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Wednesday, July 1, 2009

The 'Mendoza Line' for MROs

By John Persinos

Those of us who love baseball use an expression called "The Mendoza Line," a reference to when a player’s batting average falls below .200. If a hitter’s performance sinks beneath this threshold, he’s considered unworthy of the Major Leagues. The term is named for former shortstop Mario Mendoza, who hit .198 in the 1979 season.

My point, as it relates to the MRO industry, is that the percentage of maintenance work that’s conducted by operators themselves seems to have fallen below a threshold that can be deemed safe.

The troubled economy is a major culprit. In response to today’s hard times, increasing numbers of operators are shuttering their own repair centers and firing "excess" mechanics in favor of outsourcing their MRO work to third-party facilities.

Third-party vendors tend to be non-union, greatly reducing operators’ costs. This outsourcing trend has been underway for at least the past decade; the severe global recession has only accelerated it.

Major U.S. domestic carriers now spend about two-thirds of their increasingly scarce maintenance dollars on subcontracted repair stations here and abroad, including facilities in Asia and Latin America. This figure compares to about 37 percent in 1996. Speaking to me on a non-attribution basis, a Boston-based aviation analyst (and fellow Red Sox fan) put it this way: "The percentage of MRO work done by carriers themselves has dropped to about one third, which to me represents a sort of ‘Mendoza Line’ for the MRO industry." That’s because, he says, foreign MRO shops are not mandated to have the same number of FAA-certificated mechanics, or the same security guidelines, as airline-owned repair facilities in the U.S.

Typically, I hate sports metaphors, but in this case, I fear that his words are apt. Maybe it’s time for the MRO industry to return to training and work on its fundamentals.

This dilemma surfaced as a point of discussion during a recent Aviation Today webinar, hosted by me, titled: "Today’s Best Opportunities in Rotorcraft", produced live on April 23 and now archived on the website. One of the speakers was Ernie Stephens, editor-in-chief of Rotor & Wing magazine, a publication under the Aviation Today umbrella.

Our online webinars are recorded and archived on Aviation Today; you can register and access any one of them, on demand. They’re also interactive; registrants can email questions to the moderator, who presents them to the speakers for discussion. Here’s a relevant excerpt of my recent rotorcraft webinar:

Persinos: I have a question from one of our registrants, who asks: which market has been more affected by the economic crisis? The original equipment manufacturers or maintenance, repair, and overhaul? Anyone?

Ernie Stephens: OEMs were really living large, especially Eurocopter, Bell, and MD in the period right after September 11, when a lot of Homeland Security money came out. And of course as soon as you start buying more helicopters and operating helicopters, that means that there are more helicopters to repair. I think these two areas, original equipment manufacturers and the maintenance and repair operations, are linked to each other.

When OEMs stop selling aircraft, maintenance operations start to slip. But by the same token, if you have an operation that would like to have a new helicopter but believes it must keep what they have going a little bit longer, it could mean that the MROs will get a little more business as they try to patch aircraft that would have otherwise been sold off before.

Persinos: Well, it seems to me that there’s even more pressure on MROs to consolidate, to create more economies of scale. You’ll see more offshoring of maintenance, repair and overhaul to remote regions where there are fewer regulations and perhaps less oversight. But there’s more and more pressure on MROs to boost their bottom line to cut costs. And I think that’s one way the MRO market will be affected. It was already consolidated and I think that trend will accelerate.

I’ll reflect on the industry’s batting average, in future columns.

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