The MRO industry is in transition, and no segment of the business is being more heavily affected than independent non-OEM-owned companies serving the airlines.
“There has been a significant push by OEMs to capture more aftermarket business, although that trend is more pronounced on the engine and component side,” says Ken Herbert, an aerospace and defense analyst with Canaccord. Herbert also cites rapid changes in new aircraft technologies—mandating access to OEM intellectual property (IP)—and the trend among airlines to push more maintenance support risks onto MRO providers.
One thing is certain: It will no longer be business as usual, given global airline fleet changes predicted by 2020.
“In five years, there will be 8,000 more new-generation aircraft in the fleet and about 4,500 [fewer] older, more maintenance-intensive aircraft,” says Chris Doan, vice president of global consultancy Oliver Wyman. “At the same time, there are many new technologies poised to come on the market to support the latest aircraft, engines and components.”
According to Oliver Wyman’s 2015 MRO Survey of 100 airline and independent MRO executives worldwide, the most prominent new technologies for aircraft repair, by 2020, will include aircraft health monitoring systems, predictive maintenance, wearable and mobile technology, and composite repair capabilities. Additive manufacturing, artificial intelligence and UAV-supported maintenance were also cited.
“Advances in technologies could cut or redistribute 15-20% of MRO spending, but also spawn new business models and revenue streams,” Doan explains. “However, there will be a tendency for MROs to continue doing business as they always have, rather than recognizing the new opportunities that come with making a strategic shift.”
Doan adds that along with maturing OEM strategies that discourage the use of part manufacturing approval (PMA), there is an ongoing consolidation trend resulting in MROs that are broadening their reach. Private equity involvement also continues, as the MRO sector is seen as an attractive investment with solid upside potential.
Given that OEMs are increasingly protective of aftermarket business, many are creating separate aftermarket subsidiaries, says Frank Landrio, AAR senior vice president-strategy and OEM development. These focus on maintaining and growing the OEM’s aftermarket position by offering tailored solutions including repairs, assets, reliability guarantees, faster turnaround times, competitive pricing and, most recently, preventive maintenance and data analytics, he says. That, plus restricted IP access, makes it harder for independent shops to compete with the OEMs for maintaining newer fleets.
“Today the OEMs are doing a better job of protecting their IP with encryption, limiting the amount of information in component maintenance manuals, and granting access only to MROs that have agreements with them,” Landrio says. “Therefore, independents will have to strike deals with the OEMs and invest in the capability to service newer fleet types. Otherwise, they will be forced to compete for the legacy parts of the market, driving down prices and return on investment capital.”
In fact, the availability and cost of test equipment and other infrastructure may make more such deals a necessity, Doan points out.
“The engines and components are all new-generation, high-tech designs, so equipping an independent—which might not have the volume of work—to service them can burden costs to the point of being uncompetitive,” Doan says. “That is why more independents are looking to OEM partnerships to solve the underlying economic issues.”
To illustrate, the Oliver Wyman 2015 MRO Survey found that 61% of the responding MROs entered into licensing agreements with OEMs during the prior three years. Of the remainder, 18% shared or co-developed IP with OEMs; and 18% entered into joint ventures. In 6% of the cases, a consolidation with an OEM occurred. “However,” says Doan, “only 24% of the respondents partnering with an OEM improved their margins, indicating that for most, it was merely a survival strategy.”
Doan points out that under licensing agreements, which usually include annual fees and/or royalties, “more of the action is shared with the OEMs.” Joint ventures, on the other hand, are viewed as more equal since, for example, the MRO may be entitled to a discount on OEM parts. But Doan says that, for now, attempts by independents to reach agreements with OEMs—other than licensing—have been largely unsuccessful. “A lot of this has to do with a lack of volume of repairs made available to the MRO. Currently, the OEMs can handle the volume of repair work, with no urgent requirement to offload it to an independent.”
Leo Koppers, senior vice president-MRO Programs at MTU Maintenance, notes that up to 80% of next-generation engines will be supported under long-term OEM contracts within the OEM-approved network. “Most of the remainder will be performed in-house by the [airline] operators, which could potentially do limited third-party work. But the first wave of work within the next few years—especially warranty work—will be performed entirely within the OEM network, and all the network partners will have time to adapt to upcoming demand.”
Koppers adds that MTU, which is an independent MRO as well as a turbine engine component OEM, is partnered with Pratt & Whitney for complete overhaul services for the PW1100G family, and with General Electric for GEnx and GE9X turbine center frame work.
But independent MROs will not be locked out. Richard Brown, principal in the London office of ICF international, thinks independent MROs tend to offer lower prices than the OEMs, quicker turn times, greater willingness to use designated engineering representative (DER) repairs or PMA parts, and more responsive customer service.
“Also, their focus is often on mature and sunset aircraft and systems,” he says. “Traditionally independent MROs enter a market when the OEMs are offering lousy service, high pricing, and have turned their attention to newer products. Also, that’s when repair manuals and test rigs become more widely available for older equipment.”
Southwest Airlines presents a case in point, with an all CFM56-powered 737 fleet. “When an engine is new, it really pays to go with the OEM,” says Gary Bjarke, the carrier’s director of contract services. “Right now, we are under power-by-the-hour agreements with GE on the CFM56-7 engine. But we have outsourced some work on the CFM56-3, which powers our classic 737s, to independent shops because there is a lot of surplus material out there, and a lot of repairs have been developed in the market.”
Rob Cords, president-airlines and fleets division of StandardAero, advises that program customization is where independents can stand apart from airline and OEM offerings. “Because of the need to offer a differentiated service—independents will spend more time and resources on each customer and engine shop visit to [tailor] a program or an engine build,” Cords says. “This can range from creative contracting to material strategies, to managing a specific life cycle for an engine to minimize maintenance costs. Quality, service and program customization will help ensure that airline operators will demand that independents remain a key part of the service network.”
But Cords also cautions that independent engine MROs must still align themselves with OEMs to ensure engines are built to exacting standards, using approved materials and processes. “This alignment will help with getting access to new licenses and engine offload programs as OEMs sign up the majority of certain fleets under flight- hour programs,” he notes. “For an independent, failure to access new platforms means it will work on continually declining platforms and eventually be less relevant.”
In contrast, the airframe OEMs have shown little interest in MRO. “They have designed their business models to be very efficient within a manufacturing environment, rather than maintenance,” explains Tucker Morrison, chief operating officer of Flightstar Aircraft Services, a specialist in single-aisle heavy maintenance and modifications. “If you can build a strong brand, it means you provide excellent service at a competitive price, so people come back.”
Ernesto Ruiz, chairman of Aeroman in El Salvador, advises that the future of an airframe MRO is also contingent upon carefully implemented growth planning, based on a perception that a market for a specific type of airframe maintenance is available. For example, he explains, Aeroman, which has focused on narrowbody airframes, booked its first widebody—an Airbus A330—recently.
“Because of our expertise on the A320, we believed the A330 was our next logical move,” Ruiz says. “We also felt that the A330 was a very good opportunity based on the [limited] heavy maintenance base available for that aircraft in the North American market—which we have specifically targeted.”
Ruiz does not predict a greater presence of the airframe OEMs in heavy maintenance, but he does note some consolidation starting among those MROs. “I would not be surprised to see more of this, since by acquiring another company, it gives the MRO a greater presence in other parts of the world, adds capabilities, and presents an opportunity to expand, generally. All of this adds value,” he says.