Manufacturers winning battle for MRO business

Aviation’s Maintenance, Repair and Overhaul (MRO) sector is undergoing a seismic shift as original equipment manufacturers (OEMs) win more and more long-term after care contracts from airlines. The aggressive strategy is a threat to the bottom lines of global maintenance providers.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

February 1st 2015

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When India’s newest airline, the Singapore Airlines (SIA)-Tata joint venture full-service carrier, Vistara, entered the country’s skies in January little attention was paid to a critical aspect of its fledgling operations, the maintenance of its 20-strong fleet of leased A320s. Read More »

And the news was not good for third party MRO companies. It won’t be done in-house. Despite its links with SIA, Vistara’s airliners won’t be flown across the seas for maintenance at the the carrier’s highly regarded SIA Engineering. Instead, Delhi-based Vistara has signed a long-term Flight Hours Services Tailored Support Package (FHS-TSP) with A320 manufacturer, Airbus.

The contract provides an integrated, guaranteed service that ranges from components supply and repair to full airframe maintenance and engineering services. An on-site Airbus team will manage daily maintenance activities, including spares, warehousing and line and engineering checks.

Said Rajender Singh, Vistara’s senior vice president engineering, the commitment represented the airline’s confidence that Airbus could deliver the highest quality MRO to Vistara. “Having the aircraft manufacturer supporting our aircraft inventory, maintenance and engineering is the most comprehensive solution for our operational readiness from day one,” he said.

William Kircher, vice president of Pratt & Whitney’s Singapore Overhaul and Repair subsidiary and president of UTC Aerospace Singapore

The deal was even more significant for Airbus. It marks an important step forward in the company’s strategy to establish a major business in the global A320 maintenance market, explained Airbus executive vice president customer services, Didier Lux. Airbus’ FHS subsidiary covers more than 150 aircraft at airlines whose fleets include the A320, A330 and the A380.

It is worrying trend for independent MRO providers especially as the OEM onslaught – not only from Airbus but from Boeing, Embraer and other aircraft manufacturers and Rolls-Royce, Pratt & Whitney and GE - is gathering pace as MRO demand is slowing.

And an additional concern is developing for Asia-Pacific MROs. Their cost advantage over rivals in the Northern Hemisphere is disappearing. MRO rates in the U.S. stand at around $50 per hour, against about $30 in Asia. By 2020, they are expected to be almost on par, according to forecasts.

A 2014 MRO survey by management consultants, Oliver Wyman, which interviewed airline, MRO, OEM and finance and leasing senior management, said OEMs are “aggressively invading MRO markets” by leveraging new aircraft as a means to persuade airlines to use OEM MRO services, despite competitors’ claims the OEMs’ rates are high. The survey concluded airlines and non-OEM MROs could “hold back the invaders, by banding together in joint partnerships”.

But the penetration of OEMs into the traditional MRO market was made clear by the survey when airlines were asked who they would hire for future maintenance. In terms of engine maintenance, 69% of respondents said they would use OEMs. Only 31% opted for MROs. For components and structures, 63% said they would still go to an MRO, but a significant 44% would choose OEMs. Only in base maintenance would airlines plump for MROs (88%), with 6% nominating OEMs.

“For airlines seeking to compete and place engine and component maintenance on next-generation aircraft, OEMs have largely emerged as the only choice. Engine and large systems manufacturers have designed and deployed effective strategies to restrict alternative material and repair development by third party MROs,” the survey said.

There is a lot at stake. In 2013, according to aviation consultancy, ICF International, the world’s MROs supported 123,000 civilian and military aircraft flying about 97 million hours annually. The global MRO market earned $131 billion, with about 46%, or $60.7 billion, earned from air transport MROs.

North America remained the number one MRO market, with 31% of revenue. The Asia-Pacific edged out Europe for the first time (27% and 26% respectively), followed by the Middle East with 7%, South America at 5% and Africa ( 4%). It is forecast MRO spending will grow 3.9% annually to 2023, to $89 billion.

A TeamSAI study forecast MRO spend at a lower level. It valued the market at $57.7 billion in 2014, expanding to $86.8 billion by 2024 (for jets and turboprops), representing a 4.2% compound annual growth rate.

Whoever is winning the business, older aircraft such as the A330, B747, B767 and B777 will be phased out for fuel-efficient A350WXBs, B777Xs and the B787.

The Oliver Wyman survey said for both airlines and non-OEM MROs, this is a fundamental concern “because OEMs, Airbus and Boeing, are doing everything they can to sew up the after-sales MRO on these aircraft for themselves. Their chances of success will improve once the world’s carriers are reliant on just a trio of their planes”.

Even without this, it concluded, the OEMs are successful. “In 2014, OEMs were the winners for high-value, aftermarket aviation services, which left MRO scouting for paths to evolve and grow,” Oliver Wyman said.

According to industry insiders, the OEMs’ successful push into MRO represents a seismic shift from their former approach to the after-sales market. “For years, the OEMs seemed to regard MRO work as beneath them,” said Wayne Plucker, Frost & Sullivan’s industry manager for Aerospace & Defense.

“Now the global air transport MRO market is worth more than $60 billion annually, and growing, their attitude has changed. With all this revenue available, Airbus, Boeing and Bombardier can see the very real advantages of providing such after-market support, not just for the money it brings in, but for the chance it offered to keep customers buying their aircraft when fleet renewal falls due.”

While 76% of MRO respondents said they had partnered with an OEM in the last three years, (up from 71% in 2013), just 56% described the partnership as a licence agreement (down from 82%). The proportion of MROs that reported a successful joint venture or intellectual property agreement with an OEM in the past three years is virtually the same, at 27%, compared with 31% previously.

The stagnation could mean MROs have given up on proposing advanced concepts to OEMs as they have failed to establish mutually beneficial frameworks during the past several years, said the survey.

