The aviation aftermarket is starting to rebound, but it will be anything but a smooth, steady climb upward. The uneven path is sure to include some jagged spikes that will hurt. While conventional wisdom predicted that the Asia-Pacific market would recover first because it was the first affected by the COVID-19 pandemic, now even that does not seem clear.
On June 24, Guangzhou Aircraft Maintenance Engineering Co. (Gameco) broke ground on new $90 million component and composite repair centers that are planned to open in 2022 to help it further expand its already extensive capabilities. In contrast, the following day Qantas announced that it is cutting 20% of its workforce and does not plan to resume most international flying before July 2021.
What is clear is that a few markers will heavily influence the path forward—a big one is coming in September, when many airlines will adjust their flight schedules based on customer demand and when payroll support funding provided through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which comes with restrictions on layoffs, is set to expire. The recovery also needs business travelers, who will require both corporate clearance and increased flight frequencies to resume road-warrior travel; when that will happen is unclear, given current restrictions on international travel. What will the travel season be like in the Northern Hemisphere in summer 2021, when airlines are hopeful that travel demand will surge for the vacation season? And of course, the big question mark is the timing of an effective novel corona-virus vaccine, which would restore confidence in travel.
The good news is that the industry appears to be at or near the bottom of the market, with aftermarket suppliers starting to see an uptick in lower cost components, for example. “May was one of the toughest months that we saw because repair activity that had already started was finishing, and there weren’t any new inductions involving engine or component repair,” says Tommy Hughes, CEO of VAS Aero Services. By the end of May, business was starting to pick up, “especially on the engine side,” he says.
However, do not expect overall MRO recovery to be rapid. Hong Kong Aircraft Engineering Co. (HAECO) expects the MRO business to “come back strong and fully recover in the next two to three years,” says CEO Frank Walschot.
In other words: Plan for the worst, but hope for the best.
THE FLEET: WHERE WE ARE
Global passenger airlines grounded their fleets in response to a historic drop in demand but are steadily resuming flight schedules, with domestic and short-haul flights returning faster. Airlines are adjusting to projected new (and lower) demand forecasts. These, coupled with airlines in financial difficulty that may not resume operations, means thousands of aircraft most likely won’t return to service—with planned retirements of older aircraft accelerating, resulting in a younger fleet.
Oliver Wyman expects more than 2,600 aircraft to be retired in the next year, compared to 550-750 aircraft annually over the last five years. This, along with lower aircraft utilization, could eliminate 53% of the $91.2 billion MRO market in 2020.
Based on “an extreme example, where every aircraft over the age of 20 is retired (8,272 units), the average fleet age drops to 8.5 years from 10.8 today,” a Jefferies report predicts. If this were to happen, Jefferies expects a 14% decline in the addressable aftermarket by 2023.
Between May 28-June 12, Aviation Week Fleet Discovery data shows that 2,085 aircraft returned to in-service status and 656 moved out of semi-active parked reserve status, flying 1-2 days per week. Meanwhile, 51 aircraft were retired during this period and aircraft in storage climbed by 444, indicating that airlines are further defining their fleets. As of June 12, 44% of the fleet was in service, the vast majority of which are narrowbody aircraft. Of the parked fleet, 63% is leased, according to Fleet Discovery data.
The oversupply of passenger aircraft is affecting values. On average, narrowbody prices have declined 10-20%, and widebodies have dropped 15-30%, says Adam Pilarski, senior vice president at Avitas, who emphasizes that there can be big differences depending on variables such as aircraft age, type and engines. Freighter aircraft prices have remained stable, he says.
Jefferson Ding, team leader for aircraft technical asset management at lessor Dragon Aviation Capital in Singapore, says he has heard of sale-and-leaseback transactions at prices 30-40% lower than prepandemic rates, as airlines grabbed whatever cash they could. “In the longer term, different classes of assets will come back to normal levels faster than others,” he says. “For instance, the [Airbus] A321 will regain value and remain constant due to its suitability to a variety of markets, including the passenger-to-freighter market.”
