After decades out of the limelight, MRO - the business of maintaining, repairing, and overhauling commercial aircraft - is finally receiving attention, and with good reason. Annual MRO expenditures exceeded $23 billion last year and will reach $33 billion by 2005. The MRO supply chain holds over $50 billion in inventory. And MRO is one of the few major expense categories within carriers' control.
Most airlines are trying to cut costs and improve asset productivity and are limiting investment in MRO-related plant, equipment and inventory. The pre-deregulation practice of maintenance self-sufficiency is being replaced by sensible outsourcing, and straightforward price-based competition is giving way to more sophisticated ways of minimising total costs.
MRO today is marked by a rapidly changing infrastructure, ceaseless technological advancement, heightened financial awareness, and intense and innovative competition. Five key trends will shape tomorrow's MRO market - outsourcing, increased regulatory oversight, more involvement by manufacturers, restructuring of the supply chain, and improvements in information management.
The continued growth of outsourcing is the most significant MRO trend. For a carrier, the economic advantages of outsourcing maintenance can be considerable. Airlines are becoming increasingly aware of the total cost of maintenance - direct costs plus indirect items such as purchasing, quality control, engineering and logistics. Understanding costs and recognising where in-house maintenance truly adds value can help carriers to pinpoint maintenance activities that are candidates for outsourcing.
Continental Airlines' annual engineering and maintenance budget was in excess of $750 million in early 1994. After a careful review of all maintenance activities against total cost and value-added criteria, Continental outsourced large portions to original equipment manufacturers (OEMs), independents and airlines. Today, costs are down by 30 per cent - more than $200 million a year.
In Europe, most smaller carriers prefer to outsource their maintenance. Virgin Atlantic has long contracted with OEMs and independents to maintain its airframes, engines and components - even sending work to its rival, British Airways. Aero Lloyd, Germania, Air Europa, and British Midland all outsource major portions of their maintenance.
While traditionally inclined to build capabilities internally, Asian carriers are now rethinking their maintenance philosophy and some have taken major steps to outsource. Malaysia Airlines' ventures with OEMs and independents - Hamilton Standard, General Electric and Nordam, for example - reveal both a sound grasp of economics and a preference to establish partnerships rather than going it alone.
Startup airlines, seeking to preserve flexibility and cost-competitiveness, are avoiding large maintenance infrastructure investments altogether. Western Pacific has contracted out most services, including line maintenance away from its Colorado Springs hub. Carriers like EasyJet and Air One see no need to build hangars.
Were it not for the 'concrete overshoes' of existing capital investments and labour contracts, many more carriers would follow suit. Airline management increasingly views maintenance as a non-core activity. Several major carriers, such as BA, Lufthansa and Swissair, have turned their maintenance departments into subsidiary companies; some could be spun off through joint ventures or public offerings.
While the proportion of airline maintenance activity which is outsourced has trebled in the last 25 years, more than 70 per cent of maintenance activities are still performed internally (see graph). There is plenty of further potential for outsourcing to provide a boost to the third-party MRO market.
Of course, outsourcing does not automatically solve an airline's maintenance problems. After America West transferred its heavy maintenance to Tramco last year, the B F Goodrich unit had problems meeting the carrier's maintenance schedule and maintenance costs increased. Managing the relationship with suppliers requires a unique set of skills.
The crash of ValuJet flight 592 and subsequent actions by the Federal Aviation Administration have focused attention on aircraft maintenance activities, and particularly outsourcing, as never before. Regulators and the industry can be expected to look even harder at quality and insist on thorough maintenance processes and programmes.
Whoever actually performs the maintenance, the carrier will be judged ultimately responsible. Airlines will have to provide increased oversight of MRO activities, particularly outsourced ones. ValuJet has appointed one of the industry's most experienced aftermarket executives to head its maintenance and engineering organisation and has moved quickly to strengthen maintenance planning and oversight of outsourced activity.
