Our forecasting pundits correctly pointed out last year that the MRO industry was on the road to recovery, although the path could be a switchback. MROs like HAECO saw a bigger demand for airframe and line maintenance in the first half of 2011 but a slight decrease in the second half as passenger traffic growth slowed. So what does that mean for this year?
“I think we're on the mend,” says Chris Doan, TeamSAI chairman and CEO.
TeamSAI's latest MRO forecast backs this up. A year ago it predicted the MRO market would be worth $46.9 billion in 2011, and that turned out to be accurate. This year the consulting firm expects the market value to grow 5.7% to $49.5 billion.
The three biggest contributing factors to MRO market growth this year are a larger fleet, increased aircraft utilization and slightly higher labor rates.
Airline market warnings cannot be ignored, however. The(IATA) expects airline profits in 2011 to be down to $6.9 billion and predicts profits will be even worse this year, at $3.5 billion. Big contributors are lower passenger and cargo load factors and climbing fuel costs, the latter which TeamSAI says represent 30% of airlines' expenses but could reach 32% this year. That approaches the all-time high in 2008.
“Ultimately, the airline industry remains a low-margin business where revenue growth struggles to keep pace with cost increases,” says the consulting firm. “Airlines and MROs alike must continue to innovate, implement new technologies and processes, embrace environmental efficiencies as a standard business practice, and proactively monitor acquisition opportunities.”
AIRFRAMES and FLEET
To understand the MRO forecast, you need to understand the fleet.
The airline fleet grew by 3.2% in 2011 to 20,840 in-service commercial jet aircraft, which was slightly higher than the 20,809 aircraft TeamSAI predicted a year ago. Over the next decade, expect the passenger fleet to grow 4.4% and the cargo fleet to increase by 3.3% each year.
The narrowbody mix will grow from today's 60% of the fleet to 63%, or from 12,579 aircraft to 18,794 aircraft; widebodies will remain 22% of the fleet but will grow from 4,634 to 6,897 aircraft in 10 years. Regional jets will make up less of the fleet in a year, 14% compared to 17% now, but their numbers climb to 4,264 from today's 3,627, says TeamSAI. It is interesting to note that 83% of the new aircraft orders last year were for narrowbodies, with theleading the way. The topped widebody orders.
Airframe manufacturers are sitting on a firm backlog of more than 9,100 aircraft, with 6,050 being narrowbodies, which is consistent with the percentage of the narrowbodies in the fleet, says TeamSAI. Note that 50% of these new deliveries will replace existing aircraft. Over the 10-year forecast, TeamSAI predicts manufacturers will deliver 16,000 aircraft, and about 6,800, or 33%, will be retired as airlines seek more fuel-efficient aircraft. About 3,900 narrowbody passenger aircraft, or 33% of the fleet, will be retired as the remaining 727s,and DC-9s, “plus increasing numbers of early generation MD-80s, A320s, and 737 Classics are phased out,” says TeamSAI Senior Analyst Allen Wilson. “Some 1,620 (46%) of the current widebody fleet will be replaced, of which almost 18% will be freighter converted,” he says. Expect the remaining first-generation , DC-10s and A300Bs to retire, followed by aircraft such as mid-generation , 747-400s and A300-600Rs.
In the competitive narrowbody market, Airbus andare providing a great deal of support “to help the industry with longer C check intervals” for these aircraft, points out Tom Cooper, TeamSAI senior VP and principal.
Airbus recently extended A320 C check intervals to 24 months from 20. That equates to about $16,000 per aircraft per year in savings due to the interval escalation,” says David Marcontell, TeamSAI president and COO. “That doesn't include increased availability or revenue—that's just the maintenance savings,” he says.
As operators incorporate optimized and extended maintenance intervals such as this, “there's going to be a huge benefit to their MRO spend,” adds Cooper, and less money flowing to MRO facilities as a consequence.
Airbus and Boeing are trying to distinguish their A320 and 737 programs from each other by providing airlines with cost savings, creating a duel between the OEMs and an unprecedented level of focus on operating costs, say the TeamSAI executives.
Widebody operators with aircraft such as Boeing 767s, 777s and 747s also have benefitted from recent heavy check extensions.
Weak cargo demand continues to make the cargo conversion market lag. IATA reports the international freight market decreased 0.6% last year and the overall freight load factors was just 45.9%, which is leading some cargo carriers to introduce converted narrowbodies to their fleets, says IATA.
TeamSAI thinks the cargo market “is going to grow about a point slower than the passenger fleet over the 10-year period, so 3.3% or so,” says Doan. He thinks cargo aircraft introduced to the fleet during this time will be closely split between newly manufactured freighters, which will be widebody aircraft for more tonnage, and converted passenger aircraft, which will tend to be narrowbodies.
