Aftermarket supplier and component MRO provider GA Telesis expects the industry landscape to change dramatically during the COVID-19 crisis recovery, with airlines moving away from in-house maintenance while MROs and OEMs consolidate the market through mergers, acquisitions and partnerships.

During his keynote presentation at the ILS Connect and Component Control Virtual Conference on July 9, Jason Reed, president of the Flight Solutions Group at GA Telesis, stated that he foresees an increase in mergers and acquisitions (M&A) within MRO in the near future.

“There’s a tremendous amount of MRO activity that happens here in the south Florida area and around the U.S. Some of those players simply are not going to make it,” says Reed. “Some of the cash balance sheets that were held before are not enough to make it through this crisis, so there’s going to be companies becoming available. I’ve already seen probably half a dozen companies become available to be purchased on the aftermarket for M&A purposes.”

Reed expects MROs to increase their usage of used serviceable material (USM), which will drive OEMs—the hardest hit during the crisis, he says—to pursue the MRO market even further through pricing negotiations, partnerships and potentially even M&As. “If you look at the major players in the OEM world, there are some of them who have USM and MRO capabilities built into their business plan, but you can expect that when they see all the USM capability and all the MRO activities that are ongoing in the aftermarket, they’re going to go for a piece of that pie even further. They’re really going to go after everything they can to get that business back.”

Due to reduced spares sales, Reed believes that for the first time there are going to be discounted spares. “With 11% of the fleet getting ready to be torn down, the supply and demand curve is going to tip so heavily in the aftermarket [that] for the first time I think we’re going to see OEMs negotiating on brand new prices for parts where they hadn’t done or needed to do [it] before,” he notes.

OEMs will likely try to set up partnerships with MROs and suppliers on deeper parts discounts, which Reed notes is already happening at GA Telesis. “It’s becoming a good marriage. Fifteen years ago you would’ve never seen OEMs partnering with the aftermarket. Today, it’s a regular occurrence—it’s a welcome occurrence,” he says.

However, Reed cautions that managing inventory will be a game changer right now for many aftermarket businesses. “Inventory is the single most reason why any aftermarket company goes out of business. We’ve watched it happen for years now, where banks give financing to aftermarket providers, they’re buying used assets, they tear them down, they put them on their shelves and they don’t sell. If they can’t sell that inventory then they go bankrupt,” he says, adding that he expects more players to go out of business largely due to inventory mismanagement.

Meanwhile, GA Telesis thinks many small- and medium-sized carriers will move toward outsourcing MRO to reduce fixed costs. Reed also expects airlines to place more value in bundled service providers. “Airlines are going to look to leverage getting multiple eggs in the basket with multiple bundled service providers so that they can get better pricing per activity—whether it’s engine services, composite work or trading on an aircraft,” he says.

While many airlines focused on cabin upgrades in recent years, Reed says “that’s a thing of the past for a while” due to cash flow management. However, he expects airlines to continue focusing on inflight connectivity and efforts related to maintaining cleanliness in light of the novel coronavirus pandemic.