By Tom Cooper, Brian Prentice, and David Stewart Tom is a vice president and Brian and David are partners with Oliver Wyman’s transportation and services practice. Passenger aircraft on maintenance and flight preparation. Since the mid-1990s, there has been a consistent, almost inexorable trend for airlines to outsource their maintenance needs. Today, the state of the maintenance, repair, and overhaul (MRO) sector in aviation is encouraging some carriers to rethink that decision. A growing number of airlines are looking to build MRO capability and pursue more insourcing. The main drivers behind this strategic about-face include a desire to assure the availability of adequate capacity and, for some, an interest in building out MRO capability as a commercial activity in what is a fast-growing market with inadequate capacity. The shortages facing MRO can be seen to varying degrees in line, engine, component, and airframe maintenance, depending on the geographic region. Besides the difficulty in keeping up with demand in select market segments, there is also a looming shortfall across most geographies in the number of trained aviation technicians. At a time when the number of available seat miles is on the rise and a failure to provide on-time performance can carry costly penalties, airlines want to ensure that they can keep their aircraft serviced, and in the air, as much as possible. Shortfalls in capacity as fleet grows As a result, the aftermarket — as the MRO sector is often called — is starting to see announcements, such as the recent ones by Air Asia and Malaysia Airlines, about airline investments in new or additional in-house maintenance capabilities. This trend has been particularly evident in much of Asia and the Middle East, where burgeoning middle classes want to travel and airline fleets are growing rapidly and have done so for the last decade. For example, more than 40% of the 11,680 aircraft to be added to the global fleet between now and 2029 will be added in those two regions, according to the latest Oliver Wyman Global Fleet and MRO Market Forecast. And with this 42.5% growth in the fleet, there is naturally a concomitant increase in aftermarket spend: Oliver Wyman’s 2019-2029 Forecast projects a 41.4% rise to $116 billion by 2029 in MRO expenditures, up from today’s $82 billion. For this reason, carriers in these fast-growth regions see a possibility of expanding maintenance into a new, potentially lucrative source of revenue or have identified the need to establish MRO capability just to assure supply. For some state airlines, maintenance is or is becoming part of a national growth strategy in aviation. The buildup of in-house maintenance capacity is also a reaction to the state of play in the aviation aftermarket. Airlines are growing wary of the rising market position of aircraft and engine manufacturers in MRO. Simultaneous with the consolidation of the aftermarket in recent years, these original equipment manufacturers (OEMs) began to seek increased revenue through tighter control of their intellectual property (IP), especially on newer aircraft models. Building leverage in the market Some carriers already report that the growing reduction of competition in the aftermarket is resulting in rising prices, especially when coupled with shortages in capacity and labor. To give themselves leverage in the market and an alternative to third-party providers and OEMs, some airlines are seeking an in-house solution as a necessary strategic option moving forward. In Oliver Wyman’s 2019 survey of MRO executives, scheduled to be released April 8, the top three forces identified as the most disruptive to the MRO sector were the growing presence of aerospace manufacturers in the aftermarket, the labor shortage, and consolidation. Almost eight out of 10 industry executives surveyed told the 2018 survey that they expected manufacturers to continue to expand their presence in the aftermarket over the next three years, and a majority also indicated that OEMs would do that by leveraging control of existing IP and licensing to boost their share of business. Both trends have been continuing in 2019, and the industry’s expectation is for more of the same in the near future. WHAT EXECUTIVES EXPECT TO SEE IN MRO Results from Oliver Wyman's 2019 MRO Survey Of course, some airlines like Delta, Lufthansa, and Air France-KLM never left the maintenance business and already have a track record as a service supplier to other carriers. Here, the shortage of supply — both capacity and labor — and the rising demand are encouraging the parent airline to grow that side of the business. On February 21, Delta unveiled a new jet engine test facility, which it says is the largest in the world. The airline has said it hopes to expand its maintenance unit Delta TechOps by $1 billion over the next five years. A key part of this expansion focuses on adding newer Rolls Royce engines to its existing engine maintenance portfolio, a decision reflecting the need to assure capacity and greater supplier choice for Delta, as well as an effort to increase third-party revenue. It also provides necessary new engine maintenance capacity. MRO capacity shortfalls do not only exist in high-growth regions or in certain engine segments. In Europe today as well as the Middle East, there is a lack of hangar capacity for airframe heavy maintenance and modifications. For years, third-party MROs invested in the higher-margin engine and component markets and forgot about the less visible but just as necessary airframe work, where labor costs define the economics. Almost 90% of Oliver Wyman’s 2019 survey indicated that it was likely or highly likely that airframe manufacturers, in particular, would develop more capabilities in the marketplace. But it also wouldn’t be surprising if airlines also capitalized on the shortage.
More airlines intend to expand their in-house maintenance, repair and overhaul (MRO) divisions, following two decades of outsourcing. A trend from the mid-1990s towards contracting out maintenance needs has left the global airline industry with a shortfall in MRO capacity. While demand for air flight continues to grow, particularly in Air Asia, aftermarket sectors like MRO have consolidated and become more expensive, leading to carriers like AsiaAir Asia and Malaysia Airlines making significant investments in their own MRO businesses. As such, maintenance could become a lucrative source of revenue for some airlines in a market recently dominated by manufacturers.