Independent MROs Will Likely Be First To Feel Downturn Effects
All aircraft maintenance is taking a big hit from the collapse of passenger traffic due to coronavirus.
From January 1 to April 12, 2020, commercial flights dropped 77%, according to RadarBox. U.S. domestic flights were down less drastically, about 64%, while European flights declined 80-95%, depending on region.
Only China had seen any kind of recovery, with domestic flights down 80% in early February, but only down by 47% by April 12.
Airline policy and historical records indicate MRO spending will decline most dramatically for independent shops and for airline shops that do substantial third-party maintenance.
Carriers have in-house staff and facilities that they will want to use first on the little MRO they do. Union agreements or, in the U.S., terms of Federal assistance will intensify the natural preference for in-house work.
The history in the U.S. of the last two traffic crashes confirms this logic, but leaves open how long the recovery in outsourcing will take.
By 2001, the top U.S. passenger airlines had increased the share of maintenance outsourced to 31%, from 25% just a few years earlier.
The consequences of the September 11 attacks and the new security delays – which operated like fare increases in suppressing air travel – showed up in the following years.
Total MRO spending dropped 5% in 2002 and a further 10% in 2003-2006, according to DOT Form 41 data, summarized by MIT Airline Data Project. It was not until 2007 that total MRO spending recovered to its 2001 level.
The outsourced share of this declining spend also decreased, but more briefly. The carriers outsourced 30% of the maintenance spending in 2002, down only a point form 2001.
However, in the succeeding years, the airlines increased their outsourced share to 33%, 36%, 44%, 46% and finally 47% in 2007. So though total MRO spending was down in the wake of September 11, independent shops were getting a slowly growing a better share of that spending. Airlines were concentrating on cost control under low-cost competition and this continued to favor the long-term trend to more outsourcing.
Then came the 2008-09 financial crisis, which sent airline revenues down due to global recession. In this case the dip in total MRO spending was shallower and over sooner. But it took much longer for independent shops to recover their share.
The outsource share, which stood at 47% in 2007, dropped to 46%, 43%, 42%, 44%, and 45% in 2008 through 2012. Not until 2013, five years after the crunch had begun, did the share recover to 48%. It then continued to grow slowly, to 50% by 2018.
2020 is different from both these precedents, of course. Right now, the drop in air traffic is much sharper than before, and full recovery may take quite a while, 12 to 18 months in the view of some experts.
The only clear lesson from the past is that MRO spending will drop drastically, independent shops will get a smaller cut of the remaining expenditures in the short term and then will eventually recover their share, quickly or slowly as events dictate.
Favoring independent shops is that airlines will be under intense pressure to control costs, and outsourcing, unlike technology innovation, does not require upfront investment, which shattered airline balance sheets will be poorly positioned to make.