By STEVE GOODMAN, Engine Air Magazine
The business model of the “one-stop shop” may be great for convenience stores, supermarkets, and big box retailers such as Walmart. But is it a good idea when it comes to aircraft engine maintenance, repair, and overhaul (MRO)? Many in the industry believe that it is. The MRO market is expanding worldwide. One of the primary driving forces has been the ever-increasing complexity of aircraft structures, systems, and components.
MRO activities also have increased due to more stringent requirements for avionics and systems upgrades. In addition, economic factors are forcing both civilian and military fleets to rely more on legacy aircraft instead of purchasing of new ones. Along with this expansion, there has been an increased desire for MRO providers to offer everything from engine maintenance and repair to exterior painting – all under one roof.
DOING IT ALL SUCCESSFULLY
The all-under-one-roof concept has been a proven business model for companies such as BizJet, which is owned and operated by Lufthansa Technik Composite (LTC). BizJet has been a staple of its home (Tulsa, Oklahoma) aviation industry since 1986. The company offers MRO services for a wide range of engine and aircraft models. According to Chairman and CEO Bernd Kowalewski, one of the company’s greatest strengths was its early recognition as an alternative to General Electric (GE) for work on the CJ610 engine.
BizJet still is an authorized overhauler for the CJ610, as well as for the GE CF700 engine. BizJet also is qualified to overhaul the Pratt & Whitney JT15D engine at its Canadian facility. A Honeywell-authorized service center for the TFE731, the company also works on Rolls-Royce Spey and Tay engines, which are found on older model Gulfstreams. As part of Lufthansa, BizJet also services the GE CF34 engine. In addition to servicing these different engine models, BizJet offers maintenance, paint, and interior services for a wide range of business jets, including Beechjet, Bombardier, Cessna Gulfstream, Embraer, and Raytheon.
This is a level of service that Kowalewski says his customers have grown to expect, because “many of the engines that BizJet works on are fitted to [legacy] airplanes, which are earliergeneration jets.” And such older aircraft require a range of MRO activities. Given recent industry downturns, not only corporate fleet owners but also major airline operators are realizing the benefits of outsourcing a good portion of their MRO operations, particularly heavy maintenance engine checks. In fact, aircraft operators have expressed a preference for entering into a fixed-term contract with a comprehensive MRO provider to conduct such scheduled services. In turn, service providers that offer such maintenance services under one roof are most likely to profit from this trend.
THE ROLE OF CARRIERS AND OEMS
To provide such comprehensive one-stop-shop maintenance and repair solutions, MRO service providers frequently form alliances and enter into joint ventures with primary aircraft original equipment manufacturers (OEMs). Second tier OEMs – such as the manufacturers of avionics, landing systems, and aircraft engines – also may benefit from such partnerships. Many OEMs are aggressively pursuing the MRO market. Ever since the slump in the airline industry – caused by the 9/11 attack, the outbreak of SARS, and an overall global recession – there has been a significant reduction in the number of orders for new aircraft.
As a result, large aircraft OEMs, such as Airbus and Boeing, have focused on the MRO business in an attempt to make up for some of the lost revenue. Therefore, for independent MRO providers who want to gain market share and increase their service capabilities, especially in regard to the parts supply chain, partnering with the OEMs makes sense. OEMs have vast knowledge of system designs and operations, not to mention a broad base of civilian airline and military customers. When linked to an OEM, an MRO provider has direct access to spare parts, technical data, and a storehouse of technical expertise.
There have been a number of successful examples of such a cooperative arrangement between an OEM and a MRO provider. These include Boeing’s arrangement with Volvo Aero and Honeywell’s liaison with Cat Logistics, a division of Caterpillar that operates 130 facilities worldwide. Airlines and air carriers also are partnering with service providers to expand both in-house and outsourced MRO capabilities. The relationship BizJet formed with Lufthansa Technik is a good illustration. Much like the OEMs, the airlines are trying to capture more of the MRO market to make up for lost revenue due to increased fuel costs and travel drop-off during the recent economic downturn.
