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Technology, Strategy Shifts Reshape Growing MRO Market

Retirements are down, MRO efficiency is up—what’s it all mean for the aftermarket?

The MRO universe is in a period of steady, widespread change. Among the shifts: Manufacturers are grabbing larger shares of the aftermarket pie, and used parts are playing an ever-increasing role in both airline and service-provider strategies. Carriers also seem to be getting more efficient at managing maintenance, which may explain why a long-awaited, post-downturn aftermarket snapback has yet to materialize.

Alongside the change is one enduring constant, however: top-line growth. As the global fleet expands, so does demand for aftermarket work. Aviation Week’s latest Commercial Fleet & MRO Forecast projects new deliveries climbing from 1,800 in 2016 to more than 2,300 in 2019—part of an increase  of about 10,800 aircraft in 2016-25. The jump from 31,800 commercial aircraft in 2016 to 42,600 in 2025 represents a 3.3% compound annual growth rate (CAGR).

Even with historically high retirement levels of older, maintenance-hungry aircraft—the forecast projects an annual average of nearly 1,000 retirements through 2025—the outlook for MRO demand is solid. The projection sees MRO spending rising at a 4.1% CAGR and totaling $774.8 billion for 2016-25. Annual figures will hit $63.2 billion in 2016 and rise steadily to $90.5 billion in 2025.

Advancing technology and the related high percentage of materials costs means the engine market will dominate aftermarket demand, accounting for 36%, or $282.1 billion, of the 10-year total. It will also be the fastest-growing, at a 5.3% CAGR.

Shifting trends, such as the ability to swap components quickly mean more work is being done without pulling aircraft out of service, which is driving up the line maintenance category. Line work will account for 26% of the spend, $201.8 billion, during the decade, a 2.7% CAGR. “This reflects major manufacturers’ economic maintenance assumptions and the fact that traditionally heavy airframe-work tasks are steadily migrating to light airframe checks—such as those done during transit and in weekly checks—thereby adjusting the cost burden accordingly,” the forecast’s Market Summary Report explains.

The component segment is projected to be the third most lucrative during the forecast period, totaling $172 billion, or 22% of total MRO demand with a 3.7% CAGR. It is also arguably undergoing the most disruption.

As suppliers increase their products’ technology and reliability, complex components for models such as the Airbus A350 and Boeing 787 are needed less often than on earlier-generation aircraft. The downside is these parts are more expensive. This is boosting the appeal of flight-hour support agreements and multiple-carrier spares pooling, which can save airlines from major cash outlays for initial provisioning (IP) while providing access to spares throughout their route networks.

The trend is benefiting traditional MRO providers, such as Air France Industries-KLM Engineering & Maintenance and Lufthansa Technik, which have long leveraged their airline-MRO pedigrees and broad logistics networks to provide global support. But Airbus and Boeing customer support executives believe they are in strategic positions to provide component support to airline customers, particularly on the newest platforms.

Boeing has about 1,700 aircraft under material management agreements, including some that involve MRO and supplier partners. Joe Dunne, director of material management services for Boeing Commercial Aviation Services, says an OEM’s inventory access gives it a leg up on pure-play aftermarket providers.

Pierre Yves Reville, Airbus vice president of services-solutions, says fewer airlines are investing in dedicated IP spares packages for new fleets, which can run anywhere from $10-20 million for an airframe with access to used parts inventories, such as for Boeing 777s or Airbus A330s, to twice that and more for the newest aircraft. Instead, they are turning to pools, which offer predictability and flexible financial terms.

This, Reville says, makes offerings such as Airbus’s Flight Hour Service (FHS) more appealing, adding that access to a pool of 600-800 A350 components would cost $15-20 per flight hour.

Airbus in July landed the first of what it expects to be many deals for A350 aftermarket support, component-support services work for Vietnam Airlines’ 14-aircraft fleet.

The 12-year FHS Component agreement, signed during the airline’s June 30, 2015, first-delivery ceremonies, provides guaranteed access to line-replaceable units and pool access to spare parts. Spares will be stocked in Hanoi and certain outstations.

