That the repair station business is growing should be no surprise, given the rise in aircraft use in both the air transport and corporate aviation sectors. But the repair station business, while enjoying growth, also is undergoing fundamental changes and faces unique challenges. These changes vary, depending on a particular repair station’s location and service offering. In short, these are dynamic times for repair stations, which provide modifications and maintenance, repair and overhaul (MRO) services.
Talking to officials with independent repair stations, airlines, the avionics original equipment manufacturers (OEMs) and an industry management consultancy, Avionics Magazine has pieced together a picture of this vital aviation sector’s current state and where it may be heading. First, a look at its economic growth.
Business Picking Up
Worldwide, MRO represents about a $36-billion market, according to London- and Ann Arbor, Mich.-based AeroStrategy, a management consulting firm. The firm recently revised upward its 10-year forecast of the MRO market, predicting more than 5 percent annual growth through 2014.
Geographically, AeroStrategy foresees the greatest annual growth in the Asia-Pacific region at 7 percent, followed by Europe at 5.8 percent, North America at 4.3 percent, and Latin America at 4 percent. Europe’s growth rate is expected to exceed North America’s, according to Kevin Michaels, principal at AeroStrategy, "because the European [air transport] fleet will grow more than the U.S. fleet; it’s not as mature a market as North America’s." Dramatic growth in Asia’s aviation market is understandable, given the rapid development of the two economic powerhouses, China and India.
Dividing the MRO market by types of service, AeroStrategy sees engine repair taking the lion’s share of the market (35 percent), followed by line maintenance (22 percent) and component support, including avionics (21 percent). Heavy airframe work (14 percent) and modifications (8 percent) round out the MRO business pie chart. Within the component support slice, repairs of avionics and auxiliary power units take 14 percent of the business each, while flight control repair represents 6 percent. Wheels, brakes, landing gear etc., produce the balance of component support. AeroStrategy predicts the about $7.6-billion component support sector will enjoy 5 percent annual growth and become a $12.3-billion market by 2014.
The management consulting firm expects avionics support to remain "moderate" and not grow dramatically, says Michaels. The fact that modern aircraft come with more black boxes that will need repair is offset by the fact that new digital avionics are more reliable and won’t require replacement and repair as often as older systems, he explains.
The Outsourcing Trend
A trend that AeroStrategy watches closely is that of outsourcing, particularly in the United States, where air carriers are seeking efficiencies wherever they can find them. The firm says approximately 50 percent of the worldwide, commercial MRO activity is outsourced, and it foresees that percentage increasing, particularly in North America.
European and Asian carriers have a head start in outsourcing, according to Aage Duenhaupt, manager-international communications for Lufthansa Technik, one of Europe’s largest MRO providers. "Europe and Asia were at the forefront of outsourcing, while the U.S. airlines have had their own comprehensive maintenance shops," he says. "But now, more and more after 9/11 [terrorist attacks that financially crippled the U.S. carriers], we see more outsourcing there, and also since the low-cost carriers [LCCs] entered the scene."
Indeed, Lufthansa Technik, a third-party MRO provider linked to Lufthansa German Airlines, has taken full advantage of the outsourcing trend in the United States, having signed a "total component support contract" with Spirit Airlines, which flies MD-80s but is transitioning to an Airbus A320 family of aircraft. In addition to operating a large warehouse in Fort Lauderdale, Fla., Spirit’s base, Lufthansa Technik has established a network of supply stations for the airline. These are divided into four levels of service; each level is proportional to Spirit’s operational activity at a location.
Rockwell Collins has entered into a comprehensive agreement with Arizona-based Mesa Airways, providing a service the OEM calls "rotable total service solutions" (RTSS). Mesa receives a "nose-to-tail" service, according to Kirk Weber, Collins’ vice president of maintenance operations. This means Collins supports not only its equipment on Mesa aircraft, but also the systems made by other avionics OEMs. (Collins has 15 repair stations worldwide.)
Weber doesn’t see the outsourcing trend going all one way, however. "I see insourcing and outsourcing going on," he says. "Some airlines like to insource their support to cover their fixed costs, while others choose to outsource to gain performance guarantees."
Likewise, Adrian Paull, vice president of customer services at Honeywell Aerospace Electronics, sees "a polarization taking place globally," in which some operators, particularly major carriers, are becoming more involved in modifications and MRO, while other operators, particularly the LCCs, are outsourcing these tasks.
In the air transport market, AeroStrategy notes several outsourcing issues to watch:
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The U.S. low-cost carriers, which are most likely to outsource support, have booked the largest percentage of new aircraft orders, thus driving further growth in MRO outsourcing.
