Profit margins for airlines and MRO service providers are moving in opposite directions.
Rising MRO bills – Delta and American and United Airlines saw a 45% (QoQ) increase in MRO spending during the third quarter of 2020 alone – are reducing profits for airlines while MROs, working overtime to keep aging fleets in safe flying order, are seeing theirs rise. This is despite lengthening lead times for spare parts feeding into longer turnaround times for maintenance and overhaul services.
Rising airline revenues -undergirded by unprecedented demand for travel and dramatically higher ticket prices – are therefore not translating into record profits.
Why is the MRO space under so much pressure?
A tightening demand-supply gap has put the aviation industry in a bind. Demand for maintenance services is rising as the supply chain crisis continues to impact the delivery of new aircraft forcing many airlines to keep older aircraft in service. The supply-chain crisis and shortage of skilled technicians, labour and material is affecting both aircraft manufacturing and MRO services with the slowdown in aircraft retirements putting extra pressure on the supply of spare parts and components.
The supply-chain crisis is impacting airlines and aircraft manufacturers alike.
Aircraft manufacturers, particularly Airbus and Boeing are battling a shortage of labor and raw material and problems with engines (link). While both are working to raise production rates, there is more trouble ahead. The 737Max headache is more of a migraine and the recently discovered quality control issues with third-party suppliers (link) are hardly a balm. Airbus is also struggling to maintain its production schedules with deliveries of A320neos and A220s seeing significant delays.
Ambitious new players on the aviation pitch, including Saudi Arabia and India are placing record orders for new aircraft on top of aggressive demand from both global incumbents as well as emerging LCCs and regional players. Expect their backlog of aircraft orders to keep growing.
Airlines too are facing multiple challenges: high costs of fuel, the maintenance costs of flying older, retirement ready aircraft for longer due to the delivery backlogs and problems on the aircraft manufacturers side; spending on deferred maintenance of planes grounded during the pandemic and the inflationary effect of these complications on the price and costs of parts and labour. The rising demand for spare parts as more and more aircraft and engines need to be repaired or replaced combined with the supply chain crises, will continue to exert inflationary pressure on the MRO industry.
This perfect storm of unfortunate events has resulted in an extremely strong after-market for MRO and is likely to push prices up 15-20% per year for the foreseeable future. Industry experts expect global maintenance expenditure to exceed $110b in 2023, or around 14% of total revenues – a 30-year high.
Market Forecasts
Aviation Week forecasts total demand for MRO services to be around US$1.2 trillion through 2033 segmented across
- Engine maintenance: 46%
- Components: 23%
- Line maintenance: 19%
- Modifications: 7%
- Airframe Maintenance: 5%
Components and engine work segments are expected to grow the fastest during this period with CAGRs of 3.8% and 3.4%, respectively.
Key players in the MRO industry
Original equipment manufacturers (OEMs), such as Airbus, Boeing and engine makers such as Rolls-Royce, Safran, Pratt & Whitney and General Electric dominate the MRO industry providing maintenance services and selling spare parts. In fact, repair and servicing account for a larger proportion of the profits of engine manufacturers than the sale of engines.
Other important players in the MRO space include GE, Safran, a French company, Germany’s Lufthansa Technik, a subsidiary of Lufthansa; generic parts maker, Heico; and independent specialist, the US company, AAR. All three service a global network of carriers as airlines have been forced to loosen restrictions on the sourcing of components and services.
Even though the industry’s supply chain challenges are impacting both manufacturers and repair shops, MROs will fare better and recover faster than OEMs and engine manufacturers as we will see in the following discussion.
What’s up with engines?
A manufacturing flaw in the engines made by Pratt & Whitney, the US engine company, has meant that thousands of geared turbofan engines must be inspected sooner than their routine scheduled inspections and may have to be replaced.
More specifically, the PW1100G – one of the engines used in the A320neo aircraft – is seeing cracks on parts made during the 2015-2021 period. These engines must be inspected annually until the parts can be replaced. This will result in around 700 early inspections in the first half of 2024. These inspections are on top of other unexpected work due to durability issues in the same engines. The pressure on P&W’s facilities means estimates for wing-to-wing turnaround times for these checks are upward of 300 days. P&W expects an average of 300 AOG until 2026 with perhaps 650 AOG by the middle of 2024.
