As we stand in 2013, the commercial aviation maintenance, repair and overhaul (MRO) industry continues to recover from the economic downturn that started in 2008, but still remains far from an overall return to the good times. “2012 was a challenging year for MRO suppliers and the outlook for 2013 is hardly much better,” comments Richard Brown, a principal consultant at ICF SH&E.
Giving some context, Brown notes that the structural changes that have been taking place in the MRO market over the last few years have continued apace. Meanwhile, airlines, “faced with multiple factors that seem to make it difficult for many to return to profitability, continue to show an astute ability to defer maintenance, reduce workscope, make use of alternatives to new OEM parts (such as surplus, DER, PMAs) and continue to burn down inventory”.
Indeed, it is the commercial airline industry which ultimately fuels the global MRO industry, so this relationship must first be examined. Chris Doan, chairman and CEO at TeamSAI, says that in 2012, air travel grew by 5.3 per cent — a slightly higher rate than the 20-year average of five per cent — with international traffic rising higher than domestic traffic. A general feeling of cautious optimism is also reflected in the International Air Transport Association’s (IATA) forecast that net post-tax profits will rise to more than $10bn in 2013 (up from $8.4bn), based on a better than expected overall airline performance in 2012 and predicted stability in fuel costs.
ICF SH&E’s Brown says the global air transport fleet (currently comprising 27,000 active aircraft) will generate an MRO spend of approximately $59bn in 2013. The fleet itself will grow by almost 1,000 aircraft a year, “which translates into global installed fleet growth of just over three per cent per year”. TeamSAI’s Doan predicts a similar fleet growth of 4.3 per cent annually from 2013-2018 to 27,762 aircraft, and by 3.4 per cent annually from 2018-2023 to 32,792 aircraft. “Over the entire ten-year forecast, TeamSAI predicts the global fleet will on average grow by 3.8 per cent annually,” he says. “16,460 commercial deliveries are forecast to be delivered, and 6,197 of the current in-service fleet are expected to be retired in ten years’ time.”
So how will this growth affect the MRO market? “The total jet MRO market in 2013 is forecast to be $53.9bn, up 10.3 per cent from 2012, reflecting the fleet change, slightly higher utilisation, correspondingly higher airframe, engine, component and line MRO, and moderately higher labour rates,” says Doan. “Because of the downturn, the airline industry has been forced to renew its fleet, doing so with newer, less airframe maintenance-intensive aircraft, essentially shifting value from the heavy maintenance and line maintenance market, while engine and component MRO growth has accelerated.”
As well as maintenance types, the MRO outlook varies significantly depending on the region of the world you are in. “We see a continued growth of the global MRO market, which is mainly driven by the accelerated growth in Asia and the Middle East,” notes Marcel Versteeg, of VZM Management Services. “Supported by healthy growth of their economies and investments in new fleets, maintenance needs are up here.”
Looking at the MRO industry as a whole, Brown says that MRO suppliers, “famous for their ability to display ‘cautious optimism’ in the face of difficult trading conditions” are facing several trends which “will produce a new roster of winners and losers”. He comments that “how leadership responds to these trends” will differentiate the “successful MRO companies from the also-rans”. Among these, he identifies what he calls four “mega trends” impacting the MRO market in the nearer term, and it is worth analysing these in detail here.
Continued demand for integrated MRO solutions
Brown sees no dramatic change in maintenance contract types, and predicts that the recent demand for broad component support — where many component types are supported under a single contract, often based on flying hours or cycles — will continue further. “ICF SH&E forecasts that 40 per cent of component MRO spend will be supported in a broad based contract by 2022, up from approximately 23 per cent today,” he says. “Many airlines do not want to invest in initial provisioning or the required maintenance infrastructure, and see advantages in reducing the number of MRO suppliers they deal with. The market is awash with attractive MRO value propositions from independents, airline third party MROs and OEMs.”
