Dean Barber

Getting the Bulge on Aviation MRO

In Uncategorized on April 8, 2012 at 8:11 am

If it is your intention to compete within or serve a particular industry, it is best that you know that industry.

Now that might sound like an obvious statement, but I continue to be amazed how certain business people do not take that to heart.

I cannot help but wonder how many of the economic developers who attended Aviation Week MRO Americas trade show this past week in Dallas took the time to do any basic research in an attempt to figure out what makes the aviation maintenance industry tick. What are the trends? What are the drivers to growth if there is growth?

Mind you, I know and can appreciate that some economic developers – I will refer to them in my best southern dialect as the “good uns” — do take industry research very seriously. They develop a deep understanding of their target industries, especially when they coincide with their existing industries, so as to better serve and compete for capital investment in their respective communities.

Then there are the others, a huge block, who too often have no depth of knowledge in economic development in terms of experience and training and sometimes are not even particularly dutiful students of business. They seem to just float along in the hope of somehow snagging a prospect at any industry trade show they should attend.

Well, good luck with that.

You’ve heard the old saying that knowledge is power. It can also be translated to bottom line results. Companies become and remain players, indeed industry leaders, by understanding and acting upon the market forces and trends within their industry group, thereby getting a leg up on the competition.

During the Civil War, an otherwise uneducated but rather brilliant Confederate cavalry leader Nathan Bedford Forrest referred to getting the “bulge” on his opponents.  Essentially, he saw, he recognized and  quickly acted upon information that he gathered and processed, thereby beating his often West Point-educated adversaries to the punch.

The Aviation Week MRO Americas conference has come and gone, but there still might be opportunities for business development with only a basic cursory understanding of what is happening within the $51 billion aviation maintenance industry. If business is war, as the Japanese would suggest, then let’s get our bulge on.

We should begin with some very basic and thereby very important facts about the MRO industry, starting with the term itself. We are talking about companies that perform maintenance and repair on commercial and military aircraft, hence the term “Maintenance, Repair  and Overhaul.”

Today’s active air transport fleet around the world numbers nearly 26,000 and is growing by about 1,000 aircraft per year. So by 2021, we should be up near the 36,000 mark. Most of this growth is taking place in emerging markets, specifically the Middle East and Asia.

Currently valued at $51 billion, the global MRO market is expected to grow annually by 4 percent to $76 billion by 2021, according to Kevin Michaels, vice president of ICF SH&E, an aviation industry consulting firm based in Ann Arbor, Mich. I had a nice sit down with Mr. Michaels, who was gracious enough to explain to me the drivers of the MRO industry and his thinking as where the industry was going.

Again, most of the industry growth will be taking place in emerging markets in Asia, where a sizeable middle class is developing. Increased wealth among more people in Asia means, in short, that more people there are flying, creating more industry demand. Michaels says that China will see a $6.3 billion increase in MRO spending by 2021, compared with only a $1 billion increase in North America

“What we are seeing in the emerging economies are large groups of people reaching that point where they can afford to travel. There is an emerging middle class happening throughout Asia,” Michaels said.

Conversely, MRO industry growth is not projected to happen in a big way in the mature economies of North America and Europe, where there have been increasing pressures on a struggling middle class just to maintain.

Another contributing factor to slower growth of the MRO industry in North America might also be due to the fact that virtually all the major airlines in the United States are now placing aircraft orders in an effort to replace their aging fleets with new and more fuel efficient aircraft. The newer aircraft coming online in the North America will simply require less maintenance than the airplanes they replaced.

Chris Doan, chairman and chief executive officer of TeamSAI Inc., a Denver-based industry consulting group, said the North American fleet will shrink until 2017 and then start to grow again, despite the overall growth of the global fleet.

“The Americas growth, it really represents not a very pretty picture from the standpoint of what’s happening to MRO,” said Doan. “It’s not a growing market. It’s one that is going to have to be focused on very carefully from the standpoint of strategy.”

As a result of the Asia’s rise, the aviation industry is scrambling to establish new operations there.

“We see a lot of the OEMs, original manufacturers of airplanes, engines and components, certainly moving into the Asian market and in most cases forming some kind of a joint venture or in a few cases, building their own infrastructure,” Doan said.

So if the big story for the MRO industry is the globalization of the supply base, what will that look like? As Doan alluded to, it will mean many U.S. companies forming partnerships and alliances with their Asian counterparts as well as new startups in that part of the world.

“There is enough growth there to support lots of new players, but they just won’t all be as much North American or Western Europe. It’s going to be a richer tapestry,” said Michaels.

The rise of Asia will force many US-based MRO companies to throw into the game in order to stay relevant and an industry leader. But first they must come up with a game plan.

“All this growth in the emerging economies, what do I need to do? How do I tap into that? Do I get a partner or do I go stand alone with my own facility? How do I do it,” said Michaels. These are the kind of questions that MRO managements are asking themselves worldwide in response to increased demand in Asia.

The other big story is the continued push for newer technologies in response to higher fuel costs, which can represent 35 to 40 percent of an airline’s total operating cost, surpassing even labor.

