Low fuel prices and anticipated higher interest rates will spur MRO growth over the long term by allowing middle-aged and mature aircraft to fly longer, producing more maintenance, repair, and overhaul business for their engines, components, and airframes.
Low fuel prices have made it more attractive to fly older aircraft longer,” says Bill Dwyer, general manager, services marketing, for GE Aviation. “Industry-wide, retirements are down more than 50 percent, compared to 2013,” he says, and “most analysts predict a period of sustained low fuel prices.” He also points to the expected rise in borrowing costs, which tend to favor used aircraft. “We think these factors will continue to spur interest in extending in-service life, and that creates opportunity for everyone in the MRO space.”
ICF International expects the global air transport MRO market to expand from $62.1 billion in 2014 to $90 billion in 2024, or about a 3.8 percent compound annual growth rate, with Asia-Pacific and China as the drivers. China and Asia-Pacific, combined, are expected to spend more than $29 billion in 2024, compared with $16.9 billion in 2014. MRO firms will continue to expand their footprint in this area.
Meanwhile, U.S. carrier wide bodies are coming back to North America, analysts note. This reflects factors such as increasing labor rates in Asia, currency valuations, and the sophistication of U.S. carriers’ analysis of the total costs involved in outsourcing, says Jonathan Berger, vice president of ICF International.
Relatively lower costs in the U.S. as a result of changes in the dollar are important in this shift, but so is really good technology, says Wayne Plucker, director of aerospace research for Frost & Sullivan. He cites AAR, the U.S. MRO. “They understand composites [and] can work with more sophisticated engine materials, [which] tends to reshore some of that [work].” AAR also has invested in IT, allowing customers, for example, to access their asset data in real time.
The global air transport MRO market will expand from $62.1 billion in 2014 to $90 billion in 2024 — about a 3.8 percent compound annual growth rate, with Asia-Pacific and China as the drivers. AAR Image.
A lot of North American carriers’ MRO is still done in Asia because a lot of those airlines fly there, Berger says. A key driver is, as Asian fleets continue their exponential growth, U.S. carriers will have to compete with increased organic demand for slots in Asia.
Other pressures continue to reshape the industry. There are still too many players in airframe and component maintenance, observers say, and this may drive further consolidation. In the component area airlines increasingly want MROs to provide a wide range of services at a predictable cost. Though the march of the engine makers into the aftermarket may have reached its peak, component OEMs continue to capture business, and MROs, especially the independent operators, are teaming with them.
Meanwhile the parting out of retired aircraft for reusable airframe, engine material, and components is a growing activity at major airlines, Berger says. AFI KLM Engineering & Maintenance (AFI KLM E&M) stresses its U.S. engine teardown capability through its joint venture (JV), Bonus Tech. The MRO sees growth in aircraft and engine teardown and associated parts trading services.
Delta Air Lines also has become a savvy player in the used parts arena to reduce the cost of maintaining its own mature fleet. In 2013 the carrier bought 23 MD-80s from SAS AB of Sweden. And Lufthansa Technik (LHT) in past years has purchased former Lufthansa aircraft and parted out components for internal consumption.
This trend means these airlines are buying fewer of these parts from OEMs and surplus traders and can sell excess supplies through surplus sales departments, Berger notes. The practice is pressuring the OEMs, who are now forced to find innovative ways to replace this revenue. Airlines continue to seek creative ways to reduce their operating costs, and finding alternate sources of material is a key strategic lever, he says. “It’s a really big change in the last two years.”
The top dog of the independent MROs is probably ST Engineering, the parent of ST Aerospace, Plucker says. “They don’t miss a chunk of the market,” including engines, airframe, and components. Berger places ST Aerospace with AAR and HAECO as the largest independent MROs.
The Singapore company invests in the U.S. as well. In addition to existing sites there, it plans to open a facility in Pensacola, Fla., late next year and has opened a new parting-out business in Hondo, Texas.
AAR is the largest independent MRO in North America and the third-largest airframe MRO in the world in terms of man-hours and revenues. In 2014 AAR performed about 5 million man-hours of airframe maintenance and expects to do about the same this year, says Dany Kleiman, group vice president for repair and engineering. Man-hours are up from 3 million only three to four years ago.
