Printed headline: Capacity Crunch
Business is frustrating for those who source heavy maintenance for European airlines today.
With most providers fully booked for the coming 18-24 months, airline maintenance procurement functions are faced with long planning horizons for ordinary maintenance schedules as well as more laborious management of any out-of-the-ordinary work that comes up. Booking two checks here and two checks there does not bring great efficiencies.
Behind the current capacity crunch is demand growth of 14% over the past five years, while there have been few capacity expansions in the supply base. In fact, with Monarch Engineering’s demise, the market as a whole may have even lost capacity.
Over the coming decade, the capacity strain may become more acute, as European demand for heavy maintenance and modifications is expected to grow by 30%. This is primarily driven by narrowbody aircraft, but even some widebody work is expected to migrate back, closer to Europe, as China faces even greater capacity issues. Considering the currently strained supply base, overall European capacity will need to grow at least 35-40% in 10 years.
Where will capital for such investments come from? Given heavy maintenance’s status as a low-margin business, the lack of investment thus far has been understandable. Europe’s very fragmented heavy maintenance landscape (see chart) has typically generated overcapacity and pressure on labor rates. Even in the current environment, labor rates have seemingly remained at low-margin levels. Why prioritize building hangars when there are more profitable investments to pursue?
Any investor approaching this arena will need to consider how to change the structure and dynamics of today’s landscape. To achieve this, three objectives become central:
- Generating greater value for the airline operator;
- Gaining greater control of overall capacity or raise barriers to entry;
- Ensuring there is adequate skilled labor available.
One way to achieve these objectives is consolidation. If today’s European supply base of 30+ players would combine into larger entities, it could be much better suited to provide the slot flexibility, process control and customer service—as well as the technology and capacity investments—required to serve European airline requirements. Value to the airlines ultimately comes from longer-term relationships, where both provider and operator move through learning curves, offering more efficient service and justifying higher rates. Larger, more capitalized players are also in a better position to address systemic labor shortage issues.
North American heavy maintenance has moved toward a more consolidated and investment-friendly place over time, and labor rates have increased. One rising player in this is MRO Holdings. It combines Flightstar and Aeroman and manages the capacity for Techops Mexico, offering 40 lines of maintenance—much larger than any current provider in Europe.
Could new players of similar scale emerge in Europe? Potentially—but they would most likely be a combination of multiple Tier 2 players. Here, there is appetite for moving up the value chain to offer more complete propositions to customers. AeroDynamic Advisory research suggests that more than 40% of European heavy maintenance capacity is tied up with players that have 10 or fewer production lines. Conversely, Europe’s largest providers are broad organizations where multiple business areas compete for capital and where there is less interest to prioritize heavy maintenance investments.
European heavy maintenance is ripe for consolidation—if investors find opportunities to create bigger players, then both customers and providers stand to benefit.