“High fuel prices are stimulating production of new aircraft right now, because we are obsoleting thousands of aircraft much sooner than anticipated because they are economically obsolete,” Michaels said.

So new aircraft save airline companies money on two ends – they are more fuel efficient and they need less maintenance, all of which prompting the retirement of older aircraft and the production of new models. This may be leading to an over exuberance in airplane orders.

Both Doan and Michaels see a possible overproduction bubble in the making as the result, a bubble that would have to eventually pop because of hyper demand that is unsustainable. The result could mean a market flooded with an oversupply of jets, which would not bode well for manufacturers, the airlines or the MROs.

But just because the MRO market will remain relatively flat for North America, does not mean that opportunities might not present themselves.

Michaels believes that heavy air frame maintenance, which is a very labor intensive operation, could eventually see growth in the Southeast. Under the current market dynamics, it often makes more financial sense for a company to fly an airplane from the United States to China for “heavy check” maintenance that could entail tens of thousands of hours because of the lower labor costs there.

“But if you look at the macro environment, fuel costs have gone up a lot and labor costs are going up very fast in China. And one of the trends we could see is more of the maintenance staying in North America,” Michaels said.

The Southeast could become more attractive location for airframe maintenance, in which labor accounts for 70 percent of the total costs, because of MRO demands for flexible labor and flexible work rules, Michaels said. That is not true for engine maintenance, in which labor typically accounts for only 25 percent of the total costs. The result is the engine maintenance shops can compete and flourish in higher cost areas such as New England or Germany, where higher skilled labor is required.

In the Southeast, Florida and Georgia dominate in the aircraft maintenance industry, both of which rank as top MRO states.

The aviation maintenance industry employs 20,191 workers in Florida, with an annual economic impact at $2.684 billion, according to the Aeronautical Repair Station Association. Aviation employment is Georgia is 13,741, with an economic impact of 1.705 billion.

California and Texas are the leaders, however. Calfornia employs 37,566 in aviation maintenance with an annual impact of 5.005 billion. Texas falls in second with 32,673 workers and an annual impact of 4.430 billion.

In that same Fort-Worth-Dallas to Wichita axis, Oklahoma employs 13,485 with an annual impact of 1.463 billion. Kansas comes in at 9,792 industry workers, with an annual impact of 1.647 billion.

Nationwide, ARSA pegs the total U.S. civil aviation maintenance workforce at 274,634. The industry’s direct and indirect impact on the U.S. economy is $39 billion.

There are six times more people working for repair stations – independent MRO companies — than are employed by the airlines to perform maintenance work “in house”. Repair stations (many of which are small businesses) employ 199,913 people, while only 33,324 are working directly for airlines at base maintenance facilities and line stations.

The potential “game changer” for North America is if American Airlines, now in Chapter 11 bankruptcy reorganization, decides to farm out most of its maintenance and repair work to MROs as is the airline industry norm. If American does that, it could mean as much as $2 billion more in business for MROs, said Doan.

Well, there you have it, some useful MRO industry intel. There’s a lot more information out there to be mined and refined to your liking. But now it’s your turn with an industry of your choice.

Dean Barber is the principal/owner of Barber Business Advisors, LLC., a site selection and economic development consulting firm based in Plano, Texas. He can be reached at 972-767-9518 or at dbarber@barberadvisors.com  Please visit our website at www.barberadvisors.com

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  1. Your article does well to explain the growth in the Asian markets and the replacement of the aging fleet with newer generation planes. I would just like to point out that the market for the retiring aircraft is actually what is driving much of the independent, small business, MRO market both domestically and internationally.

    Those aircraft that are being torn down and there parts sent for repair and overhaul to small shops domestically. Aircraft that can continue to fly are being sold for modification to become private jets or cargo planes internationally. Now I am generalizing the extent because I feel that these are the locales that I hear of the most.

    So I mention this just to say that these considerations bolster the domestic MRO market, which you refer to as flat and I would agree with overall, but would just say that the flatness is due to the growth of the aftermarket transition of retiring aircraft, otherwise the market would be in decline as larger MROs consolidate and shed employment.

  2. Dean, I only just now read your article dated, I believe 4/8/12 and found it very interesting. Particularly because you state the foundations for your conclusions which are oil prices and labor costs.
    Over the last 6+ months we have seen the accumulating effects of “fracing” and its resultant increase in global supply of oil. I believe oil is now at a new normal (~$60/barrel) as fracing technology spreads to other global oil producing areas.
    If true, the effects on the aviation industry will be immense. Operators will and are now reviewing their strategic thinking re retention vs. replacement of their fleets. Should the near term combined global judgment of operators side with a longer retention period of their fleets it will result in new orders and deliveries declining over the next 10 years or so.
    This will obviously have a great impact on MROs.
    I would be most interested in your thoughts on what I consider a settled tectonic shift in the macroeconomics of the aviation industry.
    Regards,
    Dennis Germaske
    Genesis Aviation LLC
    Managing Principal
    djgermaske@aol.com
    954 610 6743

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