While the cargo market has been a bright spot, do not expect a dip in aircraft prices to lead to a surge in cargo-conversion demand. Air Transport Services Group (ATSG) is “always in the market looking for aircraft,” Chief Financial Officer Quint Turner says, but the aircraft purchase price has less of an impact in conversion demand because the feedstock is “less than half the overall cost” of a passenger-to-freighter aircraft conversion, he says. In early June, ATSG announced an agreement to lease 12 additional Boeing 767-300 converted freighters to Amazon.com Services for 10 years. One was already delivered, and the other 11 will be delivered in 2021. Israel Aerospace Industries completes the conversions in about 100 days, says Turner.
“Typically, airframe MRO has been more insulated from the downturns we’ve seen in the past,” compared to engines and component MRO, “but of course we’re in new territory here,” says Greg Colgan, CEO of MRO Holdings. “We saw our 2020 contracted work drop by the end of March by almost 80% for the end of year” from its projections just a month before, he says.
MRO Holdings, which operates Aeroman, Flightstar, TechOps MX and North State, has “recovered and stabilized to some extent for the third quarter,” but it is interacting with customers frequently as they develop different scenarios for their summer 2021 schedules,” Colgan says. “Because airframe MRO requires careful planning with six- and 12-month schedules, it can have a big impact on third-quarter/fourth-quarter 2020 workloads for them to have fleets ready by summer 2021.”
Instead of the 8.5 million maintenance work-hours it was planning for in pre-COVID-19 2020, MRO Holdings now anticipates logging 5-6 million. Because the organization was running its operation and cost structure for 8.5 million hr. when the pandemic started, “We were essentially pushing the top speed of a sports car one minute and then testing braking distance the next minute,” says Colgan. The abrupt braking forced it to reexamine processes and procedures, which Colgan thinks will be beneficial.
ATS CEO Matt Yerbic thinks its business bottomed out during May and June, but he expects softness to remain through the rest of the year. ATS received a CARES grant to help with costs through Sept. 30, and does not anticipate returning to 2019 business volumes until 2022.
However, like MRO Holdings, ATS examined its operation when the pandemic struck and has identified opportunities to “reduce costs and drive efficiencies,” Yerbic says, initiatives he expects to announce in the third quarter. ATS is operating five maintenance lines now and expects to add single lines in June, July and August, bringing the total to eight—all located in Everett, Washington.
Gameco did not lay off any staff but—like many others—cut costs, postponed hiring and leaned-out processes. “We always had a big number of cargo airline customers, and their demand for maintenance is strong. China Southern allowed us to pull forward some maintenance on grounded aircraft, so our heavy maintenance is now close to plan,” says Norbert Marx, Gameco’s CEO and general manager. China’s domestic air travel market is “showing its strength in recovery,” so the company’s line maintenance business is recovering in tandem. Marx says work related to lease returns, maintenance on grounded aircraft, and cabin solutions for disinfecting and passenger separation are also picking up.
Gameco is adding several new capabilities as well: the start of its first 737-800 Boeing converted freighter on June 16; CAAC Part 145 approval for the first Comac aircraft, the ARJ21 which soon will enter China Southern’s fleet; three new lines of A330 heavy maintenance services at the new Beijing Daxing International Airport; and new component and composite shops targeted for a 2022 opening.
“Our financial performance for 2020 and 2021 is expected to be less than 2019 and below the original plan,” Marx says.Those were viewed as transition years as the new capabilities and shops came online. But with the pandemic, “it’s time to restructure and align the organization,” he explains, including implementing change more rapidly.
Ascent Aviation Services is maintaining more than 400 parked aircraft at two airports in the Tucson, Arizona, area and can tear down up to 15 per month. Short-term storage accounts for about 65% of the total, but “we are transitioning some to long-term storage as this crisis continues,” says Scott Butler, chief commercial officer of Ascent. While reclamation inquiries “have slowed down a bit, the aircraft we are getting requests for are the ‘blue chip’ aircraft: younger A320s, 737NGs, 777s, 767s and A330s,” he says. He thinks the retirement of older, less-efficient aircraft is partly driven by “a renewed focus on sustainability in the aviation sector.”
