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MRO Work, Supply Base Consolidating

The expanding MRO market will grow more consolidated as the popular narrowbodies take hold.

The commercial MRO industry is in consolidation mode, as providers respond to customers seeking fewer vendors by adding more services or snapping up complementary businesses. But the figures that underpin two recently released industry forecasts show that the airline aftermarket is marching toward consolidation in more fundamental ways as well. The equipment with the largest share of the MRO revenue pie is growing more dominant, while end-of-life services stand to become more important as the world’s fleet undergoes a massive renewal, pushing retirements to record levels.

Aviation Week’s latest Commercial Fleet and MRO forecast, released in late fall and covering the 10-year period through 2024, shows that 62% of current-year MRO demand of $56.3 billion is generated by 10 aircraft variants, with the Airbus A320 leading the way at $7.1 billon, just ahead of the Boeing 737NG. The rest of the top 10 will generate between $2.2 billion-3 billion in work this year. They are the 777-200, 747-400, 777-300ER, A319, 757, A300-300, A330-200 and A321.

In a decade, the MRO market is expected to be $85.2 billion, Aviation Week’s figures show. The top 10 will hold about the same share of the market, but the 737NG will lead, at $12.0 billion, followed by the A320, at $9.4 billion and the 777-300ER, at $6.6 billion.

The rest of the top 10—the A321, 737MAX, A320neo, A330-300, A380, A330-200 and A319—will each account for $2.4 billion-4.4 billion. Eight of the top 10 MRO platforms will be in the top 10 aircraft as measured by fleet size as well (see chart). Two widebodies, the A380 and A330-200, will generate enough MRO demand to put them into 2024’s top 10, ahead of larger ATR 72 and Embraer 190/195 fleets.

The most recent forecast by Cavok, formerly Team SAI, shows the landscape from a broader perspective. While Aviation Week’s breakdown places common variants, like the A320ceo and A320neo, in different categories, Cavok’s assumptions combine them.

In Cavok’s projections, 85% of the current-year MRO spend of $67 billion will be generated by what it categorizes as the top 10 aircraft types. By 2025, this figure will grow to 88%, led by the A320ceo/neo, 737NG/MAX, 777 and A330, which are Cavok’s top four models today and are projected to remain atop 2025’s list in the same order.

The A330 and 747 are the two other fleet types in the 2015 top 10 that will remain there in a decade, Cavok pro-jects. New entrants on Cavok’s 2025 top 10 list are the 787, A350, A380, Embraer’s E-Jets, and the ATR family.

“Given the transition to newer generational aircraft . . . it is clear that MROs must be prepared to handle the type of activities associated with this changing mix, or focus their strategy to capture end-of-life markets,” Cavok says.

As the decade progresses and new A320 and 737 variants come online, concentration at the very top will become even more pronounced. The A320’s $16.2 billion in demand in 2015 will climb to $27.9 billion in 2025, while the newer 737s will see aftermarket spending go from $9.5 billion to $22.7 billion.

“To put this growth in perspective, the 2015 MRO spend of the 737 fleet is currently comparable to that of the third-largest fleet,” the 777 “at $9 billion, “yet by 2025 the 737 MRO spend will be nearly double the 777 despite relative rankings remaining unchanged,” Cavok notes. “In fact, by 2025, the A320 family and 737 series combined are forecast to constitute a greater share of the combined MRO market of all other fleet types.”

The 737NG and A320’s combined 38% share of MRO spend in 2015 is expected to rise, to more than 50% in a decade. These figures follow Aviation Week’s breakdown of each family by variant, in terms of fleet sizes (see chart). The combined A320 and 737 fleet is expected to account for 44% of the global air transport aircraft population by the end of 2015, Aviation Week’s figures show. By 2024, this figure will rise to 52%.

“Newer, less diverse aircraft fleets will test providers’ ability to compete,” the Aviation Week forecast says.

The flip side of new deliveries helping reshape the world transport fleet is a record retirement level. Twenty years ago, an annual figure of 200 retirements was considered brisk. Now most forecasters expect retirements to hit the 1,000-per-year mark sometime in the next decade. Aviation Week sees this happening in 2021, and surpassing 1,200 in 2023. The forecast also indicates that 9,100 aircraft, including 1,198 freighters, will retire in the coming decade through 2024, nearly doubling the 4,700 aircraft retired in 2004-13. Deliveries by the end of 2024 will total 20,672, including 301 new freighters, leaving a fleet of 40,638 at the start of 2025. 

