There will be a tendency for engine and component repair and overhaul to increasingly rely on OEMs. Even airframe OEMs are becoming MRO integrators.
Because the OEM business model has shifted from its original purpose of creating products to a reliance on aftermarket revenues to ensure profitability, discounts on list prices mean OEMs are cross-subsidizing sales with aftermarket revenues.
OEMs are also launching more patents to secure first-mover advantage as a means to delay or prevent rivals bringing competing products to market. This is complicating the mission and purpose of MROs. There is nothing wrong with patents; they hold many benefits. But industry players should be ready to license innovations that are essential to the aviation industry on fair, reasonable and nondiscriminatory terms; otherwise the welfare of the whole industry will be threatened.
The negative side to this is when OEMs start restricting the necessary technical documentation and supply parts support, invoking intellectual property rights that can reflect what is called copyright misuse. This is cause for alarm, as operators know that over-reliance on OEM services could mean that a decade from now there could be a very limited number of MROs in the marketplace, and their prices could easily escalate to unacceptable values.
The MRO industry will adjust to newer-generation aircraft and to large-scale fleet replacements. In Europe, that replacement is forecast to be around a 40% rate for the next decade. These new aircraft are NextGen and Single European Sky “ready.” They are designed for lower operating and airframe maintenance costs due to heavy reliance on the use of noncorroding advanced composite structures, which eliminate a lot of the nonroutine maintenance in the airframe, in spite of the presence of bearable visible damage scenarios.
Most mechanics and trainees will have much less time to access aircraft than before given the decreased downtime coupled with airport and airline security constraints. Virtual learning and desktop simulation-based training will increase in importance.
There will be a marked demand for stronger maintenance control centers and advanced IT expertise among engineering staffs to address the challenges of the e-enablement services and processes, and the handling of the vast amount of data generated by airplanes and sent to the ground systems.
Operating leases will be on the increase worldwide and lessors will control well over 50% of the global fleet in the next decade. Aircraft cross-border movements and airworthiness jurisdiction changes associated with ever more stringent regulatory processes will hike up the cost of compliance with the return and redelivery conditions. The maintenance checks, painting and growth of cabin refurbishments, frequently associated with inflight entertainment and connectivity installations, will require a higher level of engineering design and execution work, which will create great opportunities for MROs and, in Europe, for their associated European Aviation Safety Agency-approved design organizations.
And finally, a word about the migration of MRO services: Asia is still driving the growth of the global MRO market, but labor costs there are soaring, currencies are rising annually, and if ferry costs are rolled in, the attraction of a cheap China for MRO services will gradually fade, which means a number of operators will look further into their domestic Western markets for airframe maintenance options.
At Magnetic MRO, we see these key trends now shaping the European MRO industry:
• An accelerated trend of financial and maintenance products are being blended into one MRO solution for the end customer. Some power-by-the-hour programs are becoming a mix of financial hedging and an engineering solutioAt Magnetic MRO, we see these key trends now shaping the European MRO industry:n. Asset and lease buybacks are part of a large number of component and engine MRO deals. It is becoming more challenging for pure hangar-based operations to stay competitive in these capital-intensive MRO projects. It also creates brand-new risks for MROs—business models are now being based on the lowest-ever capital costs and there is also an overall lack of financial risk-modeling know-how and management procedures within engineering-driven MROs.
• Eastern Europe/Commonwealth of Independent States are no longer markets where older Boeing 737s and Airbus 320s fly out their green life. There has been a major shift toward a pipeline of new aircraft orders and deliveries, which will reduce the percentage of heavy maintenance expenses in the overall MRO market mix. Hangar-based MROs will face a reality-check of their business model in the next few years. Those that do not evolve their business models will either become extinct or be targets for consolidation. A large number of MROs in Eastern Europe were historically developed as hangar-based operations in a low-cost labor zone—a business model that is no longer sustainable.
