MRO Market Review: Overhaul Optimism

If economies grow and oil prices don’t explode—and that’s admittedly a big if—then 2012 should be a strong year for aircraft maintenance. Consultants and MRO shops concur in cautious optimism and some even anticipate a potential bounce-back spurred by deferred maintenance or part restocking.

Outsourcing, bundled services, consolidation and PMA use are other trends to watch. Airframe work will continue to seek less expensive labor, but Asian shops are getting a little pricier and Eastern Europe has not built up much capacity. 

AeroStrategy forecasts 3.3% annual growth in MRO over the long term, but predicts low double-digit growth in 2012 as airlines replace a massive burn-down of part stocks. But the company warns that all this hopeful news hinges on oil staying in the $80- to $110-per-barrel range and the world economy growing at 2-3%. 

Moreover, the trend will vary by type, with modifications up 8.4% a year, engine work 4.5% and components 2.9%. Airframe work will increase barely 0.5% as alloy and composite airframes come into fleets. China and India will see 10-11% annual increases, the Middle East about an 8% pace and North American MRO will grow little more than 1% per year, in the AeroStrategy forecast. 

Eastern European shops have not attracted much business from the West despite lower labor costs. Pressed by LCC competition, eastern shops have not been able to invest in MRO capacity, AeroStrategy partner David Stewart said. “And there is a perception of lower quality and productivity.”

Cost-per-hour maintenance should increase in importance. “It’s a win-win,” Stewart argued. He also sees more outsourcing as new aircraft enter service requiring investment in test and other equipment.

Aerospace consultants Oliver Wyman partner Chris Spafford said that 2011 has been a relatively good year and close to forecast. “There are capacity constraints in a lot of the major geographies, at least in the short term. Inventory on the consumables and rotables has been largely burnt through. People have pushed the limits and so we are seeing a lot of component through put in the last quarter or two.”

There remains some concern that the blip caused by this inventory burn might last through the first quarter, but then slacken. Airlines have tightened capacity and have shown real discipline on capacity. Historically this is not been the case, particularly in Europe and North America, and growth plans have been curbed and aircraft that may have been brought out of retirement are staying put, Spafford said.

Spafford said the 2011 MRO market has grown from $42 billion in 2010 to $45 billion for 2011. “We see growth in the 2-3% range after 2011.”

Spafford sees major MROs continuing to develop global footprints for two reasons. First, to take advantage of lower costs in adjacent geographies, such as in Latin America for North America, or in Southern and Eastern Europe for Western Europe. Second, to fulfill local requirements with airline customers that want to do some or all of the work at their home bases. As part of a new trend globally, Spafford sees more work being done in home markets with “a higher bar placed on work being sent across a border from a regulatory perspective, from a labor union perspective and a logistics perspective.”

Spafford also noted that the price bar is getting lower. “In the US there used to be a radical difference in price between airframe maintenance work done in the continental US and, say, in China and Asia and there was massive amount of work flying over there. But with exchange rates where they are today, with the depreciated US dollar and with efficiency gains in the US, as well as political consideration, a good amount of that work has been repatriated itself. It’s a trend,” Spafford said, adding that regulators are making it more difficult and challenging for new repair stations to gain certification.

Recession Worries 

Len Kazmerski, VP for business development at TIMCO, said 2012 looks good with one major worry. So far, US airlines have managed through the fuel challenges. But a double-dip recession would be more troubling. Kazmerski noted that several U.S. carriers started pulling capacity out of markets in 2011.

On the plus side, some work was deferred during the recession. “There is still some of that to be digested. When they put aircraft back into service, there is some interior work to do,” Kazmerski said. More interior work could also flow from the consolidation of carriers, such as the United and Continental and the Southwest and AirTran mergers.

The removal of 200,000 sq. ft. of capacity at Boeing’s Everton, Wash., facility for work on 787s is also good news for US MRO providers. “That work will have to go somewhere,” Kazmerski said. He expects off-shoring of US MRO to continue, but not as aggressively as once expected, due to union opposition.

He does not see much change in how MRO is performed. “We still get the same RFPs with the same questions, fill out the same matrices and do the same value propositions,” he said. TIMCO offers fixed prices on materials, caps on non-routine work and sometimes discounts on work above thresholds, all of which customers seem to prefer to bundled services.

Kazmerski does not expect much consolidation in MRO in 2012. “It might happen with struggling shops, but I don’t see 2012 as a year shops struggle,” he said. Partnerships among shops are most likely on the component side, in his view.