Joramco, the Jordanian MRO, is seeing a strong demand for end-of-lease checks and parking service, which Chief Commercial Officer Fraser Currie thinks will last another 12 months. He does not “anticipate a significant change to annual volumes, but we do see a change in the seasonal profile of when checks come to us.” That’s because with many airlines “taking advantage of extended MPD (maintenance planning document) tasks there is a slight shift in the seasonality, with some summer work being pushed to winter and vice versa,” says Currie.
Could the shifting maintenance tasks lead to a bottleneck?
Colgan says: “My outlier concern right now is around airframe capacity in 2021 because airlines delaying maintenance now could create a surge later, even with the forecasted aircraft retirements. The size of the surge will clearly depend on the pace of recovery, but we believe there is some form of surge coming.”
Expect parts repairs and sales of parts manufacturer approval (PMA) parts and used serviceable material (USM) to increase as airlines seek to conserve cash. ATS has seen a 35% reduction in component repair volume but “the number of parts arriving at our facilities for repair works has increased the last 20 days between 120-200%, depending on location, from the trough,” says Brian Olsen, president of component and engineering solutions at ATS. PMA sales volumes are still down, but “airline customers have indicated this will improve in July,” he says.
“In general, pre-COVID-19, what Naasco found is anyone that maintains responsibility for their own [profit-and-loss statements] aggressively looked for ways to lower the operational costs while improving reliability,” says Michael Leslie, CEO of component-repair specialist Naasco. “As the national and international markets begin to open back up, Naasco has seen similar patterns.”
On the USM front, the million-dollar question is what will hit the market, and when. “Prices will definitely be impacted but the question everyone has is ‘what is the market value of a 737-800 in 6-12 months?’ It’s all based on supply and demand,” says Tommy Hughes of VAS. There’s a bit of wait-and-see now because owners want to maximize the value of parts from a teardown, so when to proceed with the teardown to maximize value is a key question for industry players.
Teardown capacity is another issue. “You could have 5,000 aircraft retire, but how many aircraft can be dismantled in the course of 12 months?” asks Hughes.
Kellstrom Aerospace predicts that supply of USM will exceed demand for a while—with the initial surplus coming from widebody aircraft, says David Greenwell, vice president for sales and marketing. This could help cargo operators that fly widebodies.
While Kellstrom has not noticed a threshold for parts price sales, it has noticed “that time for approval of purchase orders has increased as most airlines or MROs have added additional sign-off requirements on inventory procurement,” unless it’s for AOG or immediate use, says Greenwell.
“We see material costs for airframe material decreasing but do not anticipate this happening with key USM for many engines,” he adds. This parallels demand for green-time engines, particularly for popular narrowbody engines such as the CFM56-5B and -7B, as well as the V2500-A5. He expects strong demand for those green-time engines into 2021, which will decrease demand for engine shop visits.
OEMs and independent MROs are seeing a slowdown in engine inductions but increased requests for engine preservation support and maintenance deferrals. Customers are seeking flexibility.
MTU is seeing “a move away from the traditional planning, with fixed maintenance intervals, to more customized and individually tailored solutions,” says Martin Friis-Petersen, senior vice president for MRO programs. Some customers are focused on short-term cost savings while others focus on long-term strategies.
Many are seeking to restructure service contracts to maximize their options.
Pratt & Whitney’s shops have been upgrading geared turbo-fan engines to the latest configuration, and the company says that more than half of the fleet is now active.
While the crisis has given shops time for such upgrades, it also is forcing faster innovation. For instance, MTU is integrating its engine trend-monitoring tool into its engine fleet management software to evolve its predictive maintenance—moving it toward making prescriptive recommendations to help “forecast remaining on-wing time and optimal engine and module removal points,” says Friis-Petersen.
