The Russian aircraft MRO market is shrinking as local airlines reduce their fleets in response to dwindling air transportation demand amid economic difficulties and political tensions. But local providers hope for a quick market recovery and are using the weakening ruble to localize more maintenance technologies and services inside the country to attract both domestic and foreign clients.
The Russian commercial foreign-made fleet reached a peak of 662 aircraft in 2014 before it abruptly fell to 554 airliners in 2015, said Roman Fedorov, financial director of Engineering Holding, one of Russia’s largest maintenance providers, at the MRO Russia & CIS Conference in late February. This is in line with the decrease in number of passengers carried—down 1.2% for 2015 compared to the previous year including a 15.8% slump on international routes that was not offset, even by 13.6% growth on domestic flights.
According to the MRO provider’s estimates, the volume of the Russian MRO market decreased to $1.2 billion in 2015 compared to $1.44 billion a year earlier. Nevertheless, Fedorov believes a recovery will come this year, as the market is forecast to bounce back to $1.4 billion—and then grow to $1.54 billion in 2018.
The shape of the market is also rapidly changing. Fedorov mentions that the weakening ruble is lowering labor costs at local providers. “In some regions of Russia, it is now the lowest in the world, even lower than in China,” he says. As a result, Russian MROs’ share of the local scheduled maintenance market has increased to 60% in 2015 from 45% in 2014. He predicts domestic providers will dominate the market by 2018, with their share skyrocketing to 82%.
The only possible obstacles are low labor productivity and a lack of investment in developing high-margin maintenance technologies in Russia. Fedorov says the productivity of Russian MRO companies is half that of their U.S. and European counterparts, which levels out the labor-cost advantage.
Despite the productivity issues, local providers are better at the most labor-intensive parts of the business than in the more capital-intensive maintenance technologies. For example, half of the Russian MRO market value is derived from engine maintenance—about $600 million-—but only 1% of that is done in Russia. Conversely, 95% of the market’s line maintenance is performed locally.
According to Fedorov, Russian companies are unlikely to develop expertise in capabilities such as landing gear or cabin system repairs without Western partners. The benefits of such combinations would extend beyond the domestic market, to increased global competitiveness. “The development of the successful business is impossible if you focus only [on] the local market,” Federov says.
The Russian provider has had considerable success implementing such a strategy. At the conference, it announced a cooperative agreement with Swiss-based SR Technics to provide CFM56-5B and -7B engine maintenance and on-wing services in Russia. The facility-—to be run by Engineering Holding subsidiary S7 Engineering—will be based at Moscow Domodedovo Airport and is scheduled to be operational by summer. Similar services will be offered in the future at Engineering Holding facilities in Novosibirsk and Mineralnye Vody.
It will be the first effort to service CFM56 engines in Russia since the country’s second-largest airline, Transaero-, which serviced CFM56-7B engines at its in-house repair facility, went bankrupt at the end of 2015. The full engine services will be offered at SR Technics’ facilities in Zurich. The Swiss company is not Engineering Holding’s first foreign partner. Earlier this year, the company signed an agreement with France’s Zodiac Aerospace Services to develop a local repair service for aircraft toilets in Domodedovo. It also established a joint-venture maintenance facility for heat exchangers with Israel’s TAT Technologies at Novosibirsk Tolmachevo Airport.