The major carriers also have been wrestling with the question of whether to eliminate or expand the use of in-house maintenance facilities dedicated to servicing their own aircraft. Perhaps the best-known example of a carrier creating and expanding its own one-stop MRO network is United Airline’s United Services unit. According to the company, the United Services line maintenance network, “is an innovative strategy within the aircraft support industry to provide greater opportunity and flexibility for aircraft operators.” Members of the network include China Aircraft Services Limited (CASL) and Mexicana Airlines.
In an example of corporate consolidation of its service segments, in 2005, the Carlyle Group combined three companies it recently had acquired: Garrett Aviation Services, which was primarily a repair station and modifications operation for corporate jets; Piedmont Hawthorne, which had thirty-five fixed-base operations (FBOs); and Associated Air Center, which did completion work on transport aircraft. The parent company, known as Landmark Aviation, is headquartered in Tempe, Arizona, and is now one of the largest general aviation facilities in North America. Landmark Aviation is capable of working on just about everything, from Cessnas to 747s.
LARGEST GROWTH: INDUSTRY SEGMENT
According to AeroStrategy, a global MRO industry consulting firm, overhauling of commercial air transport engines is the segment of the MRO market poised to experience the greatest growth. Worldwide engine MRO spending in 2007-2008 was estimated at upwards of $17 billion, a figure that AeroStrategy says could grow by an average of 4 to 5 percent a year, reaching over $27 billion by 2017.
According to the consulting group, commercial airline engine MRO service will continue to represent the portion of the market most likely to embrace outsourcing over the next few years. With major airlines doing less and less heavy maintenance inhouse, it is estimated that 75 to 80 percent of engine checks, repair, and maintenance will be outsourced to MRO contractors by 2017.
LARGEST GROWTH AREAS
Another interesting prediction is that the largest MRO growth will be seen in the Asian Pacific market. Over the next two decades, it is believed that the center of the world’s airline fleet traffic will shift to this part of the world, with almost 40 percent of air traffic to be to, from, or within the Asian Pacific region. Boeing has speculated that over the next 20 years, airlines will take delivery of 23,000 aircraft the world over and that more than 20 percent of those aircraft will be delivered to the Asian Pacific market. Airbus makes similar assertions, and predicts that operations in the region will account for the delivery of more than 4,000 passenger aircraft over the next 20 years – or more than 200 planes per year.
Based on those kinds of numbers from two top manufacturers, the region’s MRO market is expected to grow at a rate of over 6 percent. Over the past 3 years, India has been among the fastest-growing markets in terms of airline passenger traffic. Large numbers of first-time air travelers in a country with more than 1 billion people has kick-started the nation’s aircraft industry. But support and infrastructure in terms of MRO has failed to keep up with that growth, creating a huge opportunity for MRO providers. Air India alone, of the country’s ten domestic carriers, has a comprehensive in-house MRO facility.
Aircraft owned by the private airlines usually are sent abroad for major engine checks and other services. In February 2008, the Indian government changed its policy, and it now allows 100 percent direct foreign investment in MRO businesses. Since the change, there has been significant interest among international MRO companies in setting up shop in India, with most of the well-known players having at least carried out feasibility studies of the business opportunities in the region.
Maintenance, repair, and overhaul services play a vital role in seeing that commercial aircraft remain safe and that commercial airlines remain in business. Today, the United States MRO market for commercial aircraft is over $40 billion and growing. According to industry figures, the market is experiencing a growth rate of almost 4 percent per year, and it could reach almost $68 billion within the next 5 to 10 years.
This rapid growth is creating opportunities for new companies and causing the roles of existing MRO providers to change and evolve. In order to continue to provide one-stop shop resources to the airlines and their affiliates, MRO providers will need to think about taking on new roles, adding value, and working more closely with OEMs, airlines, and other service providers.
Image Courtesy of BizJet. Copyright 2013.