Growth in alternatives to OEM new parts
This trend will not be a popular choice among OEMS, but the issue is a complex one. Brown states that because aircraft are being harvested for spares rather than sitting in storage, “the market is awash with rotables from newer aircraft being broken up for spares”. In the last few years, he says, CRJ-200s, A320s, 747-400s “and even a few 737NGs, A330/A340s and the odd 777” have joined the 737 Classics, 767s and MD80s already being parted-out, with up to 80 per cent of surplus parts originating from parted out aircraft. “Leaner airline inventories and increased MRO pooling agreements have resulted in less surplus parts coming from excess inventories,” says Brown. “This increase in business volumes at the end of the life cycle for aircraft has resulted in interesting changes in the supply chain, as illustrated by ILFC’s acquisition of AeroTurbine, by AAR’s move into aircraft leasing, and by A J Walter’s entry into the component MRO market through its AVEOS component repair shop acquisition.”
Continued OEM focus on the MRO market
Brown believes that one of the biggest challenges faced by component OEMs is the entry into the MRO market of the biggest airframe OEMs. “With Airbus 'FHS'/'TSP' ['Flight Hour Services'/'Total Support Package') and 'Boeing Edge', airlines face new choices while competition increases for component OEMs, independent MROs and airline third party shops,” he notes. “Airbus and Boeing have made no secret of their desire to grow their services revenue and Airbus in particular has been successful in signing 'FHS' maintenance contracts, particularly on the A380 and A330. The question to ask is how will relations between airframe OEMs, component OEMs, airline MROs and independent MROs continue to evolve? Should MROs partner with OEMs? What is the future for independent MROs in a more OEM-centric market?” 2013 may be too soon to answer these questions, but more information seems certain to be revealed in the upcoming year.
Continued MRO growth from emerging regions
As already touched upon, the real growth in the MRO market is coming from Asia-Pacific (particularly China) and the Middle East, where MRO growth is forecasted to be over seven per cent per year, according to Brown. Europe and North America continue to grow, but at a more modest rate of one to two per cent. “The point is that most of the MRO infrastructure is concentrated in Western Europe and North America. Faced with growth in emerging regions, suppliers without footprints in these high growth areas are evaluating their options,” states Brown. “MRO suppliers have been signing joint ventures with local airlines and setting up distribution centres and repair shops in these growth regions. For example, airlines in China prefer to have components repaired in China and when considering customs issues establishing a local presence is often quicker and more cost-effective. How to support and win MRO work from emerging regions should be a key focus area.”
Regional and type variations
Continuing on from this fourth trend, it is important to examine in more detail some of the reasons for the regional variation, and more significantly, the impact this will have on decision-making.
TeamSAI’s Doan notes that along with Asia-Pacific and the Middle East, the highest MRO growth rates are expected in India, Eastern Europe, Latin America and the Caribbean, and Africa between 2013 and 2023. Analysing the trends, Doan says that North America is expected to lose its status as the largest region for MRO spend by 2023, as Western Europe passes it. “The North American market is expected to decline over the 10-year period, shrinking from $16.6bn in 2013 to $15.6bn in 2023. North America’s share of the market will decline from 31 per cent in 2013 to 22 per cent in 2023,” he says. “Despite growing to the largest single regional market, Western Europe will also lose market share, going from 25 per cent ($13.6bn) in 2013 to 22 per cent ($16.1bn) by the end of the period. Asia-Pacific is expected pick up two per cent in market share by 2023. China’s market share is expected to grow by four per cent as it expands to $7.8bn in 2023.”
Despite Western Europe’s expected elevation, Versteeg expects to continue to see a slow growth in the region “where the airline industry is struggling from recession and the overcapacity that exists, while the market share of low cost carriers continues”. He comments: “We expect a transformation of the landscape here, where network carriers are looking for ways to compete with the low cost competitors and reduce their losses with their European network.” He suggests solutions such as moving all point-to-point traffic to low cost subsidiaries or finding partners for regional networks. “The airlines are launching further cost reduction programmes which will also put pressure on maintenance providers — both in-house and outsourced — for example reducing costs by merging different maintenance departments in the group.”