The company as a whole recorded net sales of $2.04 billion in FY2014, down from $2.14 billion the year before, according to its annual report. But AAR’s MRO revenues grew in 2014 and will continue to grow, Kleiman says. In 2014 AAR serviced 900 to 1,000 aircraft, mostly U.S.-registered commercial carriers.
The company has been expanding wide body capacity in the last two years, taking a lease on a facility in Lake Charles, La., and building a new facility in Rockford, Ill., which is expected to open next year. “We see that U.S. companies are more competitive today with Asia-Pacific providers, and we are looking forward to the in-shoring, instead of out-shoring, of services to U.S. carriers,” Kleiman says.
While ST Aerospace expects engine MRO to drive market growth, it anticipates that component MRO growth will catch up with the engine sector in the next five years. ST Aero’s maintenance by the hour (MBH) program supports nearly 900 aircraft and more than 20 operators with fleets in Asia-Pacific, Europe, and the Middle East.
AFI KLM E&M is a major player in CMRO. As far as multiproduct MRO is concerned, AFI KLM E&M ranks No.1 or No. 2 for component support, depending on the fleets, says Rob Pruim, vice president, strategy, for the business. The component MRO market is robust and growing, he says. “There is widespread availability of spare parts for some aircraft types like the A320 and A340.”
The Franco-Dutch maintenance business sees component MRO, along with engine MRO, as a path to growth. AFI KLM E&M signed a long-term contract with Royal Air Maroc in 2015 to support component repair and overhaul for 787s. It likewise inked a deal with
Thai Airways International involving component support for 787s. The agreement includes support for consumables, rotables, and tooling and equipment, as well as for APUs and engine nacelles. In fact, AFI KLM E&M considers itself the current market leader for 787 component support.
AAR is also a player in component maintenance, as part of its “A to Z” strategy of engaging in a range of activities, including airframe maintenance – its largest line of MRO work – component maintenance, landing gear overhaul, supply chain/parts distribution and trading, engineering services, and aircraft leasing. It regards LHT, SR Technics, and ST Aero as major competitors in this sphere. Its largest revenue stream in the component area is power-by-the-hour (PBH) contracts, Kleiman says. The company in 2014 also bought the component support programs of independent MRO, Sabena Technics, in Brussels.
AJW Aviation ranks itself as No. 3 among the top five providers of component flight hour services contracts in terms of fleet coverage, says CEO Boris Wolstenholme, citing its 1,000 aircraft under PBH contracts – 850 of which are active, with the balance to come from the expected growth of contracted fleets during the course of the agreements. AJW Aviation expects revenues in 2015 of more than $400 million, about half from support contracts –both PBH and ad hoc engagements — and half from parts trading.
A core part of AJW Aviation’s strategy involves OEM participation, Wolstenholme says. Sister division, AJW Technique, “captures about 40 percent of our repair work,” with the remaining 60 percent going to OEMs or third-party specialists, he says. “That’s a balance we like to maintain.” This balance allows the OEMs to maintain their relationships with the airlines but “ensures a fair and even competitive environment” between AJW Tehnique and the manufacturers, Wolstenholme says.
“The airlines feel that they’re the ones suffering as a consequence of [the OEMs’] business methodology, but we’re there to ease the pain,” he says. The airlines are looking for integrators who can put
services together for a predictable per-flight- hour cost, so if the MRO and OEM respect each other, there’s no reason they can’t work together to provide a solution, he says.
AJW Group’s contract with easyJet this year is an example of this three-way cooperation. It covers component repair and overhaul, supply of consumable parts, and management of spares inventory – including storage and distribution — across the airline’s European network of 30 line stations. Much of the work will be performed by AJW Technique, but AJW will also deploy its network of repair vendors and “most importantly” its strategic partnerships with OEMs such as Thales and Zodiac Aerospace Services, to “further increase the quality and speed of repairs,” the company says.
Probably the largest two airline MROs are Lufthansa Technik and AFI KLM E&M, reporting external sales for 2014 of 2.7 billion euros and 1.3 billion euros, respectively. LHT has 795 customers and 3,290 aircraft under exclusive contracts, according to the company. Among the highlights of the year was the signing of a memorandum of understanding with GE Aviation to establish a JV engine overhaul facility in Europe to service GEnx-2B and GE9X engines, beginning in 2018.
