After years of sending nearly all their widebodies overseas for maintenance, repair and overhaul, US airlines are increasingly having aircraft serviced stateside.
That trend – born of rising overseas labour rates and domestic productivity improvements – has been identified by industry observers who say it has gained momentum in the last year as MRO shops opened, or disclosed plans to open, new facilities in the USA.
"The cost-benefit of ferrying an airplane overseas is shrinking dramatically," says Dany Kleiman, vice-president of operations for the MRO group at Illinois-based AAR. "We are dealing with millions and millions of man-hours that can be brought back to the US."
Chris Spafford – a partner in the aviation, aerospace and defence practice at consultancy Oliver Wyman – says "more and more carriers are looking at US providers more seriously". Cargo operators initiated the "repatriation" trend, but large passenger carriers have followed and are now performing more light maintenance checks – the type that take three to five days – in the USA, says Spafford. In his estimate, about 10% of US airlines' widebody maintenance is performed domestically, with all major US carriers having work performed overseas. But he says that figure could jump to the "40% range" in the next several years: "It's quite a shift."
Evidence suggests that airline executives are willing to pay a slight premium to keep work stateside. A survey of MRO leaders published this year by Oliver Wyman indicates that 60% of airline executives are willing to pay 5% more to have work performed domestically, while 20% would pay 15% more. "We confirmed a surprising predisposition among domestic operators to place airframe work stateside, even with a mild to moderate price disadvantage against foreign repair stations," says the report, called New Signs of Life.
The trend could put a "squeeze on stateside labour supply" and help generate 5,000 new airframe maintenance jobs in the USA, the report adds, noting that 32% of survey respondents expect to expand their workforce. The results make sense, says Spafford. "People would prefer to work with companies that are in the continental US or North America," he says. "There are no language issues, time-zone issues, or customs issues. Oversight is simpler."
The practice of outsourcing MRO work gained popularity among major US carriers as a cost-cutting move in the turbulent years following the terrorist attacks of 2001. First, carriers outsourced maintenance work to domestic MRO companies as they scaled back their in-house shops. But around 2003, airlines began to send widebodies overseas. United Airlines and Continental Airlines spearheaded the trend, but other major US carriers soon followed, says Spafford.
The three major US network airlines – United, Delta Air Lines and American Airlines – did not take up opportunities to comment for this story.
TREND REVERSAL
Around 2000, average hourly labour rates for widebody heavy maintenance at MRO shops in the Asia-Pacific region topped out at about $30, compared with about $50 at US-based MRO facilities, suggests a January 2014 MRO market report from consulting company ICF International. Since then, MRO labour rates in Asia have steadily climbed, while US rates have remained largely stagnant. ICF forecasts that while rates in some Asian markets are now in the mid-$40 range, they will climb to around $50 by 2020. "Wages are not comparable yet, but they are going there, and capacity is tight," says ICF vice-president Jonathan Berger.
Several converging factors are driving labour costs higher overseas. One is tight capacity, driven by the double-digit growth rates of carriers in emerging markets such as China and the Middle East, says Spafford. Those carriers' growth is also fuelling a shortage of highly skilled aircraft maintenance workers, many of whom are required by their MRO employers to speak English and understand complex aviation regulations, says Berger. Other industries – such as energy, telecommunications and high-speed rail – also require workers with those skills. With the promise of higher wages, those industries are now "poaching" workers from MRO companies, Berger says.
In addition to rising labour expenses, airlines may not have foreseen some costs associated with sending aircraft around the world for maintenance. Besides ferrying expenses, those aircraft are likely to be out of service longer than if maintained stateside, resulting in additional lost revenue. Cultural differences and time-zone changes add complexity, argues Berger. "There [are] a lot of hidden costs that people didn't anticipate of having your work performed overseas," he says. "It all adds up."
Also, airlines typically send a team of their own employees overseas to monitor the work. "You have a cost of keeping your team overseas [for] long periods of time, and [of] shipping parts back and forth," says AAR's Kleiman. "Logistically, it's a more expensive operation." In past years, lower labour rates would have easily covered those expenses, but less so today, he adds.