Airlines with older airworthy aircraft will be able to plug their capacity gap. Others will simply have to cut capacity. This does not bode well for ticket prices and the cost of air travel for passengers in the coming years.
Combined with raw material shortages, this problem is not only putting immense pressure on P&Ws capacity and schedules, but also as mentioned previously translating into longer AOG times for airlines.
What does this mean for the future of the MRO industry?
More broadly these issues have put a spotlight on an industry problem that has long been in the making: a lack of long-term investment in skills and equipment that is manifesting as a massive shortage of both the skills and capacity needed to effectively address the growing demand for aircraft as well as MRO services across parts and services for engines, airframes and components.
Expect frenzied activity in the MRO industry over the remainder of this decade and possibly longer with strong travel demand driving steady growth in the global commercial aftermarket for MRO services – expected to be worth around US$110.7b in 2024 – and some new trends:
- Airlines and repair stations building up spare parts inventory to avoid supply chain related servicing delays
- Manufacturers raising prices ahead of schedule as spare part sales by volume and value shoot up. [link to GE Aerospace]
- Service providers choosing repairs over replacements to reduce costs, avoid supply-chain issues or in some cases, base the replace – repair decision on the environmentally friendlier choice.
- Firms providing ‘used serviceable material’ (USM) finally seeing an uptick in growth – which had slowed as old engines and aircraft remained in service longer – on the back of new aircraft deliveries over the latter half of this decade and into the next one. Aviation Week forecasts over 1,000 retirements a year during 2024-33, up from an average of 669 during the 2017-23 period. Continuing supply chain issues will of course further delay the retirement cycle with predictable effects on USMs growth forecasts.
- ‘Parts manufacturer approval’ (PMA) providers continuing to deliver on accelerated production cycles and speeding up the parts approval process and seeing higher growth in coming years.
- Some MRO providers bringing work such as parts manufacturing and reconditioning in-house on the back of concerns about the availability of skilled technicians at smaller or third-party suppliers.
- Intensifying competition for entry-level repair technicians between airlines (which historically have not hired inexperienced technicians) and both small and large MRO shops with airlines unable to afford the luxury of waiting for trainee technicians to build up experience at repair shops.
- Extreme pressure on engine overhaul shops from both narrow and widebody aircraft operators – with demand for shop visits rising by, in some cases, up to 25% as more and more older aircraft remain in service for longer.
A case in point or a change of heart?
Between 2020 and 2023, Lufthansa has gone from contemplating selling a minority stake in Lufthansa Technik, its MRO services provider to ambitious plans to grow the business. Lufthansa Technik’s capacity and capabilities, the decision makes eminent sense.
Scheduled aircraft maintenance slots at global MRO facilities are sold out for months in advance; in-house repair and replace capabilities are a boon in the current inflationary environment where lead times are long and availability short. Most importantly, Lufthansa Technik employs 22,000 mainly highly experienced, highly skilled engineers and technicians. That’s an asset that can’t be built overnight. Acknowledging the opportunity to deliver significant strategic growth, Lufthansa Technik is now in the process of delivering on an ambitious growth plan complete with investments in Europe and the Middle East.
Meanwhile India too is in the midst of a massive expansive of its aviation ecosystem including airlines, airports and MRO services. It wants to double the number of airports to 200 by 2040, has ordered 470 narrowbody aircraft from Boeing and Airbus, while IndiGo, an ambitious LCC has ordered 500 A320neos. To encourage investment in its MRO industry, it is offering various incentives to foreign companies and has lowered VAT on parts.
What the future looks like depends on which side of the MRO you’re on
With both the Middle East and India ramping up investment in their aviation industries, the pressure on MRO service providers will rise exponentially. This is both a challenge and an opportunity requiring enormous investments in skills, labour and capital to deliver long-term results. Forward-thinking governments, airlines and MROs have taken note but those with the deepest pockets will lead the pack.
A caveat though: building capacity is the easy part. Training the human capital to deliver the labour and specialized technical skills needed to deliver a safe and successful MRO service will be the much bigger – and time-consuming – challenge.
