MRO Providers Struggle To Keep Up With Post-Pandemic Demand

Nearly three years after a historic period of crisis began and following a clear stretch of recovery, the global commercial aftermarket world is in another distinct phase: execution. And while key underlying factors such as robust demand suggest it should be easier than the previous two years, the reality may prove different.

“We are not so much limited and concerned about the demand side,” MTU Chief Program Officer Michael Schreyeogg said at the company’s investor day in November. “We are currently more concerned about the fulfillment side—spare part availability and our own capacity.”

• Supply chain and labor are top obstacles to growth
• Commercial MRO is surging
• Early 2023 outlook suggests low double-digit growth

Concerns over pre-pandemic-like sustained growth are gone. The global aftermarket sector has rattled off several consecutive quarters of impressive sequential growth in the high single-digit to low double-digit range. Third-quarter 2022 MRO provider survey data compiled by RBC Capital Markets points to growth of about 13% in 2023, as demand continues to rise and the few remaining weak links such as international long-haul begin to strengthen.

Providers large and small report full shops. Lufthansa Technik is among them, and the company sees the trend continuing for the next 3-4 years, says Marcus Motschenbacher, the company’s vice president and chief commercial officer for aircraft maintenance services.

The two most pressing issues facing maintenance providers—material and capacity—stem from different sources. Even material shortages have multiple causes. Older engines, from Pratt & Whitney 2000s favored by many freight operators to CFM56-5s and-7s that power popular recent--generation narrowbodies, are seeing little help from the used serviceable materials (USM) market. While airlines are quick to idle aircraft they do not immediately need, the decision to remove them from the fleet permanently has been more difficult to make. Among the reasons: uncertainty over the traffic demand’s recovery trajectory and, in some cases, hope that holding out on offering airframes and engines for part-out will yield a few more dollars tomorrow versus today.

Engine maintenance providers face different sources of pressure. Spare-part costs are rising quickly as OEMs and top suppliers work to offset related cost increases. While escalating part costs motivated some operators and MRO providers to stock up on materials to beat price increases, many airlines are more focused on ensuring that aircraft are available to meet rising demand. That has opened the door for suppliers to push through significant price hikes without affecting part sales.

The RBC survey found that third-quarter material pricing was up  9.5%—a slight increase over second--quarter’s 9.0%.

“We continue to believe airlines are more focused on improving operations (flight crew availability, on-time departures, supply chain risk) than supplier pricing, and the surge in inflation has provided significant cover for OEMs to be more aggressive on pricing,” RBC analyst Ken Herbert writes in a fall 2022 research note. “We believe many OEMs pushed through at least two price increases in 2022, and some are taking even a more dynamic contract-by-contract approach to pricing.”

The coming year promises more of the same, though easing inflation in some key markets, notably the U.S., could mean smaller bump-ups.

Two other headwinds affecting aftermarket providers, and the engine overhaul business in particular are few retirements and delivery delays. The trends are linked.

Boeing’s struggles to deliver 787s and 737 MAXs in recent years have forced waiting customers to modify fleet plans and keep older aircraft in service longer. Airbus has issues as well, particularly with its narrowbody types, though they are not as severe.

Each program faced different problems, and some—particularly in Boeing’s case—had little to do with the supply chain. As the internal challenges were addressed, one common theme emerged as a shared headache: engine delivery delays. These put pressure on the aftermarket by limiting spare engine and even part availability as engine-makers made hard decisions about whether to send new engines to Airbus and Boeing or provide needed spares to operators and MRO providers. The misery has been widespread, with airlines facing both late deliveries and, in the most extreme cases, grounding almost-new aircraft because suppliers could not provide spare powerplants or parts called for in engine support agreements.

Meanwhile, airlines and lessors holding older, desirable aircraft and engines have been waiting for demand to dictate their next moves on an airframe-by-airframe basis. Do they keep an aircraft in passenger service, line  it up for conversion to a freighter, or part it out?