FLAT PAY
While overseas labour rates have continually climbed, US rates have remained flat at around $50 per hour for more than a decade, and rates in southeast USA are now comparable to rates in some Asian regions, says ICF. The consultancy expects US rates to climb only as far as the mid-$50s range by 2020.
Spafford says US carriers pay about the same amount in labour that they paid seven to 10 years ago, despite inflation. "In real terms, that's a significant cost saving," he says. At the same time, US MRO shops have been improving their work efficiency and cutting costs. "A portfolio of operational improvement initiatives have allowed [US MRO shops] to reduce costs on a 2-4% year-over-year basis," says Spafford. "You have rising demand on one side, which drives prices up in that geography, and you have improving productivity here, which is driving prices down."
Experts say advances in aircraft manufacturing are also reducing the advantages of sending aircraft overseas for maintenance. New aircraft such as Boeing's 787 are built using a higher percentage of composite materials and are therefore less subject to corrosion and metal fatigue. As a result, maintenance checks on those aircraft require fewer man-hours, reducing the savings generated by sending an aircraft overseas.
Insiders note there will be no shortage of demand for MRO work in the coming years, as US airlines seek to keep their ageing widebody fleets airborne. In addition, US carriers are spending hundreds of millions of dollars to upgrade interiors with lie-flat seats and other amenities. They are also upgrading in-flight entertainment systems in order to remain competitive with overseas carriers, says Kleiman.
The trend bodes well for companies like AAR. "There is obviously an opportunity to recapture some portion of the widebody maintenance and upgrade market which in the last 10 to 15 years was ferried overseas," says Kleiman.
MRO SHOPS REACT
A number of MRO shops are now seeking to cash in on increasing demand for US domestic MRO work. "Recent investments in domestic capacity by AAR, AMR and Aviation Technical Services suggest the repatriation trend is accelerating," says Oliver Wyman's report.
Developments this year include AAR's plan, disclosed in August, to open a new MRO facility at Chicago Rockford International airport in Illinois in the spring of 2016. Up to 500 workers will be employed at the site, which will have two hangars capable of accommodating widebodies such as 777s and 787s. "The focus will be on next-generation widebody aircraft," AAR told Flightglobal earlier this year.
News of AAR's Rockford plan came one year after the company revealed plans to open an MRO facility at Chennault International airport in Lake Charles, Louisiana. AAR has since upgraded the site – formerly operated by Aeroframe – with an additional hangar capable of accommodating aircraft as large as the Airbus A380 and the Boeing 747-8. And the company disclosed in September that it had landed contracts to perform widebody MRO work at Lake Charles from two major unnamed US carriers.
Other MRO developments in the USA this year included the opening of a facility at Kansas City International airport by ATS. At the site, formerly operated by American Airlines, ATS plans to perform heavy maintenance checks on Hawaiian Airlines' 767s and modification work on Air Canada's incoming 787s. It emerged this year that Alabama's VT Mobile Aerospace Engineering, a subsidiary of Singapore-based ST Aerospace, intends to open a widebody MRO hangar in the Floridian city of Pensacola in 2016.
Those developments are in addition to the acquisition by Hong Kong Aircraft Engineering (HAECO) of North Carolina-based TIMCO Aviation Services for $389 million. That deal was disclosed in February. TIMCO, which provides airframe maintenance and manufactures seats, has sites in Florida, Georgia, Michigan and Ohio.
ICF's Berger says those developments "support the notion" of an expanding repatriation trend, adding that the new facilities will "generate a significant amount of new capacity" in the USA. "The market is acting rational. It's basic supply and demand," he says. Berger adds that the new capacity should be enough to meet demand for the foreseeable future, and predicts that the shift towards domestic MRO suppliers will not abate anytime soon.
Still, insiders stress that US carriers are not likely to bring all their widebody MRO work back to the USA, noting that overseas work still makes sense in many instances, including cases in which aircraft are already flying routes to Asia.
"Out of what goes [overseas] today, maybe half will come back over the next five years," Berger predicts. Spafford agrees: "It was not everybody who sent everything over, and it is not everybody who is bringing everything back, but it is a shift."
Source: Cirium Dashboard