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The major carriers that traditionally have "insourced" their maintenance generally face higher labor costs than independent repair stations. Their choices are to outsource, take in third-party work or do some of both in order to best utilize their workforces.
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And broad component support is emerging in the MRO business, as is evident in the Lufthansa and Collins arrangements with Spirit and Mesa, respectively.
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AeroStrategy describes broad component support as the provision of maintenance and asset or logistics management. European service suppliers such as Lufthansa Technik and Air France Industries are best equipped to provide broad component support.
In the United States third-party support arrangements comparable to broad component support have their roots in the U.S. military. The 1998 Defense Authorization Act tasked the Department of Defense (DoD) to seek innovative alternatives to product support. The result was "performance-based logistics," a process under which the services "purchase the performance and outcomes in product support instead of the products and services alone," explains Lou Kratz, deputy undersecretary of Defense for logistics, plans and programs.
"It involves more than shipping parts," says Kurt Huff, director of military business development for Smiths Aerospace, describing this new support process. "DoD figured out that if you pay someone to simply repair and replace parts all the time, there’s no incentive to make the parts more reliable. So, under this new type of contract, the OEM or repair station gets a flat fee for supporting the aircraft." The vendor’s incentive is to supply parts that are as reliable as possible because he saves money when fewer parts are returned for repair.
A primary gain for the military is parts availability. Huff cites three programs Smiths has contracted with the U.S. Navy. "When the Navy managed the inventory, parts availability was 63 percent, meaning that whenever a part was needed, it was readily available 63 percent of the time," he explains. "We now have Navy assets in Clearwater, Fla., and performance is 100 percent. When you ask for a part, we have it." (Smiths contemplates the expansion of performance-based logistic support into the commercial marketplace, according to Huff.)
Acknowledging the difficulty in quantifying how much performance-based logistics streamlines DoD’s support activities, Kratz nevertheless estimates a $15-billion savings department-wide.
Consolidation and Partnerships
The move to provide comprehensive service such as asset and repair management has generated a flurry of cooperative arrangements between MRO providers and asset management specialists. AeroStrategy cites, as examples, Boeing’s arrangement with Volvo Aero, Honeywell’s with Cat Logistics, and EADS with SAS Component and AAR. Other examples of MRO supplier cooperation and consolidation include the partnerships of Lufthansa Technik and Bizjet, and of SR Technics (formerly part of Swissair) and Ireland-based FLS Aerospace.
In one instance, a new aircraft has prompted the consolidation of MRO activity. "We are cooperating with Air France Industries to service the A380," says Lufthansa Technik’s Duenhaupt, adding that details of how the two MRO giants will work together will be announced by early summer.
Another motivation among independent MRO providers to cooperate and consolidate is the need to compete against the OEM’s growing involvement in aircraft support. "In order to compete for a tender, you have to do a lot more partnering," says Smiths’ Huff.
One company plans internal consolidation of MRO activities. The Carlyle Group plans to combine three companies it has acquired: Garrett Aviation Services, which provides repair and modifications for the corporate market; Piedmont Hawthorne, which has 35 fixed-base operations (FBOs); and Associated Air Center, which provides completion work for air transport aircraft. The Carlyle Group intends to join the three companies under one company name, to be announced in the second quarter of 2005, according to Keith Phillips, Garrett’s vice president of sales and marketing.
Combined, the Carlyle Group’s three companies may well be set to provide the most comprehensive MRO support of any independent repair station. "The new company will be able work on everything from Cessna 150s to Boeing 747s," Phillips tells Avionics Magazine.
Regional and Bizjet Markets
In the civil marketplace, avionics represents a lead item for outsourcing, according to Huff, because, despite their much-improved reliability, aircraft electronics still "has a higher failure rate than, say, hydraulics," he says. "Also avionics tend to have unscheduled failures, while landing gear, for example, are usually repaired during scheduled maintenance." These considerations, plus the fact that avionics are increasingly software-driven and require special test equipment, make outsourcing appealing to military and commercial operators alike.
As for the regional airline and corporate aviation markets, with a combined fleet exceeding 31,000 aircraft, AeroStrategy claims that the about $8 billion spent annually on MRO (not including modifications) will escalate to about $13 billion by 2013. Key trends impacting business and regional aircraft support differ from those affecting LLCs and major carriers. For example, much of the regional jet fleet is less than five years old and thus far has generated limited MRO demand, according to AeroStrategy.
