The Middle East MRO sector will have to structurally change to handle future volumes
The fact that the maintenance, repair and overhaul (MRO) business is on the fast track in the Middle East is a no-brainer by now. But here's the problem: In the current set-up, neither regulators nor operators will be able to handle the growth. Harmonization, alliances and networks are needed.
The fundamentals could not be better, however. The Middle Eastern MRO market will grow from $3 billion in 2012 to $6.8 billion in 2021, according to the latest forecast by the ICF SH&E consultancy. Vice President David Stewart told attendees at the MRO Middle East conference here recently that this is equivalent to a compound annual growth rate (CAGR) of 9.4%. Over the same 10 years, the Middle Eastern fleet will increase the fastest of any region, at a 7.7% CAGR—even ahead of Asia-Pacific at 6.2%.
The growth is largely a function of bigger fleet size at the region's airlines and also being largely composed of widebody aircraft. At this point, a lot of work is traveling outside of this region, but with local companies rapidly expanding their own capabilities, things could change quickly.
Tom Cooper, senior vice president and principal at Team SAI, highlights that the Middle East is now surrounded by 39% of the global market. And with industry growth migrating east, that figure will likely rise to 50% in the next 10 years.
The building up of local MRO capacity will lead to a better balance of supply and demand, believes Lida Mantzavinou, a consulting analyst for commercial aviation at Frost & Sullivan. More business will stay and carriers from other regions will also send work to the Middle East, if the new players manage to compete with Asian MROs.
The region's providers will have to seek their future in original equipment manufacturer (OEM) and MRO partnerships, believes James Stewart, group CEO of the Mubadala Aerospace MRO network. “Networks will become extremely important, and partnerships with OEMs will be the business model of the future,” especially for engine and component maintenance, Stewart says. He predicts that life will become much tougher for completely independent companies because they will not have access to OEM technologies and intellectual property, and they will lack the scale necessary to be competitive. Mubadala Aerospace has built its own MRO network that includesand Abu Dhabi Aircraft Technologies (ADAT). “ADAT and Joramco are the only significant third-party providers today in the Middle East MRO market,” he says.
Gulf Air's director of engineering and airworthiness, Jamal Hashim, also calls for greater cooperation in the region. He points at “great synergies if we adopt more collaboration in the Middle East.” In his view, airlines should look at component pools in particular to reduce inventories. Some preparatory work has started: Seven airlines within the Arab Air Carrier Association (AACO) have commissioned a study with SH&E that is slated to be completed by May. Major players Emirates and Saudi Arabian Airlines are part of the group, so the efforts are not limited to smaller carriers that may have a higher interest in gaining efficiencies of scale. The study is split into three phases. It is first looking at the current inventory levels and processes. It will then study how the inventory could be managed more effectively between the carriers, and it will finally scrutinize how the various MRO bases in the region can find more synergies.
On the regulatory side, Hashim believes that “there has to be more harmonization to make life easier for the airlines.” He concedes that there is already some joint work between authorities, “but it has not matured enough to become one common-type regulation.”
But initiatives are already taking shape on that front, too. Aviation authorities from the Persian Gulf states met on Feb. 7-9 to brainstorm how they could harmonize regulations around aircraft maintenance organizations (AMO). “The idea is to establish a multilateral acceptance and may even go to one approval, similar to EASA,” says Ahmed Salem Al Rawahi, director of airworthiness for the United Arab Emirates (UAE) General Civil Aviation Authority (GCAA).
Just as the benefits of harmonizing regulations was a big component of establishing the European Aviation Safety Agency (EASA), the six nations of the Gulf Cooperation Council see the potential for similar efficiencies—including technical qualifications to be recognized across borders, he says. The UAE GCAA signed a memorandum of understanding with Bahrain on Jan. 20 for mutual acceptance of AMO approval, he adds.
The general secretariat of the Gulf Cooperation Council (GCC) is driving the harmonization initiative.
Of the GCC nations, the UAE and Saudi Arabia have the most aircraft maintenance organizations—the UAE with 36 local and 120 foreign-based AMOs, followed by Saudi Arabia with 22 local AMOs and 100 foreign-based maintenance organizations. Between the GCC members—UAE, Kuwait, Saudi Arabia, Bahrain, Qatar and Oman—they have 79 local AMOs and 464 foreign-based maintenance organizations, so streamlining the approval process would save the governments and maintenance companies time and money.
With the exception of Saudi Arabia, which uses themaintenance licensing and inspection authorization approval process, the other stations have implemented the EASA Part 66 maintenance personnel licensing model.
While the Middle East region's MROs frequently have recruited maintenance technicians and engineers from countries such as Indonesia and Malaysia, salaries there are increasing and it is difficult to retain these recruits because long-distance hires often view their jobs as more temporary and as stepping-stones. This is leading some airlines and MROs in high-growth Gulf states to launch their own technical training, as evidenced by the Gulf Aviation Academy in Bahrain supporting Gulf Air. Emirates has long had a training center here in Dubai. “If this region harnesses its young, tech-savvy population, many who speak English, it could actually export talent,” instead of importing it, says Jon Boyle, a partner in Dubai with recruiting firm Heidrick & Struggles.
It is not only big operators such as Emirates that are investing in MRO growth. Even Bahrain's Mumtalakat, the parent of financially struggling Gulf Air, is planning to significantly expand MRO activities. Hashim says contracts have already been signed for a hangar that he expects to become operational within the next two years. The facility is to be used for heavy maintenance checks of Gulf Air aircraft, but the Gulf Technic unit also will offer work to other airlines.
Hashim says Gulf Air has had negative experiences with outsourcing and is therefore reverting to completing the work in house. He conceded that the airline has lost “control over technical services” and found it difficult at times to manage the split between various maintenance providers. Hashim expects the new venture to “improve quality, compliance and aircraft availability.”
The unit is planned to initially focus on airframe maintenance, but that will be followed by component servicing over time, Hashim explained.
“It is clear the Middle East and Gulf will continue to be a force in MRO—our geographic location is a big factor,” says Simon Tate, CEO of Joramco, the former Royal Jordanian maintenance division that spun off as an independent company in 2000. “I expect to see M and A [merger and acquisition] activity here with global players who want a presence in the region.”
While the Arab Spring no doubt has had consequences on MRO growth and airline traffic here, prospects are strong after the political transformation stabilizes. “If Arab airlines don't take advantage of this location, we'd be doing something wrong,” says Abdul Wahab Teffaha, AACO secretary general.