Printed headline: Invest to Build
Following the mergers of some of the region’s largest carriers five years ago, low fuel costs and interest rates have added to a positive climate in North America, where airlines are enjoying sustained profitability and aftermarket demand is strong.
The region will remain the world’s largest MRO market over the next 10 years, with Aviation Week’s MRO Fleet & Forecast data predicting cumulative spending of $229.7 billion in the commercial segment over the decade. Most of this will be generated by the components segment, which Aviation Week estimates will account for 36% of total MRO spending in the next 10 years, followed by engine maintenance (31%).
In a competitive MRO segment characterized by increasingly service-centric airframe and engine OEMs along with independent providers vying for business, North America is also seeing a lot of investment activity by airline maintenance divisions exuding a newfound confidence from their sustained profitability.
The current climate also has fostered a step-change in the way airlines operate, says Jonathan Berger, managing director of New York-based Alton Aviation Consultancy. “Now that airlines are making consistent profits, they are actually starting to compete on product quality once again,” he says. “This has been a boon for the cabin interiors business: aircraft modifications and retrofits with new lie-flat business-class seats, premium-economy seats and high-speed Wi-Fi.”
Berger also says their profitability has given airlines greater strength in their supplier relationships, especially with OEMs. “Compared to the past, airlines have much more negotiating power and leverage with their suppliers—a reversal of the supply chain power dynamics,” he says. “This is driving the big airframe OEMs to squeeze their Tier 1 OEM suppliers, who in turn further squeeze the Tier 2 suppliers, and so on.”
While the airline-OEM relationship is evolving, one area that has not changed much in North America is the MRO strategy used by low-cost carriers, Berger notes. Many are remaining true to their original business model and opting to outsource. This route is strongly favored by carriers like JetBlue Airways, which outsourced more than any other U.S. airline in 2016. According to FAA Form 41 figures, 74% of its maintenance in 2016 was entrusted to third parties, up from 44% 10 years ago.
Bringing Work In-House
Other airlines have actively taken some of their previously outsourced work in-house. American Airlines, the world’s largest airline by fleet size and the biggest MRO spender in the U.S., outsourced 38% of its maintenance in 2016, the smallest portion of MRO for an airline in the region, according to FAA figures.
In November 2017, American confirmed plans to bring CFM56-5B engine maintenance in-house at its workshop in Tulsa, Oklahoma, where it already conducts CFM56-7B overhauls, along with GE CF6 engines for the Boeing 767 fleet and the last run of the Pratt & Whitney JT8D for the soon-to-be-retired MD80 aircraft. The carrier intends to allocate repairs for the CFM56-5B, which powers its fleet of A230-family aircraft to its maintenance teams by October after putting the work up for bid to GE Engines, which previously oversaw the repairs.
David Seymour, senior vice president of integrated operations at American Airlines, says the combined volume of both CFM engine types played a role, which he estimates will stand at about 950 engines. “We found that the CFM56-5 and -7 share around 80% part commonality,” he says. “There’s a lot of opportunity to manage the parts, as they account for the biggest cost in engine overhauls. So it made a lot of economic sense.” Seymour says in the long term, consistent work in high volumes is the kind American hopes to undertake as an airline, with all its repair focus fixed solely on its own fleet and with no desire to become a third-party MRO provider.
American is certainly not alone in bringing certain capabilities in-house—the trend is gaining steam at some airlines south of the border, too. Aeromexico brought C check services on its Boeing 787 to its facility in Mexico City, having previously outsourced the first five of the checks on the aircraft to Boeing Shanghai. Interjet, another airline from Mexico, is a rare example of a low-cost carrier building in-house maintenance capabilities. According to the airline, the decision to build up its in-house MRO capacity was made to reduce direct and indirect maintenance costs through taking ownership of its own labor costs and resources. It is also looking to establish itself as a third-party MRO provider.