Increased oversight will affect maintenance suppliers, as they will need to prove compliance. Most will have to bolster their technical staffs and information systems to meet the needs of increasingly demanding customers and regulators.
The cost of maintenance will go up as airlines add engineering and quality assurance resources and third-party vendors raise prices. Smaller airlines and startups, which traditionally have lower MRO costs, will bear the brunt of these increases and can expect cost escalation of between 10 and 20 per cent. However, improvements in overall quality and reduced life cycle costs could lead to greater operating efficiencies.
The growing presence of major aircraft, engine and component OEMs is altering the structure of the MRO market. The aftermarket, once an afterthought for many OEMs, is today a vital source of revenue and an important factor in customer satisfaction. Spare parts consumption accounts for more than $10 billion in annual sales. Given the very attractive margins, this represents a significant source of profits.
OEMs have important advantages they can leverage in the aftermarket: control of spare parts supply, the ability to bundle aftermarket services with new product sales, proprietary processes and technology, and in-depth product knowledge. Many have aggressively developed cost-per-flight-hour programmes that assure customers of predictable cost levels in exchange for long-term maintenance agreements. OEMs with the financial resources to combine these advantages successfully should see their share of the aftermarket rise steadily.
The engine OEMs have increased their share of the overhaul market from 10 to 15 per cent in the past five years, and their portion of the lucrative parts repair market has grown as well. During the last 18 months, GE Aircraft Engines has made remarkable progress in increasing its market share and improving its competitive position in the engine aftermarket.
GE's acquisitions and partnerships in overhaul facilities (such as GE Wales, Celma and MAS), as well as its airport maintenance shops, a bigger book of flight hour agreement work, and several new product offerings, all point to an aggressive strategy to enhance service business revenue and profits. Indeed, GE has established a goal of doubling its annual MRO revenue to $4 billion within four years.
Even the airframe manufacturers, which have rarely taken part in the aftermarket except to sell their own spare parts, are eyeing it as a source of additional business and a means to meet increasing customer expectations for predictable maintenance costs. Boeing is looking to increase the non-proprietary share of its spare parts activity. Boeing and Douglas already participate in the modifications business and may well find rotable components compelling. Airbus partners British Aerospace and Daimler Benz are both active in airframe maintenance and modification.
Component OEMs typically participate in a significantly higher percentage of their aftermarket than either the engine or airframe manufacturers, particularly in landing systems, auxiliary power units and avionics.
The often inefficient and overly complex MRO supply chain is ripe for restructuring. Airlines, which own $37 billion of the MRO supply chain's $52 billion worth of inventory, have been the chief catalyst. 'Need-to-delivery' cycles - including the buyer's pre-purchasing preparation, the supplier's order processing, transportation, and inbound logistics - often exceed 60 days. Inevitably, carriers are asking suppliers for new types of value-added services to shorten this cycle and reduce inventories.
Eliminating 'float' in the system by cutting cycle times could reduce inventories by as much as $3-5 billion without any effect on stockout rates or airlines' operational integrity. Burbank Aircraft Supply is among the major hardware distributors which are now providing on-site inventory management for maintenance customers. These inventory management programmes provide just-in-time supply, which reduces the amount of inventory an airline needs to carry and eliminates the need to deal with dozens - sometimes hundreds - of vendors.
Most carriers are pushing for their suppliers not only to shorten parts lead times, but also to supply parts on consignment and to take a more active role in the forecasting of material consumption and parts requirements. AAR currently manages parts and rotables inventories for a number of airlines and is an active partner with GE's Wales overhaul facility.
Meeting these increasingly difficult customer demands and delivery standards is becoming prohibitively expensive for many suppliers to do on their own. More consolidation is inevitable, with larger OEMs and distributors using their scale to provide cost effective distribution and inventory management for smaller suppliers.
In addition, the airlines themselves may set up buying and inventory management consortia to gain scale and assure reasonable controls on suppliers' prices. Such actions may eventually lead to broader pooling of rotables among carriers if the age-old issues of part standardisation, valuation, and common maintenance planning can be overcome.