Meanwhile, the technology in the newest aircraft designs will change the airframe MRO landscape as well. Miika Haatio, head of A350 fleet engineering for European launch customer Finnair, cited the aircraft’s 12-year heavy check intervals as a major cost-reduction driver compared to the current six-year standard for aircraft such as the Airbus A340. The increased use of corrosion-resistant composites and titanium is the main reason for lower heavy-check costs, part of overall lower operating costs the A350 and its contemporaries will deliver.

“The aircraft is a step change in [just] about everything,” Haatio tells Aviation Week. “We expect fuel savings, better maintainability and maintenance savings.”

The less maintenance-hungry new designs, along with the normal multiyear maintenance honeymoon all new aircraft enjoy and a shift to doing work outside of heavy checks, will help temper airframe MRO growth during the next decade. The Aviation Week forecast sees airframe MROs’ share of the total aftermarket shrinking to about 9% in 2025 from 10% in 2016. Despite the increased efficiencies, the 2016 global demand for airframe work of about $6 billion will rise to $8.6 billion in 2025—a 43% increase, outpacing the 34% global fleet increase in the same period.

Macro variables, such as the recent run of low fuel prices, have created some uncertainty in near-term forecasts. Retirement rates have tailed off as airlines keep suddenly cheaper-to-operate older aircraft in service to meet rising demand. International Air Transport Association (IATA) figures show global passenger demand rose 6.7% for the nine months ended Sept. 30, 2015, compared to 2014, while capacity was up 6.0%. At least some of that demand is being filled by aircraft that would be parked if oil prices had not fallen 50% in 2014 and settled there.

Canaccord Genuity calculates the 2015 global fleet retirement rate will be less than 2%, “well below the five-year average of 3.1% and 10-year average of 2.7%.” The change is enough to provide an aftermarket bump while not disrupting OEM backlogs, Canaccord believes.

Just when—or if—such trends will manifest in above-average aftermarket growth remains to be seen. The global economic slump at the end of the last decade sent airlines into ultraconservative mode, curtailing growth plans and pushing off nonessential expenditures. For MRO providers, this meant deferred maintenance, such as eliminating nice-to-have repairs or minimizing overhaul work scopes to focus on required work. Since airlines’ bottom lines bounced back early this decade, the MRO world has waited for pent-up demand to be released. As the calendar changes from 2015 to 2016, the wait continues.

“We firmly believe we will see an uptick in 2016 against easier comps, but also as a result of the continued use of older aircraft that will finally start to see some maintenance,” Canaccord analysts say. Their best guess for aftermarket growth in 2016 is mid- to high-single-digits compared to 2015. While not bad, it is not much different from current traffic-growth rates logged by IATA, suggesting an above-average snapback may never come.

The reasons behind the lack of a major aftermarket rebound are anybody’s guess. Among the factors most often cited as surefire contributors are improved airline efficiency and the increased prevalence of used serviceable material (USM).

Airlines are becoming wiser about scheduling airframe and engine visits. Tactics include breaking up tasks and spreading them out over several overhauls, avoiding costly one-time repairs. Carriers are also better at managing inventory, helped by the growth in material management services by aftermarket providers such as AAR Corp. Greater efficiency means lower costs.

Another cost-reduction driver is USM. Canaccord’s third-quarter 2015 aftermarket survey showed 74% of all parts purchased were sourced from OEMs, while 19% were USM and the rest were new parts manufacturer approval (PMA) parts. These figures show a slight uptick in new parts and drop in USM from the previous quarter, but the macro trend is unmistakable.

“We expect USM to continue to be a key part of the market moving forward, and . . . view this as a structural change in the market,” Canaccord says.

Another clear trend is an emerging tussle between airlines, MRO providers and OEMs over who will control the aftermarket process. New-technology aircraft and shifts to strategies such as parts pooling, per-flight-hour support agreements, more efficient work scopes and even increased USM usage have one common factor: increased use of reliability data. Operators produce it, OEMs track it and MRO providers rely on it. Figuring out who actually owns it—and how to best leverage it—will go a long way toward determining who will take home the biggest slices of the growing aftermarket revenue pie. 

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