How Airlines Are Shifting MRO Strategies
The pandemic has caused cash-strapped airlines to resort to emergency measures in aircraft maintenance as in other areas of operations. But how much will airline MRO really change when the pandemic is over and recovery well under way?
In IAG’s annual report for 2020, CEO Luis Gallego said the group had to take swift and decisive actions to conserve cash and reduce its costs. “Additionally, we are converting where we can fixed costs to variable costs to more closely reflect levels of demand in the market.” He gave as a possible example changing part of IAG’s fixed prices for fleet maintenance to “power-by-the-hour” arrangements.
The group declined to comment further about what types of maintenance flight-hour contracts might cover, or whether they might replace in-house work or outsourced work currently done under more rigid contracts.
In contrast, Finnair has increased its in-house maintenance during the pandemic and does not expect to increase outsourcing or shift to flight-hour contracts in the future. VP Technical Operations Juha Ojala does not expect any major changes in base maintenance over the long term either. “We already have a strong partnership for all aircraft fleets we operate. This partnership may even deepen as the traffic will ramp-up.”
Short-term, part of Finnair’s fleet is in long-term storage so it has rescheduled some base maintenance events. The carrier has also simplified line maintenance, concentrating more work at its hub in Helsinki and making its outstations more flexible because Ojala thinks that during recovery changes in Finnair’s operating network will be very quick, with only short notice of new requirements.
Short term, the majority of the engine heavy shop visits have been postponed until new schedules are established.
Some of Finnair’s non-flying parked aircraft will be dismantled, generating more spare components, and more spares will generally be available in the market. “This is reshaping business models at least in short to mid-term, up to five years,” Ojala says. For example, Finnair is dismantling one of its Airbus A319s, and its components and parts will be reused or kept as spares.
All this has meant that Finnair has new opportunities to insource some MRO work. In addition to line maintenance, it has done more of the fleet modifications that used to be performed during C checks. Finnair mechanics have modified three A330s for cargo carriage of COVID products such as face masks and surgical gloves.
The airline also has increased its component maintenance capabilities as the component market changes.
Long-term, engine maintenance depends on future fleet plans. For older fleets, there will be more green time optimization and avoidance of excess investments. Engines on new fleets usually have long-term arrangements, often power-by-hour contracts.
Ojala says a deeply integrated MRO supplier network will increase in importance over the long term. “The focus will be more on understanding the end-to-end process where all suppliers are seamlessly linked together.” He predicts Integration will be supported by digital solutions. And post-crisis, Ojala would like to see better contingency planning for things going wrong.
But the Finnair exec does not see any big long-term changes in his in-house work versus outsourcing.
Two major U.S. carriers, the biggest LCC and biggest major carrier, also plan to hold steady.
Justin Jones, Southwest Airlines’ vice president of planning and performance for Technical Operations, says the carrier does not plan to change its mix of inhouse versus outsourced maintenance work, in response to the pandemic. His focus is on replacing Boeing 737NGs with 737MAXs, of which the carrier has just ordered 100 more, plus 155 options, and may operate 600 by 2031.
American Airlines has traditionally outsourced the smallest share of maintenance in the U.S., and its latest mechanics contract protects workers against much change. “We haven’t fundamentally changed our insource versus outsource strategy as a result of the pandemic,” a spokesperson says. “We don’t have any updates on our maintenance strategy to share at this time.”
Major MROs are more bullish about outsourcing. Kai-Stefan Roepke, Lufthansa Technik’s VP corporate sales for Europe, Middle East and Africa, observed three trends over the past two years. In the Americas, more base maintenance has been outsourced. In Europe, the Middle East and Africa, more base, line and component maintenance has been outsourced. However, “In Asia, we do not see any significant changes.”
Roepke says it is too early in the virus crisis to see significant outsourcing effects. But, because the crisis forces airlines to focus more on their core businesses, “it is very likely that some airlines will outsource more MRO services.”
The greatest potential for more outsourcing lies in full-service airlines, simply because they still do more inhouse. “Low-cost carriers and start-up airlines often already outsource a lot.” Roepke expects the biggest changes in base and line maintenance, followed by component MRO.
Tan Eng Shu, head of MRO at ST Engineering, is seeing more work from his existing outsource customers as travel picks up, but no trend yet toward outsourcing by more airlines. But he predicts that many will choose to outsource more as the recovery gains speed, “especially those that do not have adequate in-house capacity to cope with a surge in maintenance demand by aircraft returning to service, or had downsized their MRO workforce during the pandemic or need to preserve cash or reduce debt.”
So short-term, outsourcing will not increase, but long-term the outlook is brighter. Tan also sees carriers moving maintenance work closer to their home bases to reduce ferrying costs.
Low-cost carriers will lead the outsourcing trend, cargo airlines will continue to outsource most maintenance and full-service carriers will seek a balance between in-house and cost-saving outsourcing, in Tan’s view. “Airframe MRO will pick up in the form of return-to-service when airlines prepare for more flying as borders further open up.”
Oliver Wyman Partner Derek Costanza says his consultancy has discussed taking over some airline MRO staff positions. But Wyman’s latest MRO survey revealed no notable moves toward outsourcing front-line maintenance yet. “You cannot just snap outsource stuff, it doesn’t work like that. You need a capable and willing supplier, and there are huge people consequences, assuming union work rules allow it.”
If and when more outsourcing comes, Costanza says it will affect larger airlines that still mostly insource maintenance and remain in financial trouble. But so far, these carriers are still getting a lot of government support, and “we haven’t seen bankruptcy of airlines that are heavily insourced.” Newer and smaller airlines already outsource extensively.