Versteeg believes that the MROs in the Middle East are rapidly growing and “becoming more competitive” in the overall market. Perhaps the biggest threat is simply the high rate of growth, which “will make it difficult for them to find sufficient new, qualified personnel”. While there is little doubt that the UAE MROs will flourish, other companies are facing additional problems such as continued political instability in some areas and “uncertainties after the Arab spring”. VZM believes that Northern African countries also have good potential “once they get back to stability”.
In North America, the number of airline mergers that have recently taken place, as well as a high number of retirements of older aircraft, is reducing the amount of required maintenance, according to Versteeg. Doan agrees that aircraft retirements will be at “unprecedented levels” over the next ten years. Naturally, newer aircraft are also requiring less maintenance, but there are other consequences too which are applicable to the global fleet.
Doan notes that the more maintenance-intensive, older aircraft will represent an increasingly smaller share of the market. “The MRO value associated with the older vintage aircraft will be shed from the market as newer less-maintenance intensive aircraft take their place,” he says. A second impact will be that “MROs must be prepared to adapt their capabilities to meet the needs of the newer technology”.
According to Doan, one way to look at the change in MRO spend for more technologically advanced aircraft is to consider the different MRO segments separately: heavy, engine, and component. “The influence of improved technology and increased check intervals in new-generation aircraft, particularly the heavy use of composites and the maturing of smart electronics, will influence heavy/modifications spend in the future. The 787 technology is anticipated to save some 30-35 per cent over a similar sized, older technology aircraft and this is a key reason for the declining growth rate. Increases in heavy intervals for newer-generation aircraft is one way this is manifested. Longer intervals can help to suppress the MRO value (though it is possible any given extended interval could expand the scope of work and therefore the value, perhaps offsetting the decline in value).
“On the other hand, engine and component MRO, requiring greater service expertise and influenced by greater OEM control, have driven higher cost per flight hour rates, thereby driving up MRO spend for such segments. Longer engine intervals may depress this somewhat, but the value of those shop visits is certainly on the rise.
“Therefore, the result is a mix, and the spend can vary from year to year as different maintenance requirements are encountered in the standard maintenance schedule.”
In terms of numbers, Brown says the average MRO spend growth (in constant 2013 dollars) is forecast to be 4.1 per cent CAGR (compound annual growth rate) to $85bn in 2022. “This growth outlook reflects the blended impact of fleet and utilisation growth, typically higher MRO costs per event, improvements in reliability and fleet age demographics,” he says. Component MRO is forecasted to surpass 4.5 per cent, while engine MRO will also exhibit strong growth. “Despite reducing manhour intensity of airframe heavy checks as the fleet renews, upgrade and modification demand means airframe heavy MRO grows at 4.2 per cent CAGR,” he states.
Market dynamics and outside factors
Taking on board all these trends, variations and predicted numbers, 2013 and beyond will, in Brown’s words, “continue to provide MRO leadership with many questions and challenges”. Doan agrees: “For those managing an MRO business, up to the board of directors, it will be more important than ever to understand the global business dynamics to adjust strategies for future success. Competitiveness is increasing and, unfortunately, some of the business is being commoditised.”
Doan observes that the dynamics of the business and the sensitivity of the airline industry to “political, economic, and even natural shocks”, dictates that the MRO industry will continue to be faced with “cyclic ups and downs”.
Versteeg sees the increased influence of airframe OEMs in the MRO market as a major threat to the independent MROs, which he says will need to “define a survival strategy”, although “they will have a few years left for that as any real impact on the market will take a decade”. In turn, more consolidation and partnerships in the MRO market will take place, but this remains a gradual process.
Nevertheless it is important to reiterate that the MRO industry, as a whole, will experience solid growth. “The MRO business is still quite fragmented so subject to further consolidation, and the large MROs have tended to do well for the most part, driving them to grow larger and expand their global footprint,” states Doan. “Uneven growth across the industry will create demand for engineers which will tend to push labour rates higher where shortages surface first. This phenomenon will change the patterns of regional outsourcing over the next five and ten years as a consequence.”
