Airbus
IndiGo, which so far has relied on Airbus A320s, introduced its first ATR 72-600 turboprop in December.

BRIC MRO Outlook Mixed Over Next Decade

Aging fleets in growing markets jump-start aftermarket growth

The growth-engine darlings of global economists, Brazil, Russia, India, China, and—the BRICs—are closely watched in global air transport circles as well. While all four are projected to see their fleets expand over the next decade, only two—China and India—will achieve growth rates above the industry as a whole, and MRO demand will follow suit, supporting both expanding and maturing narrowbody-dominant fleets. 

While increasingly there is decoupling of MRO growth from broader fundamentals such as traffic demand and GDP trends, the air transport business, for both passengers and freight, remains more closely aligned with global economic conditions. By nearly all measures, business is booming.

Global revenue passenger-kilometers (RPK) increased 7.6% in 2017, International Air Transportation Association (IATA) data show. This year is expected to see a slight slowdown, but global RPK growth should easily surpass the 10-year average of about 5.5% annually. The BRICs—and notably their domestic markets—are playing major roles in this expansion. India recorded a year-over-year increase of 17.5%, while China’s domestic traffic jumped 13.3%. 

“We estimate that such growth rates were driven mainly by the comparatively strong rates of economic expansion seen in each country, as well as stimulus from additional airport pairs being offered,” IATA says.

H. Gousse/Airbus

IndiGo, which so far has relied on Airbus A320s, introduced its first ATR 72-600 turboprop in December.

Both countries are in strong economic growth modes. India’s GDP is projected to average a 6.1% compound annual growth rate (CAGR) through 2022, before slowing to 5.8% annually during the next five years, the Conference Board forecasts. China’s GDP is projected to rise at an average CAGR of 3.8% during the next five years before throttling down to 3.3% in 2023-27.

Economic expansion will help sustain steady air transport development. IATA sees China, currently the world’s second-largest market by passengers generated, becoming the world’s largest market in 2022, surpassing the U.S. India will climb from fifth to third by 2026.

While each country is racing up the global air-transport-market size chart, they are taking different paths, and fleet projections underscore the variations. India’s driver is its domestic market. Data from India’s Directorate General of Civil Aviation shows that the domestic growth pace in 2017 was about double its international expansion rate. A Moody’s report issued in December says combined growth rates will fall to a more moderate 8-10% during the next two years, with domestic travel expected to maintain its place at the top.

India’s fleet is dominated by narrowbodies, and that will not change anytime soon. Aviation Week fleet figures show the country’s carriers will be operating about 670 aircraft by the end of 2018—about half of which are a mix of Airbus A320ceos and Neos. Another 20% of the fleet are Boeing 737-800s. 

AMECO

HNA’s mainland Chinese airlines include Hainan Airlines, the group’s original company, founded in 1993.

Not much is expected to change in a decade, the forecast shows. In 2028, nearly 60% will be Airbus narrowbodies, led by the 620 A320neos the country’s carriers are expected to be operating. The 737 family will grab 30% of the fleet, with the 737-8 leading the way; about 240 are projected to be in service by 2028. The forecast sees the widebody fleet as staying relatively modest, growing from 60 to about 80 aircraft, while large regional jets, led by the Embraer E2 series, will take a few percentage points of market share.

From an aftermarket perspective, the most notable shift in India’s fleet will be its average age. At the end of 2018, only 16% of the fleet will be 10 years old or older. By 2028, this figure climbs to 34%.

An expanding, aging fleet will help drive MRO expansion in India at an average clip of 7.2% annually over the next decade, Aviation Week’s forecast projects. By 2027, annual MRO expenditure will be $3.1 billion, while the market will generate $23.5 billion in current-dollar spending throughout the decade.

Recent government initiatives to help boost MRO business could push these numbers higher. The government in 2016 simplified tax rules and eliminated import duties on parts and machines that had put Indian MRO providers at a disadvantage. The move has helped established MROs such as Air India Engineering Services boost third-party work. The state-owned Indian carrier’s engineering arm did almost no third-party work five years ago. That figure is now closer to 20%, and executives want to see this grow to 50% in the near future—a move that could help India’s blossoming airline industry lessen its reliance on international providers. 

China’s geographic size, population and the rapid evolution of its middle class have combined to give it immense potential as an air transport market. The country’s airline fleet is slated to grow 3.1% annually through 2027, from 3,600 aircraft to 4,800, Aviation Week’s Commercial Fleet and MRO forecast projects. The increase will mean that China’s airlines will operate about 13% of the global fleet in 2028. MRO demand will outpace fleet growth, at 4.8% CAGR, the forecast projects.

As for India, China’s fleet will drive aftermarket demand through both the expansion and maturation of its fleet. China’s current (2018) fleet is still very young, with only 15% having been in service for more than 10 years. By 2028, this figure will jump to 37%, most of which will be in the MRO dollar-generation sweet spot of 11-15 years in service.

Narrowbodies will continue to dominate China’s fleet, with the Boeing 737 family at the top. In 2027, China’s airlines are projected to be operating nearly 1,900 737s, two of every five aircraft in the country’s fleet. The 737-800 will account for most of these, with 1,100 expected to be flying in both passenger and cargo service in a decade. The Airbus A320 family will not be far behind, with a projected in-service fleet of about 1,700 aircraft in a decade.

China’s domestic traffic increase will drive narrowbody growth, but unlike India, its international expansion is supporting a steady diet of new widebody deliveries. Figures released by the Civil Aviation Administration of China (CAAC) show that the country’s international traffic expansion has outpaced domestic growth in each of the last six years, with annual figures of 20% in each of the last three years. The second half of 2017 saw the pace slow a bit, as the top three carriers—Air China, China Eastern, and China Southern—cut back on the pace of international seat expansion in favor of feeding the domestic market.