Last year the MRO announced a boost of innovation investment from 50 million euros over the preceding five years to 200 million euros for the following four-year period. The unit announced steps such as 60 million euro investment in a new wheel and brake shop in Frankfurt and a new chemistry lab in Hamburg.
Lufthansa Technik opened a facility in Puerto Rico for the repair and overhaul of narrow body Airbus aircraft. It is also expanding hangar capacity at its Philippines maintenance site. This will be the site’s its entry into Boeing 777 base maintenance. AFI KLM E&M serviced about 1,500 aircraft in 2014. About 2/3 of these airplanes are owned/leased by its 200 airline customers. As of Sept. 30, 2015, the MRO had an order book of $8.4 billion for external business, up from $7.5 billion as of year-end 2014. It has won major contracts from Air China (Cargo), LATAM, Saudia, and Jet 2.
The MRO has a growing engine portfolio, as well. It already has performed several quick turns on GEnx engines for third-party airlines. And it will be performing full shop visits for both its own fleet and external customers. AFI KLM E&M supports all major GE products, including the GE90, GEnx and GP7200.
The situation with the Rolls-Royce Trent XWB engines is developing. Air France KLM Trent XWB engines will be supported under a long-term service support agreement with Rolls-Royce, while the OEM will support AFI KLM E&M in implementing Trent XWB engine overhaul capability in Paris. Air France KLM and Rolls-Royce are evaluating further MRO cooperation, Pruim says.
AFI KLM E&M likewise is investing in America. Last year the unit took full control of Barfield, a U.S.-based component MRO, and acquired a 50 percent stake in Tradewinds, a U.S.-based engine parts trading company. It formed a branch of its “MRO lab” in Singapore, partnering with software provider, RAMCO. It also has added a new logistics center in Dubai and is opening a major aero structures/composites facility in Paris.
The OEMs remain dominant in their aftermarket. Rolls-Royce enjoys an estimated 80 to 90 percent share or the total MRO spend for its engines on average, Berger says. GE Aviation, including its share of CFM International, holds an estimated 50 to 60 percent of its aftermarket, and Pratt & Whitney an estimated 30 to 40 percent of its aftermarket, he says.
GE commercial services revenues in 2014 were $8.9 billion, including GE’s share of both CFM and Engine Alliance partnerships. There are approximately 32,000 GE and JV commercial engines in active service, powering some 15,100 commercial aircraft, including wide bodies, narrow bodies, and regional jets. GE’s overhaul shops perform less than 40 percent of overhauls for the fleet. The OEM estimates a $106 billion backlog for long-term engine services and materials agreements.
In what is may be a new high water mark, GE Aviation announced that Emirates signed a $16 billion contract for OnPoint MRO of the GE9X engines to power its fleet of 150 777X aircraft over a 12-year period. Typically from 60 to 80 percent of aftermarket contracts for new- generation engines are negotiated between the OEM and operator/ lessor at the time the engine is purchased, according to data from MTU Aero Engines, a major player in both new manufacturing and MRO.
GE Aviation nevertheless does not monopolize its aftermarket. The CFM56, of which there are 20,000 flying on 10,000 aircraft, is serviced by many MROs, Dwyer says. On GE CFM engines there is a relatively large pool of available shop visits to compete for, he says, so more third-party MROs bid on them. “That’s been a hallmark of our services business.” Because the “open network” allows for competition, non-GE MROs are interested in buying used parts, which they can purchase from airlines or other non-OEM sources, all of which helps the engines to maintain their residual value.
On newer engines the OEMs are more dominant. On the GE90-115B, for example, GE says there are only four MROs. Much depends upon customers’ perception of risk and market dynamics, Dwyer says. With new engines customers are biased towards risk transfer, but as engines get older they may want to take advantage of used parts. Many customers change their engine maintenance product during the life cycle, he says.
