MRO Market: Growth, Consolidation, New Normal

Commercial, military aftermarkets seek efficiencies and partnerships to offset constraints

Printed headline: Maintaining Position

Revenue from the maintenance, repair and overhaul market may be flat for the next year or so as the aerospace and defense industry recovers from the recession, but dynamic supply chain and productivity improvements will reshape the aviation aftermarket. Efficiencies are paramount as aviation maintenance and engineering service providers deal with lower aircraft utilization on the commercial aviation side and decreased budgets, but increased logistics and sustainment needs, on the military side. The civil aviation MRO market is expected to dip 4-6% in 2010 from $45.7 billion in 2009, according to consultancy TeamSAI. “The bleeding will be most noticeable for service related to the oldest fleet types,” says TeamSAI President Chris Doan. However, he still predicts a 4.1% compound annual ground rate through 2019, which would bring it to $53 billion in 2014 and $68.2 billion by 2019 (see graph below). TeamSAI predicts that the MRO market will grow at a compound annual growth rate of 4.1% through 2019. North America is still the largest segment today, with $16.1 billion, or 35% of the market, but in 10 years, Western and Eastern Europe will eclipse it by representing $20.6 billion, compared to $18.9 billion for North America. MRO in the Asia-Pacific region, which TeamSAI says is a $10.1-billion market now, is forecast to match that in North America in a decade at $18.9 billion. Latin America and the Middle East include emerging aftermarket service clusters in Brazil, Mexico and the United Arab Emirates (Dubai and Abu Dhabi, in particular), but those regions still will only represent $3.6 billion and $6.3 billion, respectively, by 2019, according to TeamSAI. Consulting firm AeroStrategy predicts the MRO market will be valued at about $53 billion by 2018, with the highest compound annual growth rate coming from India (8.5%), China (7.6%) and the Middle East (6.5%) (see chart, p. 88). As the MRO market becomes more global, there will be greater transparency in labor rates (see story and chart, p. 90) and service prices, according to Team SAI. Almost every MRO company is working on ways to decrease aircraft, engine and component turnaround times now, which is imperative as operators try to eke out better asset utilization. This has prompted aviation service providers—including original equipment manufacturers (OEMs), operators and MROs—to keep key spare parts in stock or in component pools in the right areas around the world. So far, however, parts pooling is used more frequently in Europe and Asia-Pacific. “Shifting massive amounts of inventory to pool managers—up to $1 million per aircraft or $700 million total for the largest U.S. airlines—should become a higher priority,” states a recent Oliver Wyman study on inventory pooling. AeroStrategy forecasts that the air transport MRO markets will grow at the highest compound annual growth rates in India, China and the Middle East. Cost containment is still a critical focus for most aftermarket service providers, but ensuring that high-quality, safe and reliable services are not jeopardized is crucial. “Although long-term market growth is expected, higher efficiencies in the MRO industry are mandatory,” says August Henningsen, chairman of Lufthansa Technik. TeamSAI’s Doan agrees. “Turn-time and labor efficiency must continue to be a business imperative for the MROs that wish to remain competitive in such a challenging business environment,” he says. One of the challenges for MROs, according to Henningsen, is OEM price escalation, which is not diminishing and affects margins. While the parts manufactuers approval (PMA) versus OEM parts argument is not new, this fiscal environment could lead to increased PMA sales as alternative parts suppliers branch out into selling interior components. Branching out also comes through partnerships and collaboration, which are growing around the world as service providers seek efficiencies and business growth globally. Collaboration, however, is most successful when data can be easily shared and the supply chain can be more transparent. Expect to see investment in information technology rise in this market segment, which still uses many manual processes. “MRO needs to automate end-to-end processes,” says Peter Scott, vice president of supply chain solutions for Exostar. Because there is more partnering and outsourcing, MROs depend on suppliers around the world, so supply chain visibility is increasingly necessary. And lastly, “After a relatively quiet year on the consolidation front, we expect there to be more merger-and-acquistion and joint-venture activity to rationalize the excess capacity in the MRO industry,” says Doan. On the military side of the market, pain points for several Western countries include aging aircraft and constrained sustainment budgets. The aging fleet problems are exacerbated by the delay of new platforms, such as the Airbus A400M and F-35 Joint Strike Fighter. For instance, France, which ordered the A400M, intended to retire its C-160s but is seeking service life extensions from its suppliers instead, according to Mike Howard of AeroStrategy. “A similar situation is ongoing with NH90 customers, many of whom are operating older-generation Sea King aircraft,” Howard says. Operators of mature Lockheed Martin C-130 transports are examining aftermarket, OEM and in-house military service options to upgrade the center wing box, the high-stress area where wings, empennage and landing gear meet. Several operators also are considering communication, navigation and surveillance/air traffic management (CNS/ATM) avionics upgrades, especially for C-130H models. A common problem for out-of-production aircraft is finding parts, which means militaries need to locate new suppliers or launch their own parts production. Then there is the fact that several NATO countries’ fleets are getting beaten up in combat or are flying more frequent humanitarian missions, even while there is less money to maintain them. For instance, the U.S. military is grappling with decreased budgets and a much different operational reality than in the Cold War. Noting that “we’re in an era of persistent conflict,” Lt. Gen. Mitchell Stevenson, U.S. Army deputy chief of staff for logistics, predicts the U.S. is not going to return to a pre-2001 military strategy or posture. “We’re probably going to have a portion of our forces deployed somewhere—always,” he says. The maintenance and logistics effect is that “a portion of our equipment will be in reset at all times,” so the armed services have to position themselves differently to adapt to this new paradigm—and with less money, says Stevenson. John Johns, assistant deputy undersecretary of Defense for maintenance, puts it this way: “What is the new normal? We all need to come to grips with that.” Budgets are shrinking, but AeroStrategy predicts global military MRO spending will be $67.5 billion by 2018, which is $6.4 billion higher than in 2009. “Key growth platforms include the F-35, V-22, UH-72, Tiger and NH90,” while the “declining platforms are led by the F-5,” says Hal Chrisman, an AeroStrategy principal.