But as the aircraft age, regional jet operators (and many corporate operators, too) must decide how to maintain their aircraft after the warranties run out, i.e., whether to invest in in-house maintenance or to outsource. According to AeroStrategy, the MRO providers are vying for this post-warranty business with offerings such as turnkey outsourcing, one-stop shopping and guaranteed maintenance cost programs.
"Regionals are under the most pressure and run very lean operations," says Paull. Honeywell provides an asset management arrangement in which it continually replenishes a pool of spares that it provides the carriers. The carrier’s "only obligation is to let us know when a part is taken from the pool," he explains. (Honeywell, incidentally, has 14 repair stations worldwide and is about to open its 15th facility, in Pudong, China.)
Other Trends
Beyond industry consolidation, outsourcing and broad component support, a wide variety of other factors also is impacting the repair station market. Some factors depend on geographic location. For example, labor costs are an ongoing challenge for European MRO providers, many of which are engineering divisions of major carriers. To meet the challenge, Lufthansa Technik "spends a lot of money on research and development to find `smart technologies’ and new ways to offer more and better service," says Duenhaupt. "We also try to get more airlines to join in our spares pool. A bigger pool can be an advantage to all who participate."
North American repair stations face their own challenges, one being FAA’s new Part 145 standards, which will require more technician training, enhanced repair station manuals and more repair documentation. The new standards are in response to a critical report that the Department of Transportation’s inspector general issued in July 2003.
Indeed, Collins’ Weber believes repair stations are challenged by "constant change in regulatory requirements." He gives as examples new procedures for bar coding parts and producing radio frequency identification (RFID) tags.
In addition, independent repair stations in North America must face the transition from avionics work that is driven by regulation to modification and upgrades that are discretionary. Repair stations such as Garrett and Midcoast have enjoyed a lucrative business of outfitting aircraft for compliance to the reduced vertical separation minimum (RVSM) and terrain awareness warning system (TAWS) requirements. Ninety percent of Garrett’s avionics work has been in modifications, and Midcoast Aviation holds as many as 225 supplemental type certificates. But with these regulatory deadlines past and no new significant deadlines on the horizon, this business is winding down. To prepare for the oncoming discretionary buying environment, independent repair stations will "have to work closely with the OEMs to gain a strong sense of what products and services are coming on the market and what will drive them from a cost standpoint," says Garrett’s Phillips.
Companies that are more involved with avionics repair must establish closer relations with the OEMs, too, according to Steve Klassen, manager of Duncan Aviation’s avionics and instrument shops. "Duncan is able to work on avionics up to a point, but new digital avionics are going into aircraft, and the OEMs have kept the repair solution in-house. We’re not able to get the manuals, training and test equipment for these new systems," he explains. "I’d say 65 percent of avionics repairs goes to the OEMs."
"The OEMs are controlling the data [required for digital avionics maintenance]," Phillips adds. "They are doing a much better job of protecting the investment they’ve made."
"We hope this won’t be permanent," says Klassen. "We’re working closely with the OEMs–trying to establish partnerships–to gain the authority to repair the newer products." Larger independent repair stations such as Duncan, Garrett and Midcoast Aviation have an advantage in establishing a favorable OEM relationship because, as modification shops, they also sell OEM equipment.
Honeywell’s Paull believes the complexity of today’s avionics leads more to a division of work levels. He sees the independent repair stations performing level 1 (swapping out boxes) and level 2 (taking out boxes and testing them to filter out no-fault-founds) support. They then would send the failed box to the OEM for exchange or level 3 repair.
The Honeywell vice president sees a customer preference for OEM support. "During the warranty period, we provide all the spares in exchange," he explains. "After the warranty, we find an extremely high number of corporate operators want to continue with the same arrangement."
But, while OEMs focus on digital avionics repair, some companies have been able to capitalize on the repair of legacy equipment. Thomas Electronics of Australia Pty Ltd., for example, has established a profitable business servicing the many cathode ray tube (CRT) displays installed in the older air transport aircraft that do not have liquid crystal displays (LCDs).
Finally, there are two interrelated challenges facing all repair stations throughout the world. "One is obsolescence management," says Smiths’ Kurt Huff. "There are several hundred parts becoming obsolete almost daily." And, as is evident with Thomas’ CRT support business, some airlines want to maintain usable equipment as long as possible.
The other challenge, Huff adds, is managing the parts supply chain, to make sure you have the "nuts and bolts" that go into a repair. "There’s nothing worse than stopping a components repair for want of a $2 part."