This uncertainty, combined with the abundance of promising options, has contributed to fewer retirements. Just 340 mainline widebodies and narrowbodies were parked in 2021, an RBC analysis of Aviation Week Fleet Discovery data shows, and 2022’s total was trending to about 525 as the year entered its final weeks. Aviation Week’s latest forecast has the figures rising to a more historically normal level of 750-800—or about 3-4% of the fleet—by mid-decade.

Engine suppliers expect to be able to meet airframe OEMs’ needs in 2023, which should help aftermarket providers that support popular current-generation models such as the 737 MAX and A320neo families—many of which are still under their initial warranty period. MRO providers that count on revenues from aircraft that have exited their initial warranties should have reason to smile as well.

A Jefferies analysis of what it calls the “addressable market”—defined as aircraft at least seven years old—shows this subfleet’s size is set to mushroom.

“Assuming an average retirement age of 26 years equates to a 2023 addressable market that is 17% above 2019 levels versus the aggregate fleet up 6%,” Jefferies said. That could push aftermarket revenues 14% above “consensus” forecasts that are largely traffic-driven, and that is before factoring in expected parts-price increases.

Historical trends support linking aftermarket revenue growth with the addressable market, as opposed to traffic growth. Coming out of the Great Recession, aftermarket revenues grew 11% from 2008 to 2011, matching the addressable fleet’s expansion, “implying a direct correlation between the size of the 6+- year-old fleet and aftermarket volumes once air traffic recovers,” Jefferies said. “As such, if revenues  grow in line with the addressable fleet expected up 17% this cycle, consensus aftermarket revenues expected up 3% in 2023 are 14 points too low.” Given the RBC survey results, the traffic-driven consensus view seems to be conservative.

Of course, a strong showing only comes if traffic continues to grow, justifying operation of older airframes and keeping retirements from jumping.

“Each one-year change in retirement age impacts the fleet by [approximately] 400 aircraft,” or about 2% of the addressable fleet, Jefferies pointed out.

“By 2025, there are more than 6,000 airplanes turning 25 years of age, and we all know that the OEMs will not build 6,000 airplanes in the next three years,” MTU’s Schreyoegg said. “So there is a gap there. This gap can be filled only by existing aircraft with existing engines. So our customers will be operating older aircraft for a longer time, which is definitely good news for all of us.”

Busy shops are only good news when maintenance providers are executing. Surging demand combined with a few specific pain points figure to challenge many MRO shops in the year ahead.

Labor is shaping up to be the most significant issue. Respondents in RBC’s third-quarter survey pinpointed labor issues as the key headwind affecting their supply chains. A small specialty shop’s shortage of specialized technicians to repair a part needed for an overhaul starts out as a labor issue, but upstream in the supply chain, it manifests as a material-shortage or turn-time problem.

While labor is straining all segments of the aftermarket, the engine sector appears to be suffering the most. The number of speciality roles needed to manufacture parts and overhaul engines means that replacing skilled workers takes time, and that assumes there are candidates available to fill open roles.

A recent report from the Aviation Technician Education Council (ATEC) found that U.S.-based schools that train technicians to become certified airframe and powerplant (A&P) mechanics need to up their output by 20% to meet projected industry demand. “National enrollment at A&P schools is only growing at about 2% per year,” says James Hall, ATEC president and dean of aviation at WSU Tech, a technical school based in Kansas. “So we have a lot of work to do.”

Forward-thinking suppliers are changing tactics to minimize labor-shortage threats. MTU and Woodward, a component supplier,  is among those that have brought some capabilities in-house to help mitigate the risk of their suppliers not being able to deliver, for instance.

“We have long turnaround times,” MTU’s Schreyoegg said. “In order to generate revenues, you have to finalize the shop visit, and you have to send [the engine] to the customer. So if supply chains don’t work, you cannot book revenues and you cannot book profits. I think managing the supply chain [will be] the most difficult part of 2023.”