China’s widebody fleet is projected to grow from about 400 today to 520 by 2027. The A330 family will dominate, accounting for about 220, roughly split between the A330-200 and -300. The 787-9 will be the single most-numerous model, with about 115. Today, more than half of the aircraft are A330s.

A major driver has been the willingness of smaller carriers such as HNA Group’s Hainan Airlines to launch services that bypass major hubs. Major routes such as Beijing-New York go to China’s top three carriers, Air China, China Southern and China Eastern, which—not coincidentally—are state-backed. Leveraging the capabilities of the 787 and other new-generation widebodies, other carriers—often backed by Chinese government subsidies—are flying from smaller Chinese cities to major hubs or to secondary continental gateways such as Boston or Brussels. The strategy is whetting smaller carriers’ appetites for new widebodies.

Long seen by foreign operators as a lower-cost option for labor-intensive services, notably widebody airframe maintenance, China has no shortage of MRO providers. But it appears that the country’s domestic airline growth is beginning to strain MRO capacity—part of a broader regional trend.

Just-released Oliver Wyman data show that about 24% of global widebody airframe checks by non-Asian carriers are being sent to the region—a 6% reduction compared to a similar analysis last year.

In China, external demand and the country’s growth are prompting expansion among its extensive network of MRO providers. For example, Ameco Beijing plans to add 787 and A350 heavy airframe capabilities in 2019 and 2020, respectively, and is working on both the 737 MAX and A320neo families. But at some point, demand will outpace supply, which will lead Chinese operators to supplement their MRO efforts with foreign help.

“There will be an inflection point when capacity growth within Asia cannot keep pace with the MRO demand of its own countries plus that of foreign operators, particularly those in the mature North American and Western European regions,” Oliver Wyman wrote in a 2018 analysis. “While China will be the key driver of MRO spend growth in Asia, rising labor costs, coupled with temporary infrastructure and capacity constraints, are likely to force Chinese operators to look to countries south and east to fulfill maintenance needs.”

Engine MRO faces similar challenges, particularly on the venerable narrowbody CFM International CFM56 and International Aero Engines V2500 powerplants. Ameco reports “rapid growth” in its V2500-A5 overhaul demand, while MTU Maintenance Zhuhai, the joint venture between the Germany-based engine specialist and China Southern, is growing.

Zhuhai, which focuses on V2500s and CFM56s, boosted capacity to 300 shop visits per year with a major expansion in 2012. MTU plans to boost capacity by another 50% in the coming years. The move is part of a strategy to service the local market—China is projected to generate nearly 20% of global V2500 demand in the next decade—while allowing the facility to handle more work from growing worldwide demand, sending more work to the facility to capitalize on its lower cost base compared to its facilities in Germany and Canada.

Russia is showing signs of shaking off recent headwinds, as traffic increased 9.2% in 2017—the fastest rate in three years, IATA figures show. An economic bounce-back is part of the reason, which is putting more passengers on aircraft and encouraging carriers to broaden networks. “A large part” of the expansion is “continued catch-up” in the wake of Transaero’s demise, IATA added. Transaero, which once had a 100-aircraft fleet, went bust in 2015.

Whether the growth leads to an increase in Russia’s domestic fleet remains to be seen. The Aviation Week forecast is betting on no net growth in the next decade, leaving Russia’s fleet at about 830 aircraft. The most notable change will be the fleet mix, as the country’s homegrown Sukhoi Superjet and United Aircraft Corp. MC-21 grab firm holds near the top of the country’s fleet table. The Superjet sits third with about 90 aircraft in service, and will hold that position in a decade with a similar number of in-service aircraft. The MC-21, which is expected to enter service next year, is projected to be the fifth most numerous model in service by 2028, with about 70 aircraft. This would put it right behind the A321 and ahead of the 737-8. The top two models are 737-800 and A320, with 145 and 137 in service, respectively. They are expected to swap positions by 2028, as the 737-800 fleet drops to 135, while the A320 fleet expands to 147.

Russia’s MRO demand is projected to grow at just 0.8% annually during the decade—a function of an aging fleet. Nearly 60% of the current fleet is under 10 years of age, Aviation Week’s figures show. By 2028, the figure will have fallen to about 30%. Total MRO demand during the next decade is projected at $21.4 billion, with a peak year of $2.5 billion forecast for 2023.

The collapse of the ruble in mid-2014 put the country into a three-year tailspin. One silver lining: lower labor costs that give Russian MRO providers leverage to attract work—or at least keep it at home. One senior Russian MRO executive, speaking to Inside MRO in 2016, estimated that less than half of the country’s MRO needs—and almost none of its engine overhaul work—were being met domestically before the economic downturn. That figure is rising and could hit 80% this year.

Brazil’s slow emergence from a multi-year downturn helped keep a damper on growth, as traffic was up only 1.7% in 2017. But brighter times are ahead for the world’s fourth-largest domestic market, with 90 million annual passengers. GDP growth was positive in 2017 after four years of economic contraction. “The market feels better,” said Paulo Sergio Kakinoff, president of Gol, which has the lion’s share of the domestic market, at 36%.

The narrowbody-dominant market will remain split between Airbus and Boeing. The A320ceo tops the list today, closely followed by the 737-800. In a decade, the A320neo will hold the top spot, with 130 aircraft in service, just ahead of the 737-8. The 737-800 and A320ceo will take the next spots. Added together, the families will split the top four spots on Brazil’s fleet list with about 200 aircraft each.

Brazil’s MRO demand will grow at a 2.4% CAGR through 2027, generating $15.1 billion in revenue. The busiest year will be 2026, with $1.7 billion in demand. c

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