Aviation Week data indicate “that 45% of the newly delivered aircraft for this decade will be ‘replacement’ aircraft. In the recent past, replacements only comprised approximately 20% of the market. Also of note is that the pace of parked aircraft has slowed, and returns-to-service from a parked status increased . . . signaling operators are utilizing their base asset capacity very efficiently.”

Part of the new life for some older and parked aircraft can be explained by the drop in fuel prices. While operators are largely sticking to long-term fleet-planning assumptions that have oil at about $100 per barrel—a level Brent crude has not seen in more than six months—the low oil price environment is providing case-by-case opportunities. 

Lessor AerCap earlier this year sold two A340s and one 747 that it had earmarked for teardown. But such assets are only flying for so long, cautions Executive Director Aengus Kelly.

“Airlines that we have those aircraft on lease with, with the current low-fuel environment, are taking those relatively fuel-inefficient aircraft and putting them into service for a few more years,” he explains.

The in-service hard-stop continues to be driven by maintenance schedules, and to some extent passenger experience demands, rather than the end of the airframe’s economic useful life.

“To overhaul four engines on a 747 or A340, plus overhaul the cabin—if you’re going to upgrade it every few years, as airlines do with their new business product—between those two events you’re looking at $30 million of capital spend,” he says. “And no airline is going to do that, because they know [over time, fuel will rise].”

The growing pool of retiring aircraft creates opportunities for an expanding part of the industry: used serviceable material specialists. Their evolution is a microcosm of bigger-picture consolidation trends that are reshaping the MRO provider segment.

Companies like AJ Walter (AJW) and AeroTurbine have taken the competencies required to run successful parts sourcing and repair businesses, added the insight they have into their customers’ needs, and built massive, multi-vertical service offerings that make them both more useful to existing customers and appealing to new ones.

AeroTurbine manages logistics for Moog’s aftermarket support business, and last year launched a technical services division that helps operators and aircraft owners manage tasks like end-of-lease records transfers. 

AJW recently won a multi-year deal to supply component maintenance, parts logistics, and consumables to EasyJet—part of the carrier’s top-to-bottom re-tender of its maintenance services with an eye on lower costs.

“We considered a variety of service options from providers, looking at each part of the program separately, versus the multi-specialist approach provided by AJW,” explains Warwick Brady, the carrier’s CFO, citing the supplier’s “best offer for the complete bundle of services” as a determining factor. Another major differentiator: the supplier’s AJW Technique component repair and overhaul center in Montreal, which the company snapped up in 2012 as part of the divestiture of former Canadian MRO Aveos’s assets.

As airlines push to streamline their operations, a vendor’s versatility becomes a strategic advantage. AAR Corp. is best known on the civil side for its heavy maintenance services—it is the world’s largest independent MRO provider—but its executives are most bullish on recent pushes into supply chain services, including consumables management for larger airlines and component support. AeroTurbine is part of AerCap, which has a fleet of 1,300 aircraft that it will continually turn over, providing a steady flow of equipment that AeroTurbine can use to support its customers—and potentially offering AerCap customers with a familiar source for disposing of older inventory. 

Much of the consolidation and service expansion is around the engine and component businesses—no surprise considering their current shares of the MRO market and projected trajectories.

Cavok’s forecast has engine MRO’s share of the current market at 41%, or $27.9 billion. Among the four major MRO segments, it will grow at the fastest rate—a 5.3% CAGR clip that will see it reach $46.8 billion in 2025, when it will generate 47% of the global MRO spend.

Component work will climb from $12.4 billion to $19.2 billion in the decade, a 4.4% compound annual growth rate (CAGR) that will give it the second-largest share of MRO spend, 19%, in 2025. Widebody engine work has the lion’s share, at 48% or $13.1 billion, with mainline narrowbody work at about 40%, or $11.2 billion. The balance is shared among regional jets and turboprops. The top spots will change by 2025, Cavok projects, with narrowbody engine work at 48%, or $22.4 billion, and widebody powerplants close behind at $21.1 billion, or 45%.