HAECO is optimistic about the engine MRO business in the future, as shown by its acquisition in March of Jet Engines Solutions, an engine MRO based in Dallas. The purchase is part of the company’s strategy to grow its engines business and “heralds the entry into the narrowbody engine market, including the CFM Leap and Pratt & Whitney geared turbofan platforms,” says Walschot. This acquisition follows the opening of a Global Engine Support location in Amsterdam last year.
MERGERS & ACQUISITIONS: WHAT'S UP?
Over the past five years, the commercial aftermarket has been characterized by a steady stream of M&A activity. Viewed by the financial world as a relatively stable industry able to generate strong returns, MRO providers have consistently remained attractive to investors.
One of the sources of this financing has been private equity companies, which have consistently poured money into the MRO segment. In the past 18 months, deals such as the Carlyle Group acquiring StandardAero, Greenbriar Equity Group buying into STS Aviation and Ardian’s acquisition of Revima have further highlighted private equity’s affinity for the commercial aftermarket.
However, given the impact of COVID-19 on financial markets, any deals will take time to develop.
“In the near-term, M&A largely gets put on hold . . . any M&A deal takes two to tango, with a willing buyer and a willing seller,” says Azad Badakhsh, managing director of Moelis & Co. “If you’re a buyer in the current aftermarket business, it’s very hard for an investment team to come up with a base case to take to their respective board or investment committee."
Airline fleet groundings and deferral of maintenance work by cash-conscious carriers will put pressure on many MRO providers, which could force some deals. “Most companies are very loath to sell in the current market environment because it’s very unlikely they’ll be able to come close to maximizing value,” Badakhsh says, but he adds that “there are going to be some distressed sellers who won’t have a choice.”
With reduced production rates, airframe OEMs are expected to retain an aftermarket focus, and some analysts believe they may look to form more alliances with MROs. Well-backed independents have also been tipped to grow market share through buyouts and investments, and some are viewing the current crisis as an opportunity. It is expected that smaller independents and family businesses may be swallowed up. This is most likely for those focused on repairs for maintenance-intensive legacy aircraft types operating in what will become an even more new-generation-focused market.
Despite the uncertainties remaining, and many companies waiting for better indications of what a market recovery will look like, some independent companies still see an opportunity. Risto Maeots, CEO of Magnetic MRO, says the company would look at possible acquisitions. “We have to come out of this crisis first, but we are also looking at ways to keep growing afterward,” he says.
The MRO industry was focusing on implementing new technologies prior to COVID-19, and the crisis has jump-started efforts at many companies to use technology as a way to cope with travel and social distancing restrictions.
Providers of augmented reality (AR) and remote--collaboration platforms have reported a huge increase in demand since March. Librestream says it has experienced a 745% increase in usage of its Onsight mobile collaboration platform, and Atheer has seen a 200-300% increase in usage of its AR platform by front-line teams, fueled by factors such as travel limitations and a production ramp-up of essential items such as medical equipment and cleaning products.
A number of MROs have started experimenting with or offering services using remote-collaboration technologies. A popular use case has been virtual inspections, both for aircraft and facilities. Lufthansa Technik is offering virtual borescope inspections in the wake of travel restrictions, enabling customers to follow engine inspections live from their locations and to communicate with technicians in real time.
Magnetic MRO recently conducted its first test of a visual aircraft inspection, which consisted of preparing video material of both the airframe and interior using a structured file system so potential customers could efficiently locate and analyze sections of the aircraft. The MRO says this technology will be used in the future both for situations where travel restrictions are in place and in other cases when physical inspections are not possible.
“Challenges the industry is facing can be tackled and solved by the implementation of digital solutions—and [the] aviation industry should be at the forefront in using innovative methods instead of being blinded by the routine,” says Tonno Toompuu, engineering manager at Magnetic MRO. “We should maintain focus on [the] ultimate goal and find new ways to work.”
