By Chris Spafford and Darryl Rose of Oliver Wyman

For independent aviation maintenance, repair and overhaul providers, the world is shrinking.

For years, major engine and component manufacturers have muscled into the aircraft maintenance market, blocking MROs from winning work on new models that comprise the lion’s share of modern fleets. MROs are left fighting for a vanishing piece of the pie: end-of-life aircraft destined for retirement or second lives in far-flung markets.

MROs stayed afloat by signing licensing deals with manufacturers and cutting costs by relying on serviceable materials. However, neither strategy guarantees a future to these providers. MROs seeking long-term prosperity need to access the growing market for new aircraft models that original equipment manufacturers (OEMs) dominate.

In our annual MRO Survey, Oliver Wyman confirmed this competitive imbalance is deepening. These dynamics have eliminated opportunities for airlines to find cost-competitive maintenance following aircraft delivery, where MROs and OEMs once fiercely competed. In response, airlines now increasingly conduct maintenance procurement in parallel with equipment selection processes, forcing OEMs to compete against each other. While this trend benefits airlines, it has blocked independent MROs from major procurement campaigns altogether.

As a result, MROs vie for a diminishing share of work tied to mature fleets, which are not dominated by OEMs. While shorter removal intervals and heavier work scopes typical of older components are a boon to MROs today, this market may already be endangered.

Retirement of aircraft less than 25 years old has been rising, hitting 43% of all retirements in 2011, compared with just 21% in 2007. Recent retirements shrink the mature aircraft market and will harm the MROs relying on those fleets.

MROs have begun to seek partnerships with manufacturers as an avenue to growth. More than 70% of our MRO respondents indicate reaching at least one OEM partnership within the last three years. And more than 80% of such respondents characterize those partnerships as a licensing agreement. This is a short-term survival strategy that leaves the MROs in a subordinated position, prone to shifts in the licensor’s fulfillment strategies and to encroachments by rivals.

According to our survey, many MROs have attempted to establish more symbiotic partnerships with OEMs, with little success. Until MROs can implement more ambitious tie-ups with manufacturers, maintenance organizations will remain susceptible to their more-powerful partners’ shifting priorities.

Still, MROs are far from doomed. Current strategies and fleet types can sustain many MROs over the medium term, and some MROs maintain strong and sustainable niches.

Plus, encouragingly, airlines want a more robust maintenance market that includes MROs in a meaningful way. According to our survey, most airlines would welcome competition from MROs for long-term maintenance services when aircraft are purchased.

To thrive rather than survive, MROs must find a way around OEMs and into these sourcing campaigns. MROs must seek partners who can inject them into the selection process. Two candidates are aircraft lessors and airframe manufacturers.

Aircraft lessors work with many operators at the point of aircraft acquisition. MROs could serve carriers in need of bundled services and owners keen to ensure capable stewardship of their asset through its lifecycle.

According to our companion survey of the aviation finance market, many lessors would support this strategy. Of lessor respondents, 70% indicate they already advise airlines on maintenance contracting matters. And a significant majority of our respondents also favor pairing MRO services with lease agreements for commercial (63%) and asset marketability (100%) reasons.

MROs should also consider partnerships with airframe manufacturers to gain access to the aircraft selection process. These players continue to develop their own aftermarket service offerings, but with less success than their engine and component counterparts.

There are clear challenges ahead for engine and component MROs. Seeking powerful allies, defining ways to serve unmet needs, and developing innovative business designs to combat OEM dominance are critical to long-term viability.

The authors may be reached at: Christopher.Spafford@OliverWyman.com and Darryl.Rose@OliverWyman.com.

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