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MRO - Ready for Transformation

Increasing complexity and dynamism in the aviation industry are putting pressure on maintenance, repair, and overhaul operations

Maintenance, repair, and overhaul (MRO) companies are used to puzzles. A problem exists that has a clearly definable solution for those with the necessary expertise to know where to look and what to do.

But, for airlines, the MRO market is something different. There is no hard and fast right or wrong, and decisions have to be made based on a sometimes conflicting array of data. What is happening with the MRO market and how can airlines be sure it will cope with their growing, modern fleets?

MRO is a $50 billion industry. According to a recent paper from management consultants Oliver Wyman, growth is predicted to be more than 7% per annum through 2013, although this figure could underestimate the sector’s potential.

The past few years have seen record aircraft orders, driven by the introduction of advanced, new models capable of opening up new market sectors, and the accelerated retirement of expensive, gas-guzzling, older planes. Globally, airlines will spend $2.9 trillion on new aircraft to be delivered by 2030. By that time it is estimated there will be an extra 15,000 aircraft in the skies—a 64% increase from today. It means that all the big manufacturers believe more than 500,000 new mechanics will be needed in the next 20 years.

Increasing the pool of qualified staff numbers must be planned for well in advance, according to Jose Luis Quirós, Sales, Marketing and Business Development Director for Iberia Maintenance and Engineering. “We work very closely with different training centers and institutes to satisfy our requirements, in terms of the number of technicians and the necessary skills,” he says. “In some areas it is more difficult than in others to develop the technical profile we require, and therefore additional internal training is needed.”

The MRO sector’s highly fragmented nature is a further complication. More than 60% of companies have a local focus and earn $100 million a year or less. It brings a strong regional flavor to what should be a global marketplace.

Regional variations

There are significant regional differences in MRO capability in the present market. With modest market movement in mature regions such as Europe and the United States, MRO capacity isn’t a problem. New mechanics will always be required due to the sheer size of the markets, but workhorse engines such as the CFM56 are easily accommodated.

However, the regions presently showing the strongest air traffic growth—the Middle East, China, India, Asia-Pacific, and South America—lack experienced capability in some areas. Key processes, such as high-tech parts repair, are hard to find. Boeing predicts Asia-Pacific alone will require 125,000 new personnel by 2030.

In addition, open market competition is restricted in certain regions, which means some MRO operators may not be driven by the efficiency, motivation, and knowledge that the free market brings.

Iain Lachlan, Divisional Senior Vice President Emirates Engineering, simply sees airline traffic growth in the Middle East region as an opportunity for MRO expansion. “There is large scale investment from MRO companies, with modern facilities being expanded and developed to accommodate this growth,” he says.

“The Middle East is strategically well placed and is willing to actively pursue growth in the support of maintenance overhaul through investment in the infrastructure required to challenge existing suppliers. The opportunities to work with suppliers through partnerships and working relationships are also available for those willing to consider enhancing the capabilities that currently exist.”

Facilities are also expanding in China. MTU Aero Engines, based in Germany, has entered into a joint venture with China Southern at Zhuhai. “This was originally conceived for 200 shop visits a year, but the company is undergoing an expansion that will allow for 300,” says Dr. Stefan Weingartner, CEO of Commercial Maintenance. “This will support the Chinese domestic market growth, forecast to be the fastest in the world in the next 10 years.”

Similarly, Lufthansa and Air China opened a joint venture last year—Ameco Beijing—that has a hangar for four Airbus A380s.

Investment potential

The evidence points to the MRO market changing to meet future requirements. In time, most regional differences will be ironed out. Global players hold increasing sway in the market and this should help meet airline MRO needs into the future. The Oliver Wyman paper, for example, considers that bigger players will help progress a sector ripe for investment and consolidation.

There are solid reasons why MRO should be attractive to investors and global players. For a start, the market obviously has good growth prospects. Companies also need to offer vertical, global solutions to meet airline demand, which organic growth from small beginnings can’t supply in the short term. And investors will also find MRO’s sizeable assets and generous scope for efficiency gains reassuring.

Big industry players have already sensed the potential. Iberia’s Quirós believes original engine manufacturers (OEMs) are becoming increasingly active in the MRO arena. “The OEM looks at it as a potential business in the aftersales activity, which is not necessarily the best option for MRO companies,” he says.

Quirós believes that open competition rather than restricted data would provide the optimal MRO solutions. OEMs trying to capture MRO spend for their own products might not necessarily be in the best interest of the airlines. It could put independents out of business, reducing competition and forcing costs substantially higher.

On the other hand, OEMs will argue that they will supply much-needed capacity for the MRO market, and their expertise may even help reduce aircraft downtime and provide cheaper solutions for the airlines. They are also responding to market requirements for vertical integration. OEMs supply parts and repair them. Airlines in turn have a simplified supply chain to administer, and there are potential savings through bulk discount; a big airline could give an OEM an enormous slice of business. There is also the advantage of a common standard and quality experience throughout the world.

Cost reduction

Airlines’ increasing tendency to outsource also hints at an increasingly globalized market populated by larger players. Airlines will naturally gravitate to those companies that can offer a worldwide presence and economies of scale, as well as the ability to handle diverse requirements.

“There is a need for less expensive MRO services, which translates into higher price pressure and increased outsourcing in order to reduce MRO cost,” says MTU’s Weingartner. “Ultimately, when the shift towards new engines has been fully completed, we expect smaller airlines will have stopped overhauling their engines in their own shop as they will most likely lack sufficient volume and the technology to repair highly complex engines.”

Weingartner believes consolidation in the MRO market will leave only a few strong global players with the financial and technological means to cope with the shift towards new models. In-house operations may still exist but they will find it increasingly difficult to compete for third-party work given the financial risk and strong competition.

Iberia’s Quirós agrees that cooperation will be vital for MRO companies. “Consolidation or joint ventures will help to gain efficiency through critical mass and additional investment in R&D,” he says.

“Focusing on the core business is something that airlines have been doing for the past 10 years, and there are very few startups that have developed MRO in-house capacity other than line maintenance. On the other hand, some established airlines have already spun off their maintenance divisions.”

New designs

Other variables come into play. New airframe and engine designs could reduce MRO demand by as much as 30% as better manufacturing and performance parameters enter service.

“Clearly, engine MRO is a top priority in new design as it represents the highest share of total MRO cost,” explains Weingartner. “All new engine types have improved on-wing time and more reliable parts.”

Even small improvements help. MTU has a new engine cleaning method that blasts dry ice instead of water on to the blades. Blade cleanliness is improved, there is no residue, and the cleaning unit is mobile, minimizing operational disruption.

Airframe improvements are equally important. Composite materials, such as the carbon fiber reinforced plastic used on the Airbus A350, require far less maintenance, for example, as they are less prone to fatigue than aluminum.

Forecasting the exact nature of the MRO market may be rather more complicated than even the most technical of engine faults. But what is certain is that MRO is ready to be transformed. If future airline requirements are to be met, new business models are essential.

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