MRO Holdings, already exploring virtual technology before the pandemic, used video conferencing on a mobile device to facilitate a regulatory inspection of a facility expansion at one of its repair stations in April. The virtual inspection enabled the regulatory representatives to see everything they would have if they had been on-site, while providing more digital evidence than they normally would have obtained.
On the regulatory side, the FAA released guidance earlier this year on using technology such as cameras and video conferencing for tasks such as conformity inspections and engineering and ground tests. While the guidance does not exclude specific technologies or products, it does note that video quality should be sufficient for the task and provide some method of validating that whatever is being recorded is happening where and when it is supposed to occur.
Other technologies, such as AR and drones, are also seeing more interest as the crisis spurs the industry to embrace innovation. Western Michigan University noted during a recent ATEC webinar that the current situation is an opportunity for technology innovation, with one instructor creating a mixed reality program using an AR headset to enable students to see inside, take apart and reassemble CFM engines.
PTC recently worked with the Air Force 58th Special Operations Group at Kirtland AFB, New Mexico, to use its Vuforia AR software to capture heavy maintenance processes for Bell-Boeing CV-22 Osprey aircraft that can be used for training technical personnel. PTC notes that new social distancing requirements will accelerate the need for new tools and techniques when it comes to training or reskilling technical staff post-pandemic.
HAECO is testing laser-ablation cleaning and robotic painting, AR glasses and drones for aircraft inspection.
Donecle, which specializes in providing automated aircraft inspections by drone, says there has been renewed interest in the ability to share inspection data remotely—both from existing customers and new prospects. “Many of our recent discussions have revolved around our system’s ability to immediately upload and share inspection data with colleagues or clients to provide a complete and objective view of an aircraft’s structural condition,” says Josselin Bequet, CEO of Donecle.
“A second concern is a spike in maintenance work that has been deferred due to the current shortage,” says Bequet, noting that some regions already facing skilled labor shortages had to lay off a portion of their workforce due to the COVID-19 crisis. “Several organizations expect to be understaffed in late 2020/early 2021 and automated drone solutions will be a force multiplier, both in terms of physically conducting inspections but also to analyze inspection data and issue reports.”
Increased use of data analytics is also predicted. HAECO is developing a “real-time monitoring and big data platform that correlates aircraft sensors and airline data, without aircraft modifications,” says Walschot, to enable early fault detection and predictive maintenance.
Opinions on the recovery’s pace vary, with agreement that the path will be long, with many painful steps along the way.
Avitas’s Pilarski predicts that airline traffic will not return to 2019 levels until the end of 2023 or early 2024. He sees global economic activity picking up in 2021 but thinks there will be a deeper disconnect between economic recovery and airline traffic due a recession predicted before COVID-19 broke out. If that happens, demand for new aircraft will also drop.
Other industry analysts’ predictions also paint a gloomy picture for the rest of 2020. Teal Group’s Richard Aboulafia has forecast that aircraft services revenue could be up to 75% lower in 2020 compared to last year, while consultancy Alixpartners, estimates a drop between 60-65% for this year.
In the engine segment, the near term will see large revenue declines, with consultancy AeroDynamic Advisory predicting that engine MRO demand will fall 60%.
While pointing to the importance of market analysis to paint a picture of the future, Andreas Drosdowski, head of maintenance Europe and CEO of Lufthansa Technik Maintenance International, believes line maintenance will be the first segment to pick up. “We see even more storage programs coming up which will generate work,” he adds.
Jonas Butautis, director of Australia-based Heston MRO, believes the company may adopt a more regional approach after COVID-19, albeit one still centered on passenger travel. “Our customer pool may change to a more local or regional one, but we will still work with commercial airlines in the region. There are still some 30 times more passenger than cargo aircraft globally, so this visual increase in importance of cargo aviation will not generate a major shift in MRO trends for the industry players.”
Keren Rambow, a GE Aviation marketing services executive, summarizes the market position well: “The recovery demand will dictate the levels of aftermarket supply.”