Airlines, MROs and OEMs adjust to big shift in business dynamics
A series of changes over the last year has altered the Americas' MRO sector. The U.S. airline industry entered a possible consolidation end game, a major full-service provider—Aveos—liquidated, and Latin America continued its emergence as a blossoming repair center for narrowbody jets. And after years of airline cutbacks, carriers finally gave MRO providers news to celebrate.
“We are at nearly five million man-hours at five MRO locations in the U.S.,” reports Jack Arehart, co-chief commercial officer for AAR Corp. “We are seeing a lot of modification projects, such as inflight entertainment and lie-flat seat installations, as more of our customers are choosing a broader selection of AAR services during a shop visit.”
AAR has benefited from the closure of Aveos, which performed 75% of's MRO. AAR now handles a variety of MRO services, from repair activity management to aircraft and landing gear repair services, says Arehart. Both Air Canada and Aveos were AAR customers, Arehart notes, explaining that the Aveos bankruptcy created instant capacity that AAR was able to put toward additional Air Canada work.
The MRO wasn't the only company to land new work from neighboring operators in 2012. “[Last year] was a busy year for contract bids by North American operators,” says Leonard Kazmerski, vice president-marketing and business development at Timco Aviation Services. “In addition to booked work, there were several new programs which absorbed some excess capacity from North American MROs in prior years. While there still is available capacity, this market is clearly in a better state of health than it has been for several years.”
Airline mergers rank high among the reasons why. Jim Sokol, vice president-maintenance operations for, points out that within the past two years, mergers—such as Southwest-AirTran Airways—have triggered peak MRO activity as airplane cabins and liveries are reconfigured to match the new brand.
“This type of work tends to occur outside the scope of normal maintenance planning, and accounts for the spike in business at some North American MROs,” Sokol says. “But in order to win these significant new business opportunities, the MROs have positioned themselves to be more competitive by improving their internal capacity to meet established time commitments to their customers.”
Aviation Technical Services (ATS) President/CEO Matt Yerbic says that airline operations are getting back to the 1.1 trillion seat miles flown prior to 2007, which means that there will be increasing demand for MRO services. The Everett, Wash.-based MRO completes 500 aircraft annually—mostlyfor customers such as Southwest and . Yerbic cites a trend of widebody airframe work returning to the U.S. from Asia. “We are seeing this especially on the because the cost differential between the U.S. and Asian MROs is narrowing,” he explains.
ATS's own analysis of outsourcing trends is positive enough to convince the company to add hangars and expand its component business.
“Prior to 2012, some 30% of all North American airline heavy maintenance and modification hours were generated internally,” Yerbic points out. For 2013-14, ATS predicts this will drop to 22%. Two events driving this trend are the Aveos closure and the phase out of American's Fort Worth-Alliance Airport maintenance facility, which Yerbic believes will prompt more outsourcing.
The uncertainty of the new' maintenance plans is a wild card for MRO providers. “We don't know what American, or a merged American and , will do about maintenance outsourcing,” says William Swelbar, a research engineer with the Massachusetts Institute of Technology (MIT) International Center For Air Transportation. “It is very likely that they might bring some contracted-out maintenance back in-house if they can make the case that it will be more affordable. That would also mitigate labor concerns with respect to the merger.”
American declined to comment. The carrier's silence is not dampening enthusiasm from service providers, however. Flightstar Aircraft Services COO Tucker Morrison considers the proposed merger an opportunity for new business. “AMR is high on our list of prospects, and we are talking with them about getting some of their narrowbody work,” says Morrison, whose Jacksonville, Fla.-based company specializes in narrowbody airframe maintenance and modifications.
Flightstar has 11 maintenance lines in two hangars at Jacksonville's Cecil Field, and plans to add four to six more in a new hangar at that location by 2014, Morrison reports. That expansion, he says, is driven by demand from existing customers, which include operators and leasing companies such as Southwest, AirTran,, FedEx, DHL, , and Aviation Capital Group.
Besides demand, changes with airline pilot scope clauses could impact some North American MROs going forward, particularly those that have serviced the 50-seat jet market, points out Rob Cords, StandardAero senior vice president of airlines and fleet.
“New labor agreements are permitting pilots at regional affiliates to fly larger aircraft, and consequently, we are seeing a shrinking fleet of 50-seat jets,” Cords reports. “Planning for our capacity needs is predicated partly on a projected reduction in the number of 50-seat jets between 2015-20. As we determine the numbers, we will decide what capabilities we will need to keep in place.”
For that MRO market, Standard Aero's specialty is the-3, which powers the /200, and the used on the ERJ 135 and 145. As the 50-seat jet fleet shrinks, the MRO's marketing strategy “will have to address a more [globally] fragmented market, in which operators fly just a few,” Cords says. “We see an opportunity to work with those operators to optimize the remaining life on the engines. That includes helping them take a more aggressive stand in the surplus market for their parts acquisition planning, based on how long they plan to keep the aircraft.”
While demand for CF34-3 work may be declining overall, Standard Aero sees expanding MRO opportunities with the-7 and the CF34-8. “We are also seeing some growth opportunities on the Pratt & Whitney-Canada PW127M, which powers the -600,” says Cords.
has assessed the changing dynamics of the engine MRO market and sees excess capacity—at least for now.