Another common theme of the North American MRO market is airline maintenance divisions adding to existing capacity. U.S. carrier Silver Airways, headquartered in Fort Lauderdale, Florida, operates a much smaller fleet than American and United, comprising 22 Saab 340B turboprop aircraft. Starting this summer, ATR 42-600 and 72-600s will come into its fleet, with the Saabs expected to be retired by 2020.
With relatively few MRO providers in North America for the aircraft it currently operates, Silver sought to strengthen its maintenance operation by taking the majority of heavy work on the aircraft in-house, tasks previously undertaken by subcontractors. Central to this was a $15 million investment in a new facility in 2015, relocating its maintenance operation from Gainesville, in northern Florida, more than 100 mi. south, to Orlando. The move to the site, previously home to Comair, has had a beneficial impact on its operation, according to Kurt Brulisauer, the airline’s vice president for ground operations and technical operations. But during the transition, heavy maintenance was outsourced to third parties due to the challenges of relocating an operation and losing technical staff. “The goal is to eventually get everything back into Orlando and in the Silver Airways network to accommodate work flow,” he says.
On a larger scale, Southwest Airlines, which operates one of the largest fleets in the U.S., comprising more than 700 Boeing 737 variants, plans to open a new facility at Houston Hobby airport in late 2019. Once operational, the 240,000-ft.2 hangar will have space for six Boeing 737s and will include aircraft washing facilities on the apron outside, as well as taxiway connections, parking and loading docks, offices and parts storage areas.
Similar capacity investments are being made by Alaska Airlines, another carrier anticipating a large influx of aircraft, with orders for nearly 40 737 MAX variants and integration of some of the A320 fleet of Virgin America, which its parent group acquired in 2016. In September of that year, it announced plans to build a new $40 million maintenance hangar in Anchorage, Alaska, having outgrown its existing facility there that was built in 1954 to accommodate DC-3 aircraft. The more modern setting will have space for two Boeing 737 MAX-9 aircraft. “As far as added capacity, this facility helps us cover the overnight maintenance needs as we grow our fleet,” Alaska’s vice president for maintenance, Kurt Kinder, told Inside MRO last year.
Mobility is Driving change
With new hangars appearing, investment in the tools, equipment and technologies found inside them is ongoing. Alton Aviation’s Berger says there is a particular penchant in the region for paperless operations, meaning “technicians can spend more time on the aircraft in lieu of work centers with electronic task cards, manuals and e-signatures.”
The line maintenance segment, projected to generate $47.5 billion in North America over the next decade according to Aviation Week’s Fleet & MRO Forecast, is also seeing investments in the digitalization of day-to-day technician tasks. Airlines, particularly with larger networks, are ramping up their line capabilities and presence.
Don Wright, vice president for United Airlines’ line maintenance operation, says United’s Tech Ops investment priorities have ranged from workforce hiring and training to reliability initiatives, data analytics projects and infrastructure investments, including the building of a new widebody hangar at Bush Intercontinental Airport in Houston, scheduled for a late-2019 opening. With the arrival of the 787-10 into its fleet in March 2018, set to be followed by the 737 MAX the following month, he says there has also been “significant” investment in related training, tooling and equipment.
For line operations, United is placing an emphasis on achieving greater mobility by deploying devices such as iPads to its 6,000-strong line maintenance workforce. To date, around 1,000 units have been distributed. “It will take two quarters for full deployment, but once complete it’ll really unleash technicians from desktops and having to be present in the office area,” he says. United also has moved to simplify its daily processes through having all aircraft entered into one logbook, and parts are managed electronically through one maintenance management system.
American is adopting similar methods across its MRO hangars and line stations. “Devices are starting to get out there to frontline mechanics,” Seymour says. While concerns about the average age of maintenance technicians, estimated at 51 years by Oliver Wyman last year, are certainly challenging North America’s industry, adoption of new technologies into the day-to-day environment has not posed too many obstacles for American, says Seymour. “The feedback so far has been good from technicians, who have requested more as we deploy them,” he says.