Providers of military MRO begin to ponder their ultimate fate
If there was any lingering doubt, Kelly Whalen put it to rest. Whalen, a longtime defense industry strategist, looked out over the room full of military maintenance, repair and overhaul (MRO) providers at Aviation Week's MRO Military Conference here this month and put a voice to their doubts.
“Frankly, some of us in this room won't be here a year from now,” said the sector vice president for strategy, business development and innovation atTechnical Services. “And that's OK.”
Whalen was speaking only for himself, but he might as well be speaking for the entire Western MRO military industry. One thing became clear over the course of the one-day conference: MRO military providers have gone from simply trying to figure out how to innovate themselves through a historic downturn in post-war government spending—the conclusion of previous conferences—to wondering whether there will be a viable marketplace worth their efforts, after all.
The worldwide MRO sector will experience an additional business decline of almost 3% from 2013 to 2014, according to Hal Chrisman, a leading analyst and vice president at aviation consultancy ICF SH&E. He said forecasting—which is especially critical in the aftermarket world—is very tricky this year, particularly in the U.S., where the Obama administration released its fiscal 2014 budget request April 10. The administration's proposal has been widely criticized or lamented for ignoring the 2011 Budget Control Act's mandates, as well as the effects of the law's sequestration cuts that took effect in March.
So far, it appears defense operations and maintenance spending will drop nearly 8% from fiscal 2013 to 2014. But Chrisman notes that “analyzing this budget is a high-risk proposition.”
Chuck Artymovich,Aeronautics vice president and general manager for modification and MRO, agreed. “What's our environment? I don't know, and our customer doesn't know—[that is] for sure—right now,” he said in a panel on industry's response to budget reductions. Artymovich said the effects of the 2013 sequestration will not be felt for another 6-12 months, and he warned that defense officials' plans, in part, could call for in-sourcing work from contractors to protect against new rounds of base realignment and closures sought by the White House and Pentagon leaders.
“We are going to go through some very turbulent times over the next couple years, and the decisions that are being made are being driven not necessarily by smart economics, but because of the loss of jobs and politics,” Artymovich said.
Sequestration also kept military personnel from traveling to the conference—the lone U.S. military representative there drove himself from nearby Robins AFB, Ga.Col. Daniel Hicks, aviation commander at the Defense Logistics Agency, did not address in-sourcing concerns in his presentation, although he concurred with worry about the uncertainty and ripple effects on government and industry. “It's got to ripple through the industry, and it's got to ripple sooner rather than later,” he said.
Nevertheless, despite what could be seen as a potentially historic opportunity to refashion how the U.S. military seeks and acquires MRO for its equipment and systems, most executives voicing opinions at the conference said they expect the so-called “50-50” and “core” mandate to remain in effect. U.S. law based on post-World War II drawdown concerns requires theto maintain a core MRO capability of its own, rather than outsourcing it all to the private sector. Moreover, at least half of the military MRO workload has to be provided within the government. Flattening, and now declining, defense budgets have spurred advocates of change to call for altering or scrapping the law, but most business executives are apparently resigned to its permanency.
“I never, never tilt against that,” said Randy Fowler, a former assistant deputy undersecretary of defense for materiel readiness who now is director of life-cycle management integration at Lockheed Martin. Credited with helping to introduce and grow use of performance-based logistics (PBLs) inside the Pentagon, Fowler said he expects the 50-50 requirement to outlive him.
Whalen echoed the sentiment to conference attendees: accept it and try to help the government meet its needs through contracts that also help industry, like PBLs. “One of the things industry needs to do is take risks,” he said.