MRO providers see an uptick in activity, as pent-up demand boosts industry
Many maintenance, repair and overhaul (MRO) company executives feel cautiously optimistic as the airline aftermarket rebounds, but they are readily cognizant of market forces, such as rising fuel prices, that could undo the uptick.
“Cautious” is a key word because “it's not time to break out the champagne bottles and get too euphoric about what the future picture is,” says Chris Spafford, an Oliver Wyman partner.
Prominent features in today's picture, besides routine maintenance, include pent-up demand for non-critical MRO work that has been deferred and needs attention, and inventories that were greatly downsized during the global economic recession and require replenishing. Airlines also are upgrading lackluster interiors, especially in premium cabins, as passenger traffic picks up. All of this could generate an 8% growth rate from this year to 2012, predicts Spafford, who thinks after the maintenance bubble pops the growth rate will slide to around 3% per annum through 2014.
Aviation consultancy TeamSAI pegs that MRO market at $46.9 billion, which is 10.8% higher than in 2010. It forecasts a 3.8% compound annual growth rate through 2016, when it predicts the MRO market will be worth $56.4 billion.
The forecasted expansion is noteworthy, but the roller-coaster climbs and dips over the past decade have basically placed the civil MRO market where it was in 2001, says Spafford. So while the champagne celebration may be premature, tentative optimism stems from the belief that the major industry restructuring is over.
Three reasons support this are:
•Aftermarket organizations are adding personnel. Oliver Wyman will release its annual MRO survey April 12, which finds that 23% of respondents plan to increase their staff, offsetting the 22% that plan to decrease head counts. This compares to 50% of survey respondents who reported decreases last year.
•Several leading MROs are sold out for many months in advance—some for the rest of the year. This is true for high-quality MROs around the world; 47% of respondents to the Oliver Wyman survey indicated capacity utilization rates of at least 80%.
•Aftermarket companies are investing. For example, Dean Baldwin Painting plans to double its company size by acquiring a hangar in Peru, Ind., and spending $10.5 million to convert it into a state-of-the-art, four-bay paint facility, which it aims to open in December.
AeroTurbine, owned by AerCap, has been spending money the last four years on hiring people, expanding aircraft and engine component spares capabilities and adding offices in Singapore, the U.K. and Abu Dhabi. This investment in front-end business growth has positioned it to chase larger deals, such as the one it recently signed with. The carrier sells its excess inventory to AeroTurbine, which opened a warehouse in Tulsa, Okla., near American's heavy maintenance base, and it monetizes that surplus for the airline. “The initial batch of parts includes 20,000 line items”—parts for aircraft ranging from to MD-80s, according to Mike King, AeroTurbine's president and CEO.
MRO companies like AAR Corp. will continue to invest, too. AAR, which projects sales this year of about $1.8 billion, up from $600 million in 2003, has expanded through acquisitions and organic growth, such as component repair and engineering services. David Storch, chairman and CEO, says, “I would visualize making acquisitions that are complementary to the things that we currently do . . . [to] widen or broaden our footprint and our capabilities.” When prodded, he admits to being open to completing “some deals” this year.
Broadening and widening is also what Chromalloy is seeking in its $35 million expenditure on turbine engine ceramic core and component casting facilities in Tampa, Fla. It also is developing a new technology center for turbine engine repairs, parts and coatings in Florida that it expects to open in the fourth quarter. The casting facility decreases parts processing time, which allows more throughput.
Investing in high-tech capabilities positions aftermarket entities to offer bigger bundled service packages and also helps prepare for future aircraft. Over the next 10 years, TeamSAI expects 46% of the 20,203 aircraft in the commercial fleet to retire, with high fuel prices virtually eliminating aircraft such as737 Classics and DC-9s during the decade. The continued drive toward fuel-efficient aircraft will not let up because “even half a percent of improved fuel burn can mean a lot if your fuel price is going up by tens of dollars a barrel,” says Chris Seymour, Ascend's head of market analysis.
As new aircraft such as the, and prepare to enter service (or, in the case of the , have just entered service), MROs “are very much jockeying for leadership positions on the new aircraft,” says Spafford. “While the numbers from an MRO perspective won't be reflected in any of the forecasts because the maintenance related to those aircraft is years out, people are making significant investment and significant bets” on them, he says.
Besides going after new aircraft types, aftermarket entities must examine where the fleet growth will occur over the next decade.
For instance, operators and leasing companies in the Asia-Pacific region last year placed 29% of the new aircraft orders, with China alone nabbing 10%, reports TeamSAI. This will translate to a growing percentage of MRO in the region. By 2021, the consultancy predicts the Asia-Pacific MRO market will be $21.1 billion of the $69 billion market, with China representing $7.2 billion.
While Asia-Pacific will eclipse each of the North American and Western European MRO markets, they are projected to be worth $16.5 billion and $15.9 billion, respectively, in 2021. If you add Eastern Europe into the mix, the whole European region grows to $20.7 billion from $13.8 billion this year, TeamSAI forecasts.
It believes the North American MRO region this year equates to $14.9 billion of the worldwide total of $46.9 billion.
In global terms, TeamSAI and Ascend forecast the worldwide fleet to grow 3% in 2011-16 and then 4.1% in 2016-21.
The percentage of narrowbody aircraft in the fleet will remain at 60-61% over the next 10 years. Widebodies represent 23% of the fleet and will climb to 6,700 in a decade from 4,546 aircraft now, according to TeamSAI and Ascend data. The size of the regional jet fleet will increase to 4,322 in 10 years from 3,568 currently, but its percentage drops to 15% from 18% during the period. So, even though the new slew of larger regional jets such as the Superjet and MRJ are coming out, they still represent a small portion of the overall fleet.
If you follow the money and hone in on high-margin MRO tasks, engines dominate. Powerplants represents 46% of all MRO spending, according to TeamSAI. While airframe maintenance costs break down to about 70% labor and 30% material, engine MRO is the opposite—70% material and 30% labor. Even with greater use of used serviceable material and parts manufacturer approval (PMA) parts, powerplant material costs resist dropping (see article below).
As China's economy has expanded and its labor rates have increased, “there are actually some American MROs that can compete pretty favorably now against China. That was not the case five years ago,” says Ken Aso, an associate partner at Oliver Wyman.
It comes down to competition being more than just labor rates. “If labor rate was the only thing that mattered, there wouldn't be a single aircraft overhauled or going into a hangar in Europe,” adds Spafford.
Oliver Wyman's survey respondents say their No. 1 investment is making fundamental improvements to their operations. While process improvements might not generate the excitement that new technology expenditures do, “the aviation sector generally lags other manufacturing services across the globe and many other servicebusinesses from a quality, reliability and efficiency/productivity perspective, so it's refreshing that the industry is focused on this,” says Spafford.
Maximizing production efficiencies also frees up space and manpower. “That's where they're insourcing more and developing new engineering and margin-rich tasks,” says Aso. That translates to making more money.