Walter Heerdt, senior vice president of marketing and sales at Lufthansa Technik, sees the global maintenance market growing 3.5-4% in 2012 and LHT increasing business about 3%. The company expected some bounce-back above traffic growth in 2011, but did not see it, and so is not counting on it next year. But value buying of integrated MRO services is an increasing share of LHT’s business, both for start-ups and specific models in legacy fleets.

LHT sees above-average growth in Eastern Europe, Russia, Asia and the Middle East. In a decade, Heerdt says more Western Europe maintenance may be done in Eastern Europe beyond Sofia and Budapest. Notably, Lufthansa Bombardier Aviation Services recently expanded line-maintenance capabilities for business aircraft in Latvia. Prospects for more western widebodies visiting Asian hangars depend on labor-cost and productivity trends, in Heerdt’s view.

James Stewart, chief executive officer of SR Technics, expects 5% yearly growth from 2011 to 2015, based on traffic trends. New models like the 787 and A350 will need less, but more complex, maintenance. Stewart thus predicts fewer MRO providers, but more global ones. “We are moving beyond traditional MRO provision to become a strategic partner for global aviation solutions for both airlines and OEMs,” Stewart said.

SRT will strengthen its partnership with ADAT to support Mubadala Aerospace’s goal of establishing a leading global MRO business. “Going forward, we also want to expand piece-part repairs and are establishing Zurich as a Center of Excellence,” Stewart said.

Ludovic Loisel, manager of strategy and coordination for AFI-KLM E&M, has seen a recovery in demand from two years ago but no relief from pricing pressure. On the up side, his customers are shifting away from time-and-material deals to longer-term agreements, and they are signing on to larger agreements.

While airlines outsource more to major MRO providers, they also ask for more offsets and buybacks, Loisel said. These can include help with financing, buying airline part inventory or subcontracting work to the customer in exchange for a big outsource job.

AFI-KLM E&M watches the European debt crisis carefully, after experiencing hits from disruptions in North Africa in 2011. The company would like to do more business in fast-developing countries. It has formed a joint venture on components in India and one on nacelles in the Persian Gulf. “We are always interested in China,” Loisel said. “We are looking at that carefully.”

Tighter Licensing 

The firm will add capacity and a test cell for GE’s biggest engines in 2012. AFI-KLM E&M is well-positioned for the 787 and A380, which should help over the medium term, Loisel predicts. But there is a catch. OEMs are getting tighter on licensing repairs on new-aircraft components. “With the restrictions they are putting on, it is harder to get data on usage and intellectual property,” Loisel said. “They are trying to steer the business to themselves. Airbus component OEMs have moved very fast on that in the last two years.” AFI-KLM E&M increasingly concentrates on components and modifications, shifting away from airframe heavy checks.

Use of PMA parts will increase, “but maybe not as fast as people think, due to leasing companies and other OEM pricing,” Loisel said. Overall, “2012 should be good year on volume, but a tough one on price.”

Chang Cheow Teck, president of ST Aerospace, sees a gradual return to stability, with outsourced maintenance increasing about 3% annually through 2014. He believes outsourcing may spread from the US to a broader penetration of European and Asian markets. Airframe and line maintenance will grow slowly, component, engine work and modifications more rapidly, in his view.

LCCs prefer to outsource to independent providers, and ST Aero’s Maintenance-By-the-Hour program is attracting traditional airlines as well as LCCs.

Freighter Conversions 

ST Aero wants to reduce turn-time on freighter conversions, has a new combi conversion product for Boeing 757-200s and will explore conversion of other models. The company also wants to increase line maintenance, interior modifications, component repair and, after 2014, landing-gear work. It will offer on-wing support on GEnx-1B and -2B engines and is getting into engine leasing. An ST Aero engine shop opened in Xiamen, China, in October.

Hong Kong Aircraft Engineering Company Ltd. (HAECO) did quite well in airframe work in 2011, said Group Director Commercial Summit Chan. “Our customer portfolio is quite strong for our Hong Kong operation, and the outlook for 2012 is still that we will do fairly well.” However, subsidiary TAECO was hit by the slowdown in freighter conversions in 2010 and more recently by tough times in Japan.

Chan said new aircraft—787s, 747-800 freighters and A350s—will require less labor-intensive maintenance, at least on airframes. Offsetting this will be pent-up demand for cabin reconfigurations by airlines that deferred them during the recession. “Legacy carriers want new flat beds, this is part of the airframe business and we see a lot of these in next couple years,” Chan said.

