Aerospace manufacturing “right-shoring” has received significant attention in recent years as a result of shifting comparative advantages and morphing OEM supply chain philosophies. As highlighted in my Feb. 24, 2014, Up Front column, the Southeast U.S. and Mexico are the new hot spots for aerospace manufacturing investments.
But what about maintenance, repair and overhaul (MRO)? Is the same thing happening here? The answer is a qualified “yes.” Consider the following recent investments in labor-intensive airframe heavy maintenance:
•AAR is establishing facilities in Rockford, Illinois, and Lake Charles, Louisiana. The latter will cater to widebody aircraft.
•After years of anticipation, Lufthansa Technik just announced it will open its first major North American heavy maintenance plant, in Puerto Rico.
•Aviation Technical Services recently built a facility in Lake Moses, Washington.
•Airborne Maintenance & Engineering Services not long ago expanded its Wilmington, Ohio, operation to target Airbus A320 heavy maintenance.
•Delta Air Lines and Aeromexico opened a joint heavy maintenance plant in Queretaro, Mexico.
Recent analysis by my firm, ICF International, indicates North America led other regions for major MRO investments in 2012-13, and the momentum appears to be accelerating. Just a few years ago, China gained the most investment.
Underpinning this shift is a convergence of labor rates between North America and Asia. A decade ago, a customer could expect to pay $50-55 per hour for heavy maintenance labor from a U.S. MRO—50% more than at established Asian MROs in Hong Kong or Singapore, and an even larger differential with emerging Chinese MROs. Not surprisingly, North American operators shifted widebody heavy maintenance to Asia. Today, labor rates for North American MROs are nearly the same as a decade ago thanks to the 2008-09 recession and modest wage rises, while rates in Singapore and Hong Kong are approaching $50 per hour. In China, it is around $40 per hour. ICF International expects the labor rates to converge further this decade. Add to this the higher cost of ferry flights to Asia, and it is no surprise that North American operators are increasingly pursuing in-region suppliers for airframe maintenance.
Does this mean MRO investment will inexorably shift to North America? Not necessarily. One way that MRO differs from manufacturing is the significant importance of proximity to maintenance customers. And maintenance spending growth will be led by customers in emerging economies. Today’s $60 billion in air transport maintenance spending will increase to $90 billion in the next decade. Approximately half of this $30 billion growth will come from Asia and the Middle East. North American spending will grow by less than $3 billion. Demand growth inevitably will support increased investment in other regions. So the best explanation for the recent shift in investment is that the days of easy labor arbitrage in Asia are drawing to a close, and new investment in North America reflects the likelihood that more maintenance will take place closer to home.
What is happening in the other major maintenance categories? Aeroengine maintenance is capital-intensive, with labor comprising just 25% of total costs. Logistics, solid processes and skilled labor count for more than low- cost staffing. Operators prefer in-region shops but will ship engines overseas to reach a good vendor. Not surprisingly, most aeroengine MRO facilities are in North America and Europe, although Asia continues to add maintenance facilities. Change here will be gradual, as new engine facilities are expensive to build and plenty of capacity exists for most models.
Component maintenance is much the same in expense as aeroengines, with labor accounting for 40% or less of total costs for most systems. These facilities are much more dispersed than aeroengine shops, and customers want rapid turn times to improve service levels and reduce inventory holdings. Not surprisingly, new component MRO facilities are increasingly clustered around major logistics hubs such as Singapore, London or Dubai. Miami also remains a popular location for serving Latin America.
Comparative advantage in aerospace, like most industries, is ephemeral. A decade ago, the notion of setting up a new widebody maintenance base in the U.S. would have seemed far-fetched. Right-shoring means the decision of where to locate new MRO facilities will be nuanced and reflect the ongoing tension between customer proximity and supplier quality and productivity. Expect the change to continue in the years ahead.
Kevin Michaels is a vice president with ICF International’s Aerospace & MRO consulting practice in Ann Arbor, Michigan.