But all the market changes taking place produce new opportunities for “agile” MRO suppliers, according to Brown. Among these, “OEMs are reviewing their attitude to selling surplus parts and see this as a potential new revenue opportunity. OEMs may appeal to some customers if the surplus parts are at least offered with some kind of OEM backing/warranty.”
Brown also sees an opportunity for some aircraft lessors to “move downstream into parts trading, asset management and MRO”. He says: “This provides increased competition to incumbent MROs. Four of the five largest surplus component traders are owned by lessors. A key question to consider is whether lessors will integrate maintenance and asset management into their offerings given their increasing MRO capabilities.”
Finally, MRO suppliers will need to adapt their capabilities to “align with shifting aircraft utilisation patterns and demographics”. Brown states: “The migration of the fleet to new technology aircraft such as 787s and A350 XWBs strengthens the position of OEMs. It’s a market reality that there will be continued downward pricing pressure where repair offerings are in competition with surplus aircraft, components and engines. Therefore, MROs have been creative to leverage availability of surplus parts to reduce maintenance costs and prices. Even the most traditional OEMs are now offering parts repair solutions rather than the traditional approach of replacing parts. The trend of developing value propositions to help airlines cope with sunset aircraft is set to continue.”
Versteeg agrees that the changes in the MRO market are challenging maintenance companies to adapt their services. “Leased aircraft often require different offerings from the MRO to be attractive, and with the increasing share of leased aircraft this will become even more important for MROs and OEMs to realise,” he notes. He says that, currently, the OEMs’ maintenance service packages for the new generation aircraft often lack “adequate solutions” for leased aircraft.
Another force impacting the MRO market is the speed of technological change in the aviation industry as a whole. Doan identifies three major elements representing what he says are the greatest opportunities and challenges for the MRO community.
So-called “smart” aircraft, engines and component designs are producing significant diagnostic data to predict eminent issues and failures. Thus, the first challenge for airlines and MROs is “to determine how to leverage the data effectively and how to alter the work culture to take full advantage of what is possible,” says Doan. “The other new technology aspect of newly designed aircraft, engines and components is the incorporation of advanced materials ... which introduces new challenges to the MRO industry in equipping itself to handle the new repairs. The important thing here is that most of the new material content is designed to make the equipment last longer and be more efficient - but repair/replacement costs may be higher.”
There is also an opportunity to improve the productivity of the mechanic/engineer “by making data (manuals, task cards, etc) available wherever the work is going on”. Doan states: “With the right IT technology, there should no longer be a requirement to ‘waste’ time leaving what is being worked on to find a computer, a printer, a microfilm machine, or a paper manual. Today it is possible to deliver any information right to where the work is taking place. Just think of the ‘wasted’ time that can be eliminated.”
Finally, the right technology can greatly enhance supply chain effectiveness “which is a multi-dimensional topic in itself”, says Doan. In brief, “It is about having the right parts or kits available to the mechanic/engineer when and where needed, with minimal inventory investment.”
Expanding on these elements, Versteeg notes that radio frequency identification (RFID) technologies specifically are becoming more mature and will thus see increased application in the industry. Airbus, for instance, is planning to deploy the technology on a large scale on its aircraft in 2013.
“This technology will benefit component control, logistics and introduce new efficiencies for maintenance. For example a cabin in which life limited parts are tagged with RFID can be checked in less than a minute just by walking down the aisle with a handheld scanner, eliminating a labour intensive job inspecting them manually,” says Versteeg. “Further development of software assisting in analysing data generated by onboard monitoring systems will help to reduce costs as it enables converting unscheduled maintenance tasks to scheduled ones. To take full benefit of these tools, it will be required to realise a culture change as mechanics are accustomed to follow expert advice to replace a component that has not yet been failed.”
For every challenge the MRO industry is facing in 2013, there seems to be at least one exciting development to match it.
For the full version of this article, including interviews with leading MROs, see Issue 123 of Aircraft Technology Engineering and Maintenance.