“During 2012, fewer cycles were flown worldwide, than in 2011. That, and increased engine reliability and longer on-wing time, have impacted demand for MRO services at our facilities in the Americas, which help to support the worldwide fleet as part of our global network,” says GE Aviation Services Chief Marketing Officer Bill Dwyer. “The airlines are benefiting economically, but this has meant less demand for shop visits.”
While Dwyer cites the greater degree of reliability of the CFM56-5B and CFM56-7B compared with the earlier model CFM56-3 and CFM56-5A, GE's venerable-80 also is remaining on-wing longer compared with earlier models. “For the CF6-80 family, there is nearly a 30% increase in time on wing, which has added unanticipated shop capacity.”
On the other hand, says Dwyer, GE is ramping up for the next generation of narrowbody and widebody aircraft engines, the LEAP andfamilies. “We are in the process of selecting six to eight MRO partners to participate in GE Branded Service Agreements for the GEnx, and 10-12 for the LEAP. We now have two facilities supporting the GEnx—GE Durham [N.C.] in the U.S., and GE Celma in [Petropolis] Brazil.”
Latin America is developing into an airframe MRO center, particularly in Central America and Mexico. One of the biggest is San Salvador-based Aeroman, which specializes in 737 andheavy checks. “We have about 120 annual heavy maintenance visits on the A320, and about 50 on the 737,” says CEO Ernesto Ruiz. “Just about all of our 737 work is on the Classic models, but we expect to book our first 737NG heavy check sometime this year.”
According to Ruiz, plans are moving forward to expand Aeroman's El Salvador operation. However, Aeroman is also studying expansion opportunities elsewhere in Latin America, he notes. That could mean a stand-alone, Aeroman-run facility, or joint venture with an established MRO.
Ruiz says capacity constraints are driving the plan. “Within the past few years, about 90% of our capacity has been typically booked,” he explains. “That's why any new capacity expansion we have under study will be to support the needs of our existing customers, who have already indicated that they want to give us more work.”
Nearly all of Aeroman's customers come from North and South America. Ruiz says that while the company's focus remains on narrowbodies, widebody work is a possibility down the road. “It will be at least five years before any decisions about that will be made,” he acknowledges.
Mexicana MRO Services, with hangars at its Mexico City headquarters and at Guadalajara, also could be expanding shortly in the direction of widebody maintenance, reports Jorge Jacome, senior vice president-engineering and maintenance.
“We have been increasing our [Boeing] 767 work, more recently with winglet installation on new-productionout of the factory for Grupo Latam,” says Jacome. “We did six in 2012, and completed another in February.” He also reports that Mexicana may be adding heavy maintenance on the , should a deal with a South American operator materialize. The carrier currently sends the airplanes to Asia for heavy checks, he notes.
The narrowbody market—primarily comprising the A320, 737 and 757—remains Mexicana's mainstay business. Most of the MRO's airline customers are based in Latin America, with leasing companies accounting for the majority of North American clients, and European operators are the primary source of its 757 and 767 work. North America, Jacome says, is considered the target for expansion of its customer base. “We do expect to close some deals on heavy checks for U.S. and Canadian customers this year,” he says.
Mexican MRO Services operates 10 maintenance lines, eight of which are at Mexico City, and plans are in the works to increase capabilities within the existing infrastructure.
“We are aware of [MRO] capacity growth in Central and South America, and the fact that North American operators are looking at those regions for additional capacity for heavy checks,” Jacome notes. “Cost control is one reason, and the other is the closure of Aveos. Canadian operators are looking at U.S. facilities for MRO, because of free trade agreements and the proximity of the U.S. facilities to Canada. That, in turn, is constraining U.S. capacity, causing some U.S. operators to look at Central and South America. Narrowbody aircraft operators will drive most of this business,” he says.
Delta TechOps and Aeromexico are in the very early stages of constructing a facility at Queretaro, Mexico. The new hangar will be able to accommodate seven narrowbodies simultaneously. The airlines have not released the facility's exact size or opening date.
MIT's Swelbar notes that Latin America's narrowbody heavy maintenance facilities are evolving into a great specialty for the region, but cautions that the region's advantages may be short-lived. “The gap between their labor rates and [the U.S.'s] will decrease over time,” he says. “In fact, this follows a trend for [overall] MRO costs to increase worldwide.”
|Aeroman||Aero Technical Support & Services Holdings, which is liquidating Aveos, purchased an 80% stake in 2007; Salvadoran investors hold the other 20%|
|Aviation Technical Services||Taurus Aerospaces Group, owned by Macquarie Group, purchased fromin 2007|
|Aveos Fleet Performance||Bankrupt in 2012, parent Aero Technical Support & Services is liquidating it; AJ Walter acquired component business|
|Flightstar Aircraft Services||Moelis Capital Partners purchased majority in 2011|
|Mexicana MRO Services||Mexicana Group, purchased by Med Atlantica in 2012|
|StandardAero||Dubai Aerospace Enterprises purchased from Carlyle Group in 2007|
|Timco Aviation Services||TAS Management purchased the company in 2007|