• Geopolitical risks and mixed messages about the European economy put pressure on passenger volumes and load factors. This results in a two-way impact on the European MRO market. First, it pushes airlines to review and accelerate retirement plans for older-generation, less-fuel-efficient fleets. It has a direct negative effect on the values of part-out components and load factors for labor-intensive MRO volumes such as component repairs. Second, it pushes major European operators, especially incumbents, to face the brutal facts on costs and service levels of in-house versus outsourced MRO services. We sense that our customers now have more political resolve for the possible outsourcing of major segments of MRO services by large incumbent airlines, even if it goes against prevailing in-house labor relations. These were forged in the 1990s, when completely different economic realities were in play. This is an encouraging trend for independent, cost-efficient MROs, but a threat for technical departments of major airlines, which are often steered away from independent alternatives.
• OEMs in MRO markets: At Magnetic MRO we do not subscribe to an ‘us versus them’ view between independent MROs and OEMs. A completely new MRO ecosystem is taking shape, and OEMs will play a major role as technical data centers, as they are the ones that developed the product. However OEMs will need external, independent MRO partners to execute their MRO service contracts. It is a complex task to turn an engineering-minded product manufacturer into a customer-focused service company. A natural, faster, more efficient alternative is to use the networks of MRO service organizations to execute complex OEM service contracts. Manufacturers such as Boeing, Bombardier and Airbus are realizing that, and seem to believe there is a firm place for independent MROs in this new MRO ecosystem.
Adria Airways Tehnika, as an independent MRO that performs airframe maintenance for Airbus A320s and Bombardier CRJs, faces multiple changes in the MRO market in Europe, Russia and the Middle East—our target markets.
There is still overcapacity and fierce competition among the more than 40 MRO organizations in Europe, North Africa and the Middle East for A320 and CRJ maintenance—and much of this comes from global players—but our strengths include flexibility, operational experience and geographical location.
The European market is more active than in recent years, and in all segments there is increased pressure on prices, payment terms and other incentives.
The conflicts in Iraq and Libya destroyed a great portion of their fleets and infrastructure, and curtailed fleet utilization.
We also experienced lower activity in the Russian market; work is increasingly being kept in-country. In general, we are very concerned about developments in Ukraine and the Middle East, which might affect our industry.
MROs today face demand from the market and customers to be more diverse—no matter what the product or core activity the MRO provider is offering.
In Europe, labor-intense products have to compete with other world areas with lower costs, therefore specialization on MRO tasks that require more expertise, as well as increasing productivity are a must for MRO providers here.
And when it comes to parts-intensive products, the situation is not much better, because prices are driven by OEMs as are the extent of repairs. So in many cases, surplus parts cost less than the repair itself. In the near future, we expect to see more alliances between MROs and OEMs for specific components and for particular projects. On the other hand, MROs will drive efforts to access parts from tear-down aircraft in good economic condition to overcome the ever escalating cost increases related to new parts.
It might make sense then to consider another step forward, based this time on the resources rather than just the product.
Take a look at the scope of the training and knowledge base of our workforce. Changes there would allow future maintenance technicians to execute tasks with a higher level of complexity, reducing even further the specialization silos in place now. It means that one individual or group will have the ability to execute tasks without having to overlap with other technicians or departments. All of this would increase the efficiency of the workforce.
Diversification is going to be needed to survive. To achieve it, expertise will be a key factor for success. MROs that focus on return on investment will develop competitive advantages that may allow them to retain and even gain market share in the aftermarket environment.
But I caution that there is some uncertainty about these trends and how the MRO market will develop in the near future, which makes it difficult to forecast.
The current introduction of a number of new aircraft types presents the MRO sector with a variety of challenges. Substantial investments in equipment and know-how are required in order to deal, for example, with electronic systems that are ever more integrated and complex—or the use of composite materials as primary structure.
Lufthansa Technik has maintained a high level of commitment to research and development for decades, but the company is now substantially increasing these efforts. We are focusing on computer-aided automated diagnostic systems for the early detection and assessment of material damage, as well as robot-based procedures to ensure rapid and consistently high-quality execution of composite material repairs, to name just two examples.