Another favorable trend is the big order book for A320s and 737NGs, much of it from LCCs that are doing well. “New aircraft will not need heavy checks in the first few years, but they do expand the world fleet,” Chan noted. And lease returns that relocate aircraft with airlines that want different configurations will be a positive factor.

China Questions  China is an attractive maintenance location now. But Chan cautions that wage inflation is an issue and appreciation of the renminbi is expected. HAECO has invested heavily in training its TAECO workers in China. The firm has also invested heavily in facilities, a landing-gear shop and a composite-repair joint venture in China. It plans more investment in a GE90 shop there. Chan is hoping these commitments pay off as growth resumes.

On the engine side, Brian Ovington, senior marketing manager for GE Aviation services, cautiously expects 4-5% overall shop-visit growth in 2012. Newer models like the GE90 and CFM56-5B/7 should see more robust growth, but mature models like the CF6 and older CFM56s will flatten or decrease in overhauls.

CFM56-5B/7s have performed very well and, with minor work on items such as high-pressure compressor top cases, stayed on-wing beyond expectations. However, “looking at deliveries in 2003 to 2006, there are a number of engines that will come up on life-limited part limits over the next several years. So we anticipate an increase in shop visits beginning toward the second half of 2012,” Ovington said.

GE sees increasing demand for its support or long-term overhaul services. The long-term service backlog has grown to $60 billion. Further, “we notice that many customers who buy new engines like the GEnx and LEAP engines sign long-term service agreements at the time of engine purchase to lock in maintenance costs.”

GE is also seeing growing interest in MRO from leasing companies, which now own more than 40% of engines. “They want services that ensure assets are maintained to high reliability and performance standards in order to preserve demand, transferability and value,” Ovington said. “Portable maintenance agreements meet these needs by allowing transfer between lessees and reducing lease-return conflicts.”

Independent MRO consultants have views that broadly tally with those of providers. Chris Doan, president of TeamSAI, sees maintenance increasing about 3.8% annually over the next five years. “Overall MRO growth looks pretty solid.”

Doan doesn’t expect any bounce-back in 2012. “I think that has already happened. We think the last downturn altered the curve in growth. We haven’t seen any surge after the recession and I don’t think we will.” Doan does not see any restocking of inventories in 2012, believing that occurred in 2011.

 MRO in the Americas will grow slowly, about 2.4% annually, while China and India see near 7% rates due to rapid traffic growth. But maintenance, like traffic, remains vulnerable to shocks, especially in oil and the economy. Recent traffic growth has been healthy, capacity is up moderately, but airline profit prospects are down, Doan noted. So far, maintenance has lagged slightly behind traffic growth.

Yearly growth shows ups and downs around trend, but the major elements of MRO— airframe, line, engines and components—will not differ much in growth, according to TeamSAI’s forecast. Cost pressures will force carriers to consider new options, “but at this point we don’t see a big shift to outsourcing.” Doan predicts MRO will continue to consolidate, as shops seek to diversify and look for relief from airline cyclicality, for example in military markets, manufacturing or other aerospace segments.

PMA use has elicited price reductions by OEMs and still faces hurdles from leasing firms. “PMAs will certainly grow, but there is a natural limit,” Doan said.

A COMPETITIVE ROAD

Airline-affiliated MRO providers are voicing concerns about a trend by original equipment manufacturers (OEMs) to grow their share of the maintenance and overhaul business.

For Air France Industries (AFI) president Frank Terner, it’s a question of balance: OEMs’ increasing control of the MRO market is distorting the competitive landscape.

 “Competition is good for our customers; it is good for safety, for quality. We need this competition as long as it is fair competition,” Terner said during a briefing at the Paris Air Show in June.

 “OEMs have been in the aftermarket for years, but their pressure and level of activity is rising,” he said. He warned that if the balance shifts further to the OEMs, this will have an impact on the ability of third-party MRO providers to offer a fairly priced service to airlines. This will be the case particularly for the more complex, new-generation equipment such as the Airbus A380 and the Boeing 787, he said. 

Much of the concern focuses on intellectual property (IP) rights. “We do not expect the manufacturers to make their IP freely available to service their equipment. We do respect the right of IP, but how do you value it in the aftermarket?” Terner asked.