“Failed collaboration in all forms declined from 2013 to 2014. It is the generational change in aircraft and engines that is playing a pivotal role in the changing face of global MRO.

The bottom line: MRO demand growth is decreasing because the fleet is getting younger, more reliable and has improved system design.

The penetration of OEMs into the MRO market is illustrated by the increasing number of contracts written by Pratt & Whitney’s Singapore Overhaul and Repair Facility. William Kircher, vice president of the Singapore subsidiary and president of UTC Aerospace Singapore, told Orient Aviation there is more demand for after sales agreements.

“In 2003, Pratt & Whitney had about 10% of its active engine fleet worldwide captured for maintenance through Fleet Management Programs (FMP). This has risen quickly to nearly 50%,” he said. “Today, about 45% of the PW4000 fleet and about 60% of the V2500 fleet are under Pratt & Whitney FMPs.

“We anticipate about 80% of the Geared Turbo Fan engine fleet will be under FMP. It’s a trend that will continue. Engines maintained under FMP provide operators with predictable maintenance costs, fewer unscheduled engine removals and longer time on-wing between shop visits. This offers greater value to the customer as engines stay on the wing longer.”

Kircher said airlines want to focus on the core competencies of flying people and parcels. “They are transferring the ownership of maintenance on the MRO side. Whether it is engine development, on-wing health monitoring or overhaul and repair, customers want the value of having it all under one service program umbrella within a single transaction,” he said.

Efforts by MROs to stem the OEM tide by establishing partnerships with the OEMs have stalled. The Oliver Wyman survey suggested MROs have reached a critical point in seeking fruitful forms of cooperation with OEMs.

Progress in shaping deeper relationships, however, appeared to have slowed or even cease. 

Failed license agreements were reported by 64% of MRO respondents in 2013, declining to 46% this year.

Last year, 47% of MROs reported failing to finalize proposed joint ventures in the last three years. Without the steady influx of licensed work from OEM partners, generating new sources of revenue is imperative for MROs.”

The OEMs are often accused of using their position to charge higher rates, a charge they deny. Rolls-Royce, one of the most successful after-market service providers, said it is only fair the company should seek as much MRO work on its engines as it can. It said its outlook is different from third-party MROs, as are the advantages and responsibilities. Mark Kerr, the UK company’s head of marketing for services, said recently that by pricing its TotalCare support packages on a dollar-per-flight-hour rather than a time and materials basis, “we’re incentivised to do things to the engine that makes it as reliable as possible.

“Independent shops, operating on a time and materials basis, don’t have this incentive.” Rolls-Royce believes its data shows engines supported by TotalCare stay on wing 20%–30% longer than engines handled independently by airlines.

“For these engines, the total life-cycle costs are lower. One reason is the contracts “take on board all the service directives, shop and repair activity that needs to be included,” said Kerr. “Another benefit Rolls-Royce can offer airlines, although some MRO shops also can do this, is providing additional spare engines if customers need them.

“That tends to be at our expense,” said Kerr. “There is a lot of risk transfer [to Rolls-Royce] involved” in its TotalCare agreements. “We get feedback from customers that they like this.”

Obviously, airlines will decide who comes out on top in the OEM versus independent MRO battle. In today’s high risk aviation business, where cutting expenses and eking out efficiencies are critical, whoever offers the most cost efficient solution will win the most customers.

Next generation aircraft reducing MRO demand The generational change in aircraft and engines is playing a pivotal role in changing global MRO operations. Pratt & Whitney aftermarket president, Matthew Bromberg, summed up the situation at a major U.S. MRO conference last year when he said traditionally, MRO growth has been larger than OEM growth. “Ten years ago, we estimated OEM growth of 3%–4% a year and MRO growth to be 6%–8%. And today? It is common knowledge we are riding an amazing bow wave of new aircraft deliveries. The installed base of aircraft is projected to reach more than 41,000 by 2030,” he said. “As a result, OEM growth is forecast to expand at 6%–8% for the next decade. One would expect MRO growth to follow. However, it has not. There is a solid consensus in the industry that global MRO spend will grow at only 3%–4% per year in the next decade.” Bromberg said: “Today, the average aircraft age is 15 years, which is the oldest fleet ever. In the next decade, this will drop as new aircraft are introduced into fleets and aircraft are retired. Since younger aircraft require less maintenance, the demand for MRO services will drop,” he said. “This new fleet is more reliable. Pratt & Whitney is inserting cutting-edge technologies, such as our geared architecture, advanced materials, and 3D aerodynamics, to stretch engine performance. Engine time on wing and aircraft reliability have increased by 30% in the past 10 years.” He added that 40 years ago in-flight shutdown rates were in the range of 40 per 100,000 engine flight hours. Today, the industry targets a rate closer to one shutdown per one million hours, an improvement of almost 400 times. “Finally, aircraft and engines are designed for reduced maintenance. The P&W Geared Turbofan engine has 2,000 fewer airfoils and six fewer LLP stages than a conventional turbofan. The engine has a 50% improvement in on-wing inspection intervals with many previous tasks eliminated. Engines are designed for less frequent and easier maintenance. This also reduces MRO demand.” “As the [global] fleet grows, it is becoming less diverse. In the last ten years, Boeing and Airbus aircraft types have reduced from 13 to seven. Today, 75% of all aircraft are narrow-body, and 90% of those are the B737 and the A320. Even with strong deliveries from Bombardier and Embraer, and new models from Mitsubishi, COMAC and Irkut, the worldwide fleet is becoming less diverse,” Bromberg said. “In the long run, this creates economies of scale across the MRO landscape. Consequently, the industry will require less diversity among parts, tools, and shops and less capacity to deliver the same MRO services.”