Recent years have been a time of both prosperity and pressure for U.S. aftermarket firms. Moving forward, which factor will tilt the balance?
Josh Sullivan, managing director for aerospace and defense at the investment bank Seaport Global, remains cautiously optimistic about the U.S. aftermarket, despite a possible squeeze between competitive pricing and future increases in labor costs, and the uncertainties arising from airframe OEMs entering the aftermarket.
Sullivan cites AAR’s confidence in its own business expressed at a recent conference. The independent MRO acknowledges that labor costs may rise, but it says they would rise for OEMs too, so there should be enough strength in the market to pass on labor increases.
The main problem with labor that independent MROs have is not necessarily recruiting mechanics, Sullivan notes. “The problem is the senior guys are not sticking, they have other options. It’s difficult to keep the senior guys.”
With such wide differences in MRO facilities versus airline pay, 38% in the most recent Labor Department survey, it’s not hard to see the difficulty independent MROs have in retaining experienced workers.
Another big question in the U.S. aftermarket remains Boeing Global Services’ strategy and how muscular it might be. Sullivan says it is still unclear if the airframe OEM will seek to acquire aftermarket firms or launch joint venture with them. One reason for joint venturing rather than acquisition is that Boeing seeks an overall operating margin in the mid-teens, which independent MROs seldom achieve. On the other hand, Boeing “might need an MRO or two,” to achieve other objectives, for example in part distribution.
Drew Lipke, aerospace and defense analyst at the financial-services firm Stephens, is more wary. “I think independents either need to partner with an OEM network or bring a unique value-added capability to the market,” Lipke argues.
One firm that has done the latter is HEICO, which Lipke sees as bringing a unique capability as the aftermarket’s dominant PMA provider. “Heico’s component repair and overhaul and aftermarket distribution both act as conduits for the company’s core PMA competency. As long as OEMs continue to subsidize sales and generate profits in the aftermarket, Heico will continue to bring significant value.”
Partnering with OEMs is another way for independent MROs to survive. “Many airlines are looking to reduce their supplier base and this is an opportunity for integrators to capture market share,” Lipke says.
The alternatives may be grim. Without a unique value add or an integrated service, Lipke predicts U.S. MROs will be squeezed between their own rising costs and competition from MROs in nations with less expensive labor.