Climbing to third in total share over the next decade will be line maintenance, from $12.3 billion to $17.8 billion in 2025, or a 3.7% CAGR.

Falling from second to fourth in total share will be airframe MRO, moving from $14.5 billion today to $16.7 billion, or a 1.4% CAGR. The slow growth rate is directly tied to the evolution of composite airframes, which do not crack or corrode, and therefore will require less maintenance.

The good news is that established models with large sizes of mid-life fleets still flying—fewer than 10% of the 1,050 757s built are retired, for instance—which means ample opportunity for traditional airframe providers.

“From an airframe MRO perspective, providers must be able to address the demands of new composite and metal matrix airframe materials that are present in the newest generation of aircraft such as the 787 and A350,” -Cavok notes. “At the other end of the spectrum, the 757/767 fleet will still account for over 2% of the global MRO market in 2025, meaning those with proven 757/767 capabilities and competencies should be well-positioned to capitalize on the extended life of these aircraft.”

The reduction in touch-labor requirements for composites combined with rising labor rates in developing markets will create opportunities for MRO providers in mature, higher-cost markets to keep work home. Aviation Week’s forecast has North American operators generating 28% of the total share of airframe demand work in 2015, tops among world regions, and it will still hold 20% in 2024, behind Asia-Pacific. Lower labor costs in places such as China have helped Asia-Pacific grab a disproportionate share of airframe work—particularly widebodies—in the last decade or so, but signs indicate this is changing. Evidence includes new widebody MRO capacity built by U.S.-based providers such as Aviation Technical Services and AAR Corp., including the latter’s greenfield facility in Rockford, Illinois.

Cavok calculates that North America generates $2.4 billion per year in airframe demand, and about 25% of it is shipped to other regions. “An examination of the flow of maintenance work among and between regions reveals that North America contracts more airframe maintenance to the rest of the world than it provides to other regions,” Cavok notes. “Structural characteristics in the global economy such as labor rate differentials and complex supply chains have led to these trends; however, as the differentiators between developed and developing regions narrow, North America will be ripe to repatriate airframe maintenance currently contracted to other regions.”

Adds Cavok Vice President Dave Marcontell: “We know from discussions with operators and MRO providers that there is substantial and extensive conversation to bring aircraft back.”

Cavok forecasts the delivery of 18,068 new passenger aircraft and 423 new cargo aircraft through 2025, and the retirement of 7,346 passenger aircraft and 664 cargo aircraft over the same period. Under Cavok’s assumptions, the current fleet of 23,927 aircraft will grow at a 3.7% CAGR to 34,408 aircraft, and 57% of deliveries will be for growth. Cavok’s figures show that 33% of the current fleet will be retired in the next decade. 

Top In-Service Fleets by Aircraft Model 2015 vs. 2024

2024 Rank

Aircraft Model 2015* % Total 2024* % Total Compound Annual Growth Rate (2015-24)
1 737-6/7/8/900 5,445 18.20% 5,880 14.50% 0.90%
2 A320 3,811 12.70% 3,835 9.40% 0.10%
3 737 MAX 0 0.00% 3,817 9.40% NA
4 A320neo 12 0.00% 3,271 8.00% 86.50%
5 A321 1,190 4.00% 1,426 3.50% 2.00%
6 ATR72 740 2.50% 1,402 3.40% 7.40%
7 A319 1,352 4.50% 1,117 2.70% -2.10%
8 777-300ER 614 2.10% 991 2.40% 5.50%
9 A321neo 0 0.00% 898 2.20% NA
10 E190/195 703 2.40% 885 2.20% 2.60%
11 787-9 63 0.20% 875 2.20% 34.00%
12 787-8 324 1.10% 865 2.10% 11.50%
13 A350-900 60 0.20% 855 2.10% 34.30%
14 E170/175 526 1.80% 822 2.00% 5.10%
15 A330-300 616 2.10% 731 1.80% 1.90%
16 Q400 490 1.60% 656 1.60% 3.30%
17 A330-200 555 1.90% 631 1.60% 1.40%
18 CRJ700/900/100 757 2.50% 612 1.50% -2.30%
19 A330neo 0 0.00% 600 1.50% NA
20 757 850 2.80% 478 1.20% -6.20%
* projected fleet totals as of Dec. 31
Source: Aviation Week Commercial Fleet & MRO Forecast

 

 

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