Airline-affiliated MRO providers, such AFI, Iberia Maintenance, Lufthansa Technik and KLM Engineering & Maintenance (KLM E&M), have traditionally had negotiating leverage against the OEMs through the buying power of their parent carriers.  “But where do we stand for our third-party activity if we can’t purchase the IP rights at a reasonable price?” KLM E&M executive VP Peter de Swert said, cautioning that this will lead to a less competitive MRO industry in the long term and “inevitably to higher prices for operators.”

AFI KLM E&M is one of the larger suppliers of multi-product MRO solutions, with a joint workforce of approximately 14,000 supporting 1,300 aircraft for 150 airline customers. It has over 1.2 million square meters of infrastructure worldwide, 77 aircraft bays and 600,000 parts in stock. The provider has two engine test cells (ETC) and completes an average of 450 engine shops per year. One of its ETCs is being upgraded and will have capabilities for engine run-ups on the GP7200, GE90-94 and GE90-115 family of powerplants when it opens in April. 

“AFI KLM M&E has made substantial investments in developing its engine maintenance portfolio, in particular in the very big segment. This puts us in an excellent position to provide a strong alternative to the OEM’s services,” de Swert said.

 “We performed better than the [industry] average. We had a very good order book and increased profitability owing mainly to two factors—a stringent cost reduction and productivity increase program and the implementation of our ‘adaptiveness’ strategy,” Terner said.  Adaptiveness is AFI KLM M&E’s response to the changing MRO business environment and means “listening to our customers and constantly adapting our solutions to their needs,” he said.

Iberia Maintenance senior VP Jose Luis Ruiz de Castaneda similarly sees some “worrying trends” in the MRO market with the growing OEM influence. “We see more and more that Airbus and Boeing want a part of the aftermarket [business] with their new products,” he said.

Ruiz de Castaneda believes the future MRO market will be marked by more partnerships between MRO providers and OEMs. “MROs will have to align with an OEM otherwise it will be difficult to stay in third party,” he said.  “So far, Iberia Maintenance has been able to manage the situation. We have good agreements with OEMs, mainly CFM International and GE. We have not been so successful with Rolls-Royce because we are a heavy competitor with them on the RB211-535E4. There has been less room to get an alliance, but we are working it to see if there is a possibility in the future.”

IB Maintenance recently inked an agreement with GE Aviation to offer MRO on the CF34-8, an engine IB does not operate. Ruiz de Castaneda confirmed that gaining the CF34-8 license was part of the negotiations for Iberia’s order placed in July for up to 16 GE CF6-80E1- powered A330s.

“As an airline offering MRO you have to make good use of these moments,” he said, noting that all new fleet decisions for Iberia and BA are now concentrated in the IAG office. This offers “new opportunities for our maintenance activity,” he said.

—Cathy Buyck

CUSTOMER CARE

To be competitive in today’s maintenance, repair and overhaul (MRO) market, it’s no longer good enough to offer the best quality at lowest price. Understanding each customer’s specific MRO needs is also essential.

Iberia Maintenance senior VP Jose Luis Ruiz de Castaneda sees the MRO market as one marked by “very thorough and increasing” competition with pressures on margins and turnaround times, especially in the engine and component segment of the business. “Every MRO provider has to give quality, price and good turnaround times to stay in business, but other factors like proximity to the customer in attending their needs, understanding specific problems and flexibility for slot allocations are playing a role as well. In the components market, the ability to give full support to airlines is a decisive factor. The customer wants full support for the fleet and the MRO provider has to subcontract whatever is not in its capability,” he said.

Man-hour rates are still decisive for the labor-intensive, low-yield airframe checks, Ruiz de Castaneda said. That makes it difficult for providers based in locations with standard or higher labor costs, like IB Maintenance, to compete on price alone. But opportunities still exist with those customers that value services such as detailed customer attention or have niche requirements, Ruiz de Castaneda said. “We redefined our strategy in this segment toward special programs that require higher technology resources.”

IB Maintenance, a division of the Iberia Group which in January merged with British Airways to form International Airlines Group, has won a contract to convert Airbus A330 passenger airliners into Multi-Role Tanker Transports.

The IB-BA combination brings together complementary capabilities that each side hopes will boost market prospects. BA Engineering has a wide capability on Boeing aircraft; IB Maintenance has a strong Airbus portfolio.

 Having already won their first joint contract, the companies are working together now on a request for quotation to provide MRO services for the SAS fleet.

“Together, we cover all the needs for many customers. It is clear that we now jointly have a much stronger position in this very competitive market,” Ruiz de Castaneda said.

—Cathy Buyck