Meanwhile, Rolls-Royce, the OEM with the largest share of its aftermarket, is reengineering its aftermarket operations to inject more competition. It selected Delta TechOps as the first independent
Approved Maintenance Center (AMC). Delta TechOps will be able to overhaul Trent XWB and Trent 7000 engines for Delta and other airlines. Rolls-Royce also announced changes to three AMC JVs, introducing “a more competitive business model,” according to information from the company.
Pratt & Whitney
Pratt & Whitney likewise has a large presence in the aftermarket. It has 19 facilities in eight countries — with a work force of about 5,000 people, says Joe Sylvestro, vice president of aftermarket operations. Most of these facilities do work on commercial aviation engines. Major facilities are located in Taiwan, Shanghai, Singapore, Istanbul, and the U.S.
Pratt & Whitney also asserts the strong residual value for its engines. The V2500, for example, boasts some 200 customers and over 6,800 engines delivered. About 60 percent of the V2500 fleet is managed by Pratt & Whitney, but customers have a wide range of maintenance options, the company says.
As of March 2015, the company calculated an engine services backlog of $57 billion, including commercial, military, and smaller engines.
Since 2000 P&W has been performing about 650 engine overhauls a year, adding up to more than 10,000 engines in the past 15 years, mainly PW2000s, PW4000s, and V2500s, Sylvestro says. There are more than 10,000 Pratt & Whitney engines in operational use today in commercial aviation. And there is a backlog of 7,000 new Geared Turbofan engines. The company has about 450 airline customers.
P&W has invested heavily in Asia-Pacific over the last 30 years and recently announced an investment of nearly $110 million in two new facilities in Singapore, says Kevin Kirkpatrick, the company’s executive director of aftermarket operations for Singapore and Taiwan. One of these supports PW4000 engine component repairs. In fact, overhaul of the wide-body PW4000 engine is carried out only in Singapore, he says. The PW4000 overhaul facility is a JV with Singapore Airlines Engineering Co.
Unlike GE and Rolls-Royce, Pratt & Whitney works on engines other than its own. For example, the Shanghai Engine Center, a joint venture with China Eastern Airlines, completed its 500th CFM56 overhaul this year.
MTU Maintenance is the largest independent engine MRO provider in the world, according to Leo Koppers, senior vice president of MRO programs at MTU Aero Engines. “The worldwide commercial engine MRO market is at about 8,000 shop visits for 2015, 8 percent of which are performed by MTU Maintenance,” he says. “This makes us No. 3 worldwide, and the largest independent provider.”
MTU Maintenance is very active in the aftermarket of GE, CFM, and Pratt & Whitney engines It is the No. 1 independent MRO provider on the CF6-50/-80C2, the GE90-110B/-115B, the CFM56-3/-5B/7, and the PW2000, according to Koppers. MTU Maintenance has more than 150 airline customers and about 50 lessor customers with a commercial maintenance order backlog of 4.4 billion euros as of Sept. 30, 2015.
In the commercial arena MTU’s relationship with GE Aviation, according to the U.S. OEM, involves or will involve:
- CF34 – Overhauls via a GE-Branded Services Agreement;
- CFM56 – Independent third-party overhauls;
- GE90 – Independent third-party overhauls;
- GEnx – Risk sharing partner (new-make and overhaul provider for the turbine center frame);
- GE9x – Risk sharing partner (new-make and overhaul provider for the turbine center frame);
The company also has secured aftermarket participation on the PW1100G-JM Geared Turbofan engine. MTU is only one of three shops that will have capability to repair PW1100G-JM engines shortly after they enter into service, Koppers says.
The company’s MRO revenues in 2014 reached 1.3 billion euros, a seven percent increase from the preceding year. For FY2015 MTU expects to achieve “high single-digit growth rate in revenues in the commercial maintenance segment, compared to 2014,” Koppers says. Additional opportunities may result from the “investigation of the EU Commission [as to] whether airlines are forced into anti-competitive contracts,” he says. Although this investigation involved specific engines and components, it “may result in more OEMs’ opening up the market,” he says.
MTU Maintenance also has expanded cooperation with AAR for the supply of used PW2000 engine material, which will “significantly streamline the logistical processes and improve the turnaround time for PW2000 shop visits,” Koppers says. In the last few years MTU also has expanded or upgraded maintenance facilities in Zhuhai (China), Dallas, Vancouver, and Hannover.