In view of the rising cost of aircraft fuel, another focus of our team is the development of applications that are easy to integrate in regular operations and that aim for the greatest possible efficiency of the aircraft and its engines.
Member of the Executive Board of MTU Aero Engines • President MTU Maintenance
The MRO market is in a transition period in which older equipment is increasingly being replaced by newer aircraft and engines. This is the result of technological advances as well as structural and operational changes within the aviation industry. New engines remain much longer on-wing and will see fewer shop visits throughout the life cycle. Further, they are far more difficult to maintain, overhaul and repair from a technological standpoint. As a result, competition is continuously increasing, especially on older-technology engines where fleet sizes are slowly but surely declining.
In the medium to longer term, we anticipate that this will foster both an industry consolidation toward large, strong players as well as the emergence of highly specialized niche players. Meanwhile, the increased availability of surplus parts and engines for older equipment is giving rise to a new breed of competitors, with a focus on solutions for aging engines. From an MRO perspective, the ability to use surplus material provides not only the chance to offer customers cost-effective alternative solutions but also potentially to gain access to fleets that have previously been under OEM coverage.
For older engine types, the desire to place engines exclusively under OEM contract is decreasing as the market provides increasingly attractive alternatives. Operators typically prefer to evaluate their options on a case-by-case, engine-serial-number basis.
This industry shift is occurring in tandem with heightened customer interest in asset and material management solutions that are designed to optimize engine value throughout the final phases of the engine life cycle.
Over the longer term, increasing OEM penetration into the aftermarket for newer engines represents the most significant challenge for the global MRO Industry. It is fortunate that MTU Aero Engines maintains a hybrid business structure. On one hand, we operate in close alliance with the OEM for certain engine programs as a risk- and revenue-sharing partner. For other programs, we maintain a distinctly independent approach as MTU Maintenance. Regardless of the program, meeting customer expectations is our highest priority.
There is pressure on cash-strapped airlines in Europe—everyone in the supply chain will be affected by European Commission Regulation 261. The industry is seeking clarity as to the rights contained within the regulation following denied boarding, canceled or delayed flights. On our part, AJW is pursuing areas of additional support in which we can help our customers cope with the potential problems this legislation may cause.
It is clearly nonsense to suggest that airlines would deliberately fully ignore safety issues in an effort to meet punctuality targets. Airlines cannot exist without proper safety systems. However, adding increased pressure on airlines to turn aircraft around in the midst of a technical issue (now that the courts have decided it is a normal function of the aviation world) will mean extra pressure on the entire operation, which inevitably includes safety.
No airline is in business to delay its aircraft. Delays are costly—aircraft are expensive assets, and there are major cost implications if they are grounded for any length of time. It is in every airline’s interest, and a legal obligation, to keep aircraft properly maintained—any unanticipated technical issue is a problem. The costs associated with this legislation, particularly in the MRO arena, will have to be accounted for somewhere and ultimately these affect the consumer with increased costs of flights.
AJW is focusing on helping operators in Europe deal with this issue through extra pool capacity, ever-faster repair shop turnaround times and improved reliability. Not only do we have a global fleet of more than 500 aircraft under power-by-the-hour, we also have more than 20,000,000 flight hours of fleet and component reliability data. Very few organizations can match our experience, which allows us to challenge “normal” practices and truly innovate within the industry.
However we see the OEMs struggling to meet the supply agreements mandated by the airframe manufacturers. This continues to affect our pool capacity, which we have to supplement with additional investment to meet demand.
Within Europe PMA parts are still a taboo subject despite the savings that can be made. It is a common misconception that PMA reduces value. Many lessors actually prohibit the use of PMA through fear of value reduction; but with the exception of safety critical and engine components, value remains unchanged long term.
Designated Engineering Representative (DER) repairs also are viewed with scepticism, even though major airlines and OEMs embrace DER options in the component repair cycle. When labor outweighs the costs of parts, DER saves hundreds of dollars.
A version of this article appears in the October 6 issue of Aviation Week & Space Technology.