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Opinion: MRO Capacity Crunch Driving New Behaviors

What will the consequences be of the MRO capacity crunch?

Printed headline: The Looming MRO Capacity Crunch 

A funny thing happened recently when sourcing several airframe heavy maintenance checks. For the first time in my 25-plus-year career, there were no near-term slots available.  

Sure, perhaps it was just poor timing, as no airline wants to have an aircraft out of service during the peak summer months. But recent discussions with several major airframe suppliers confirm a common theme—their hangars are full, and some are even turning away work.

For the past few decades, MRO supply has easily exceeded demand. All three MRO supplier segments—OEMs, independents and airline-affiliated providers—had excess capacity, which fostered a very competitive MRO sourcing environment that kept prices low and supplier options high.

As Bob Dylan famously sang, “for the times they are a-changin’.”

It now appears that several industry trends that began more than a decade ago have resulted in the current MRO capacity crunch through a combination of legacy airlines divesting in-house maintenance capabilities to cut costs, low-cost carriers outsourcing their MRO from the very start and the exponential fleet growth experienced during the airline industry’s longest period of sustained profitability. Most MRO hangars and engine shops are at or near capacity.

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That said, airlines are not sitting idly by. Moreover, we are starting to see operators reconsider their traditional MRO buying behavior. In an effort to mitigate the flight schedule risks associated with limited hangar slot availability, several forward-thinking airlines have initiated discussions with their preferred suppliers to negotiate capacity agreements for 3-5 or more years to secure future slots and lock in favorable rates. Consequently, MRO providers are being forced to rethink their existing pricing strategies to accommodate these long-term deals.

MRO executives clearly have some big decisions ahead of them regarding how best to manage the looming capacity crunch. The obvious strategic options to increase capacity are adding additional shifts, implementing best-practice process improvements to increase throughput and/or building new facilities.

The major dilemma facing these executives, as well as many of their private equity owners, is the risk associated with building new facilities.

With economists and industry analysts predicting a recession or industry slowdown within the next few years, is now really the right time to invest tens of millions of dollars in new hangars? And given the industry labor shortage, will they be able to find enough skilled technicians to support the capacity increase? Or could not adding capacity inadvertently encourage airlines to bring MRO work back in-house to protect their core flight operations?

According to Alton’s independent, global MRO forecast, MRO demand will grow at a compound annual growth rate of 4.2%, from $73 billion to more than $110 billion over the next decade. Given this tremendous growth, one thing we know for sure is that airline customers in the near term will undoubtedly see their maintenance costs increase as MRO providers selectively allocate their limited slot capacity to the highest bidders.

And perhaps more consequential, we just might be witnessing the genesis of MRO procurement-negotiating leverage transition from buyer to seller. The times are indeed changing. 

Jonathan M. Berger is managing director of Alton Aviation Consultancy, a global aviation and aerospace advisory firm. The views expressed are not necessarily those of Aviation Week.

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