Finally, more logistics specialists are taking over distribution and order entry activities. FedEx Business Logistics will manage Bombardier's spare parts logistics out of its Memphis warehouse with the goal of delivering parts to North American customers within eight hours. UPS currently handles part of Boeing's spares distribution process. Caterpillar Logistics Services, which has had great success in the heavy capital equipment and automotive industries, is targeting aviation as a logical new market.
Information management, which has already transformed other industries, will play an increasingly important role in MRO. Effective information management has the potential to improve maintenance productivity and quality, lower the incidence of no-fault-founds, and cut inventory all along the supply chain.
The increasing technological complexity of aircraft equipment and the dwindling engineering resources at airlines are placing an increased burden on OEMs - and they are responding.
Boeing On-Line Data (Bold) provides on-line access to aircraft drawings in two-dimensional, digital format, replacing the thousands of microfiche cards typically required to support a fleet. Bold has saved United Airlines 14,000 man-hours in one year.
Honeywell is developing its Airline Maintenance and Operations Support System (Amoss), which combines in-flight maintenance monitoring with advanced diagnostic tools to improve dispatch reliability, reduce inventory, and decrease the frequency of no-fault-founds.
Large OEMs will be the primary beneficiaries of the changing MRO environment. Most of the key trends - outsourcing, the restructuring of the supply chain, and the need for improved information management - play to OEM strengths. Combined with a more aggressive and customer-driven posture, this will allow alert OEMs to increase their share of the MRO business.
Independent maintenance suppliers face greater competitive pressure. They have traditionally differentiated themselves through price and customer service, but must now find new ways to compete against the total service offerings of the OEMs and large airline third-party maintenance suppliers.
In an MRO marketplace where scale is becoming increasingly important, larger independents with broad capabilities, such as AAR, Greenwich Air Services, and FLS Aerospace, are likely to do well. The choice for smaller independents may be to focus on a unique technology or a set of specialised components while teaming with larger OEMs.
There is a mixed outlook for the third major supplier group - airline maintenance organisations.
Large airlines which can leverage inventory, technical expertise and scale have a significant opportunity to expand business through total technical support agreements. TTS agreements offer economic advantages to smaller carriers which do not wish to develop engineering and maintenance infrastructures (such as Midway Airlines), startup airlines (such as Laker), and airlines with a few aircraft that do not fit into their long-term maintenance plan (such as Austrian Airlines' A340s). From a regulatory perspective, TTS agreements address the need for greater maintenance oversight by involving strong and experienced suppliers.
European companies like Lufthansa Technik have been leaders in developing the TTS market. For example, by providing fully maintained equipment, fully manned line stations, and even flight crews, Lufthansa Technik has helped Uzbekistan Airways develop into a reputable Asian carrier. North American carriers, long dormant in third party maintenance, have also begun to pursue this market as a means of enhancing revenues and cutting costs through economies of scale.
Partnering and alliances among suppliers will become increasingly common as firms realise that they cannot win alone. Customers require low-cost, flexible, and responsive suppliers to reach their objectives in a rapidly changing world. This would imply an array of smaller firms. Yet customers prefer dealing with fewer, larger suppliers with broad-based product lines and financial staying power.
These contradictory requirements - large yet responsive, broad-based yet low-cost - will probably cause firms to form strategic partnerships to create seamless, 'virtual' companies with the necessary combination of scale and efficiency. BA Engineering, for example, offers a total maintenance support service even though it outsources the maintenance of some components and occasionally leases inventory from other suppliers.
There are many ways to lower total maintenance costs, shorten order-to-delivery cycles, and improve customer satisfaction. Carriers which seize these opportunities will improve asset utilisation and strengthen their financial performance. Suppliers which understand the changing environment and position themselves to meet the needs of more demanding customers will survive and prosper.
Source: Airline Business
