Commercial aftermarket providers, facing a mixed bag of positive news and worrisome trends, are on their way to a solid but unspectacular year of growth in 2017, with the airframe maintenance market showing particular sluggishness.
A Canaccord Genuity analysis projects a 1-3% uptick in heavy maintenance volume this year, while airframe MRO pricing will not improve more than 2%. The total market’s projected high-side increase is about 4%, and less growth is a possibility. Shops that perform modifications have brighter prospects, with an expected jump in the mid-to-high-single digits, Canaccord—which bases its outlook on quarterly surveys and publicly available data—projects.
While the airframe MRO growth outlook is weak enough on its own, it looks even more anemic compared with related fundamentals. Canaccord’s outlook for the total MRO market—engines, components, modifications and airframes—shows it growing at up to 7% in 2017. Passengers are cooperating—air traffic demand as measured in revenue passenger kilometers (RPK) jumped 8.1% in the first quarter, well above the rolling 10-year average of about 5.5%, International Air Transport Association figures indicate.
Strong demand is helping drive other areas of the aftermarket. Shop-visit volumes of several popular engine models—notably the CFM International CFM56, International Aero Engines V2500 and General Electric GE90—are increasing as projected. This has engine MRO providers riding a wave that could see year-over-year growth top 10%.
“The strong growth momentum in our MRO business has continued into 2017,” says Reiner Winkler, CEO of MTU, which posted a 21% jump in MRO revenue last year and just logged its sixth consecutive quarter of record revenue. Strong demand for work on V2500s, CF34s, GE90s and GEnxs is driving the growth, which the company projects will hit 10% for the full year.
Aircraft utilization is bolstering component providers as well. Canaccord sees a component MRO growth target for the year in the mid-to-high single digits, even as airlines continue to focus on keeping inventory as lean as possible.
While there is plenty of good news across the MRO landscape, headwinds from familiar directions offer cause for concern. New-parts providers continue to battle an influx of used serviceable material (USM). Canaccord’s first-quarter survey found an eye-opening 27% of purchased parts came from USM stocks. While the company does not expect this trend to hold for nine more months, a full-year figure of 20% is possible.
Lower-than-forecast initial provisioning (IP) continues to be a concern for many component providers because of the popularity of pooling agreements.
Canaccord’s analysis of aftermarket sales for eight component-heavy suppliers it tracks—Crane Aerospace, Heico, Honeywell, Meggitt, Rockwell Collins, TransDigm, United Technologies Aerospace Systems (UTAS) and Woodward—shows year-over-year sales are expected to be up only 2%. UTAS surprised with a 4% year-over-year growth number in the first quarter.
The tepid projections for airframe MRO stem from several sources. Retirements of older, more touch-labor-hungry aircraft picked up again in the second half of 2016, Canaccord Genuity says, while few retirement candidates left in service are being put through additional heavy checks.
“We did not see the widespread step-up in spending on these older aircraft that we anticipated when fuel prices started to drop in late 2014,” Canaccord notes.
Meanwhile, airlines are working on shrinking heavy-check packages to minimize out-of-service time, opting instead for more rigorous workscopes on traditionally lighter checks. And the newest models, led by the Boeing 787, need about half as many heavy checks as their predecessors. Moreover, thanks in large part to greater use of corrosion-free composite material, each check requires fewer manhours.
These trends, combined with excess capacity and airlines’ growing emphasis on shrinking vendor lists, are driving traditional airframe-focused MRO providers, especially those located outside labor-cost-friendly regions, to diversify. And it is working.
AAR Corp. has deepened its push into fleet-support deals with several announcements this year. Among them: a five-year agreement with IndiGo to overhaul Airbus A320 landing-gear shipsets and a component-support deal for Allegiant Air’s growing A320 fleet. Both are new customers. It also added work with existing customers SkyWest, for Bombardier CRJ support, and BlueBird Cargo, for Boeing 737 Classic component support.
AAR President and CEO David Storch believes the wins reflect his company’s expanding focus in response to an evolving market. “What you’re seeing from our vantage point is more of a market-share grab on our part,” he says.
Agreements signed last year with Air New Zealand, for Boeing 777 rotable support, and South African Airways Technical, for power-by-the-hour (PBH) component inventory management and repair, are bearing fruit.
“We’re starting to benefit from some of the investments we have made and some of the actions we’ve taken in prior periods,” Storch says. “I think you [will] see, hopefully, continued performance coming from our parts businesses.”
Aviation Technical Services (ATS), another major, U.S.-based independent MRO provider with deep heavy-maintenance roots, has also been broadening its offerings. It boosted its engineering capabilities, ranging from small projects to full-fleet cabin configurations and even a bespoke Boeing 767 crew rest area for FedEx.
Like AAR, however, ATS’s biggest changes are in the components arena. The company in December 2014 bought Texas Air Composites (TAC), a composite structural fabrication, support and repair specialist. Last September, it added Texas Pneumatics Systems (TPS), which overhauls pneumatic and fuel-related components and systems.
These additions bolstered an already growing structural repair business and have helped the company both bundle and diversify its service offerings. “Three years ago, we were largely a heavy-maintenance business,” ATS President Matt Yerbic says. “That was 60-65% of our business then. The component businesses are a very large chunk of our business now.”
While diversification will remain a key strategy, ATS sees more opportunity in airframe MRO. The long-time Boeing 737 narrowbody heavy-check provider is prepared to offer Airbus narrowbody check services. It has acquired the necessary tooling at its Everett, Washington, facility and is poised to serve North American A320-family operators.
Air France Industries KLM Engineering & Maintenance is another provider that continues to benefit from a broadened focus. Work for external customers, now 43% of its maintenance revenue, increased 16% in 2016, to $1.9 billion. The growth was led by a 17% jump in engine work and a 14% bump in component services. Its third-party revenue breakdown showed 49% of sales from engines, 41% from components and 10% from airframe maintenance.
The Air France-KLM MRO operation conducts about 450 engine shop visits per year and has 1,300 aircraft under some form of support contract as part of its services to 200 third-party customers.
Lufthansa Technik (LHT), with more than 4,100 aircraft under some sort of service contract, offset an 11% decline in internal work with an 8% boost in third-party work last year. Cost pressures forced LHT to close airframe overhaul operations at its Hamburg headquarters and ruled out the location as a candidate for a new joint venture with MTU to open a Pratt & Whitney geared turbofan engine shop.
With a firm share of the traditional maintenance business and facing cost pressures, LHT is among a growing list of companies turning toward the digital frontier. The company states in its most recent annual report that it aims to “play an active role in shaping” the MRO industry’s digital transformation. It purchased a majority stake in data and records management specialist FlyDocs and this year will roll out Condition Analytics, a stand-alone component-condition-monitoring and predictive-maintenance service.
“Data will determine the future of our business to a large degree,” Lufthansa Technik Chairman Johannes Bussmann says.