TeamSAI says 58% of the new fleet, or 753 aircraft, will come from conversions.
FedEx Express is a good example of the split, between its Boeing 757 conversion program and its order for 27 new Boeing 767-300Fs.
Of the 1,597 in-service cargo aircraft flying today, TeamSAI pegs 47% of them to retire over the next decade due to their higher age.
Putting this all together, airframe MRO (including modifications and line to heavy maintenance), will be worth about $17.6 billion this year. This segment will grow to $23.4 billion in 2022, predicts TeamSAI.
ENGINES and COMPONENTS
Engine maintenance consistently comprises the biggest piece of the MRO expenses pie, and 2012 will be no exception. At $22.4 billion, this segment represents 45% of the market, but a year ago TeamSAI predicted that number would be a bit higher.
“Especially on the new fleets, engines are performing incredibly well from a time-on-wing perspective, and it's remarkable, really, how good they are,” says Cooper. He cites the-7 as an example of an engine that consistently stays on-wing for 20,000 cycles. This type of performance triggers lower cost-per-hour-rates.
While narrowbodies account for 51% of the total MRO spend in 2012, the forecasters estimate that engines powering these aircraft will make up 47% of the $22.4 billion total this year. That percentage should stay stable over the next five years, predicts TeamSAI.
The firm forecasts a compound annual growth rate (CAGR) of 4.3% over the next five years, which will take the engine MRO market to $27.2 billion in 2017, then slow to a 2.7% CAGR over the next five years.
Airlines outsource 79% of engine maintenance, compared to 84% of components work.
TeamSAI predicts the MRO market for components—including items such as landing gear, wheels/brakes and avionics —will be $9.5 billion this year and will grow by a CAGR of 3.5% in the first five years of the forecast to $11.3 billion in 2017.
Similar to the engine aftermarket, component MRO “represents an area where the value continues to grow because of the relative concentration of power in the value chain amongst a smaller set of competitors,” states TeamSAI.
In both cases, being an independent MRO not aligned or partnered with OEMs might become more difficult with newer equipment because of the intellectual property (IP) and the advanced technology involved.
Scott Gunnufson, VP and general manager of service solutions for, says the manufacturer approaches the aftermarket and IP issues basically the same as it has for the last decade. When it comes to avionics, he thinks people often mix up IP and test equipment issues. Unlike mechanical components, avionics are software driven and their complexity has increased dramatically over the past few years. Gunnufson says each generation of avionics offers 30% more reliability.
This has also increased the complexity and cost of test equipment.
Rockwell Collins has a substantial footprint on the, for example, and has integrated the functionality and weight of several boxes into one “so the complexity of the chip and circuit cards is intense,” Gunnufson says. This also drives up the complexity and expense of the 787 test equipment.
Owners of the aircraft will still get the IP, schematics and manuals necessary to maintain the 787 avionics, but he doubts many will buy the test equipment. He estimates “you would need a fleet of 250-300 787s to justify the cost,” adding that “we don't mark up the test equipment more than we used to, but the whole processing architecture is very different than even five years ago.”
Doan agrees with Gunnufson that aircraft electronics are rapidly advancing. “We're seeing the sophistication get to the point that it becomes difficult for independents to afford the technology to even handle them.”
MRO unit costs per available seat mile have steadily dropped over the past decade because maintenance companies have worked hard to improve operational and technological efficiencies. Last year the unit cost per available seat mile (ASM) went up slightly, from $11.4 per 1,000 ASMs in 2010 to $11.7 in 2011. TeamSAI predicts this year will come in about the same, but over the long term, extended maintenance intervals and higher unit reliability “will continue to drive that unit cost slightly down,” says Doan.
While maintenance unit costs may be decreasing, questions arise about MRO costs in the future—especially given the entry barriers to next-gen equipment maintenance, financing difficulties and potentially shorter aircraft lifecycles.
If owners and operators continue to retire aircraft at a younger age, at 20 years instead of 30, for instance, to reduce fuel consumption, that eliminates a decade of costs. Coupling fleet renewal with the fact that it is easier to secure financing today for new aircraft instead of used ones, there is a major impact to the average lifecycle. But is the trend sustainable? Costs spread out over 20 years instead of 30 “change the financials pretty substantially,” says Marcontell. He says it is too early to call this a trend, “but we're watching it pretty closely.”
Looking at the airline MRO industry from a macroeconomic perspective, “there are a lot of things going on right now that give you a lot of anxiety about what the future costs are going to look like,” says Marcontell.Forecasters predict traffic growth in Latin America, the Middle East and Africa will beat the global average of 2.9% in 2012.