Aftermarket consolidation continues in fits and starts, with some acceleration in 2011 as maintenance, repair and overhaul providers seek, in part, to get bigger to achieve the benefits of size, which include the availability of capital and technical expertise. Buy it's not just about size. Maximum efficiency comes from combining the right type of MRO assets to enable more complete packages to airlines, particularly offers that hold down inventory costs. Acquiring firms therefore look for assets that complement their current business.
Reducing turnaround time (TAT) is critical to reducing asset costs, and the top outsource providers have been working hard to cut in-shop TAT. But what really counts is total TAT. For engines and components, that means the time between removal from the aircraft until return to airline spare stocks. Airlines can help their outsource providers reduce in-shop TAT on airframes. For engines and components, they must cut waste in the processes that bookend shop TAT and lengthen total TAT.
Modern aircraft are generating much more data that can reduce maintenance costs by reducing downtime and improving repair efficiency. However, “there is more talking going on than listening,” stresses Peter Feldmann, VP of the Cavok division of Oliver Wyman. Translation: aircraft and everything on them talk, but systems are not fully exploiting the data because sometimes they are not even connected, and sometimes they speak in different languages.
Aftermarket acquisitions in the second decade of the new millennium got off to a fast start. Aviation consolidation in early 2011 has been “even more robust than we predicted,” summarizes Chris Doan, president and CEO of TeamSAI. “Activity in the first month of 2011 is equal to that of the first quarter in 2010.” Doan sees that strength continuing throughout the year and predicts its aerospace acquisitions will double or triple the number in 2010
The little engines that start, assist and sometimes replace propulsion engines are taking on many of the characteristics of their on-wing brethren. Auxiliary power units are becoming more reliable, thriftier with fuel and more environmentally friendly. Furthermore, APU maintenance increasingly follows wing-engine practices, covered by maintenance contracts from manufacturers and guided by sophisticated analysis of sensor data.
It’s that time of the cycle again. Mergers and acquisitions in aerospace and the aviation aftermarket are picking up. PricewaterhouseCoopers reported $3.8 billion in aerospace and defense deals in the third quarter of 2010, up from $3.2 billion in the same quarter of 2009.
Information technology plays an increasingly important role in managing aircraft, engines and components. Operators aim to make smarter and more economic decisions about maintaining and holding tens of billions of dollars in extremely complex aviation assets. Because such huge sums of money are involved, the best software can offer major gains. To that end, some IT providers are beefing up their offerings. For example, AerData, which provides CMS Lease Management software, acquired EFPAC, a leading engine management software, in December 2009.
Fully exploiting information technology to improve maintenance requires massive sharing of maintenance and performance data among airlines, shops and manufacturers. And that in turn requires standardizing data, the focus of ATA’s Spec 2000 project.
Spec 2000 standards for maintenance data under ATA Chapter 11 are largely complete, although adjustments are still being made.
Probable recovery of aviation maintenance markets is within sight, even if not experienced yet. That usually means some reshaping of the industry through mergers and acquisitions.
Acquisitions of aftermarket firms come in two kinds. Manufacturers or shops already in the business can make strategic or “bolt-on” acquisitions of firms that complement their existing capabilities. And private equity or venture capital firms can buy shops purely as financial plays, seeking to profit, grow the business and gain on ultimate resale.
The pressure for airlines to acquire and manage parts more economically is changing traditional arrangements for parts. The oldest and broadest airline pooling arrangement, the International Airline Technical Pool, is growing and plans to add significant new services. IATP has added five new members, three from Europe and two from Asia, in the last year, bringing its total airline participants to 111.
Part sales plummeted in 2009, and airline part stocks declined as aircraft, especially part-hungry older models, were grounded. Most look for a recovery beginning in 2010. Orders for expendables will likely turn up with traffic. Rotable sales will begin to recover as maintenance events increase, hopefully in the second half or 2010. But full recovery in rotable sales likely awaits restocking of inventories when airlines are stronger financially. That may not come until 2011, or even 2013, in the most pessimistic scenario.
Lean and Six Sigma often start in maintenance by cleaning out hangars, putting items not needed frequently into well-organized warehouses. You have to be able to see clearly what you are doing before you can improve it.
The most important factors in an airline’s selection of an airframe maintenance firm typically are quality, turnaround time (TAT) and price, in that order. Airlines usually rank TAT ahead of price because it can cost $10,000 a day to lease a narrowbody for each day of planned TAT, and several times that for a widebody, according to maintenance consultants at Oliver Wyman. Unplanned TAT delays cost even more in revenue losses.
Pressure to cut costs is sending airframes outside airline shops and often far from home markets. Labor rates, which represent up to 70% of heavy-check costs, simply differ too much among regions to ignore. Cost-saving pressures intensified in 2009, but there are new twists on the cost side. Labor rates have converged among some regions. Long-term, some low-cost regions may become more expensive. New MRO facilities could open in countries or regions not now actively considered. Exchange rates could shift. And the U.S.
Part-way through the devastating slump in air traffic, the MRO industry is under severe pressure. In the short term, these pressures are pushing at least some airframe work to smaller shops that offer very low prices, at least for a while. Airframe prices industry-wide are thus softening a bit. But major providers are fighting fiercely to hold on to long-term customers without cutting prices drastically. So far, they appear to be succeeding. After the slump, the best of these firms could wind up with an even bigger share of the airframe business.