With specialist maintenance units closing and relatively slow demand growth predicted for North America, many airlines are starting to reassess their MRO set-ups
Consolidations, bankruptcies and facility closures are changing the North American maintenance, repair and overhaul landscape, affecting capacity and choices for where airlines can carry out maintenance.
Boeing's market outlook shows the most significant fleet growth in North America over the long term will be for single-aisle aircraft, which are expected to increase from 3,730 today to 6,090 by 2031. Twin-aisle orders in this region are set to increase only slightly, while large aircraft and regional deliveries will actually contract by the end of the forecast period.
Airframe maintenance in North America is expected to have a slow rate of growth overall compared with Europe and Asia, says aerospace consultants TeamSAI in its 2012-2022 global forecast. Average compound annual fleet growth in the region from 2012-17 is expected to be minus 0.3%, then (plus) 2.1% until 2022. Based on fleet needs, MRO spend will only increase by around $300 million in North America to about $16.4 billion at the end of the forecast period.
Despite this relatively slow growth, maintenance work will continue to be needed in North America - especially for narrowbody aircraft. Independent MRO and interiors manufacturer TIMCO says it is expecting to see increased levels of narrowbody work. "From a fleet perspective, the North American 737NGs are beginning to represent a larger part of the market, as more of the type reach heavier scheduled maintenance events," says vice-president for marketing and business development Leonard Kazmerski. "TIMCO has been a long-time provider of A320 airframe maintenance, but we have also seen growth in demand for maintenance on that fleet among North American operators as well."
In the past year, there have been several changes to the MRO landscape in North America. After filing for bankruptcy protection last November, American Airlines earlier this year announced it would be outsourcing some maintenance work and closing its Fort Worth Alliance maintenance facility. The carrier has confirmed it will be shifting to contract maintenance for its widebody aircraft and Boeing 757s.
The carrier says it will pursue contract maintenance agreements for its Boeing 777, 767 and 757 flights to help streamline operations. "While most of our maintenance work is - and will continue to be - performed at our own facilities, our competitors have forged a path of having their maintenance completed where it is most cost-effective. In order to compete, we must similarly adapt," it says. It is unclear which specific MRO units will absorb the maintenance work.
In March, Tampa-based maintenance and cargo conversion centre Pemco filed for bankruptcy protection, later closing its facility in Dothan, Alabama. In the same month, Aveos Fleet Performance, a key maintenance supplier to Air Canada, shuttered its doors for good, leaving a bankruptcy court to divide up its assets.
Aveos failed to find a buyer to restart its engine and airframe businesses, and five MROs ended up buying the business in portions. Court documents show prospective bidders cited that doing airframe maintenance in Canada had a "limited role" in a global context. Aveos's engine facility had a similar fate and was liquidated after failing to secure bidders, with "significant amount of global excess capacity" for engine overhauls around the world noted as one of the deterrents.
Despite the lack of interest in the engine and airframe businesses, UK component supplier AJ Walter used the Aveos shutdown as an opportunity to start up a new component maintenance capability in Montreal, primarily focused on component logistics and inventory services. AJ Walter was the only company to restart any part of Aveos's business in a way that resembled what it had been before.
The new facility, called AJW Technique, will be operational by early 2013. AJ Walter president Christopher Whiteside says there is already demand. Work based on demand from existing customers will fill up the facility at first. "We're hoping to sign this year at least 100 A320s in North America, and South America and Central America," he adds.
Pemco, unlike Aveos, will continue to offer MRO under its own name. The company shut down its Dothan maintenance facility in June, but emerged from Chapter 11 restructuring at the end of August. It signed a new maintenance contract for A320-family aircraft with an undisclosed US-based ultra low-cost airline operating an all-Airbus fleet in the USA, Latin America, South America and the Caribbean - matching Spirit Airlines' profile.
MRO capacity overall in North America is "relatively tight" says Chris Spafford, partner at Oliver Wyman, with the industry relatively stable and growing slightly. He says that this is caused in part due to MROs improving the way they manage capacity throughout the years.
Spafford also notes that dynamics abroad for doing maintenance work may not be as attractive as they used to be due to rising labour rates elsewhere in the world. "You're starting to see people reconsider whether sending aircraft to Asia makes as much sense as it used to, certainly on the narrowbody front," he says.
US Airways senior vice-president for operations David Seymour says MRO is now a seller's rather than a buyer's market. "Demand for third-party heavy maintenance is going up and supply has come down a little bit." In many cases, airlines are placing emphasis on their operational and maintenance strengths and letting a third party - be it an OEM or an MRO unit - take care of the rest of the work.
"We want to stick to what we can be really good in, where our core strengths need to be," says Seymour. For US Airways, that means providing line maintenance to its own fleet, as well as keeping its shops full for heavy maintenance, rather than focusing on providing third-party work to other airlines.
The carrier says that 100% of its scheduled line maintenance is done in-house, and an emphasis on improving day-to-day maintenance functions is paying off. In the past four years, the carrier has reduced its maintenance cancellations by half, and deferred maintenance items are down more than 50% on average, says Seymour.
United Airlines, meanwhile, has a long-term strategy to outsource its engine maintenance to OEMs, said then senior vice-president of the technical operations division James Keenan in September, shortly before leaving the company.
Keenan says outsourcing the maintenance will allow for cost savings and enable United to take advantage of OEM contracts for materials. "While United has a long history of overhauling engines in-house, work began as long as 15-20 years ago to begin shifting from that model towards one where more of the work is done on an outsourced basis by the manufacturer of that engine type," says Keenan.
Outsourcing maintenance will allow the airline to move from fixed costs associated with maintaining its own engine shop to variable costs, which allow for more flexibility. "In the volatile and often unpredictable world of airline economics, the ability to have more of our cost basis in a variable category is helpful, because it helps us to be more nimble, to react more quickly to industry change and things like that," says Keenan, adding that OEMs are well positioned to optimise and leverage materials costs.
This means United will start looking to outsource power-by-the-hour type contracts with OEMs as it buys new types, Keenan says. As this happens, new aircraft types will have contracts and maintenance work will decrease at its San Francisco facility over the longer-term until each engine is contracted out and United outsources most of its engine maintenance.
Engine manufacturer General Electric says it has noticed several airlines looking to defer maintenance and cost risk to the OEM through exclusive time and materials agreements. "Airlines are definitely trying to control costs and workscopes," says Marty Fritsch, general manager, T&M Solution, GE Aviation Services. "So they're trying to minimise their investment and still meet their maintenance requirements, and they're trying to maximise utilisation of their fleets."
As more efficient engines come into the market, fewer shop visits will be expected throughout the life of each engine. Therefore, competition for engine contracts continues to heat up among OEMs and MRO units.
More and more airlines are seeing an opportunity to create a point of leverage to guarantee maintenance costs throughout a particular ownership cycle by thinking about maintenance contracts when they acquire the aircraft, says Oliver Wyman's Spafford.
"They're negotiating long-term maintenance costs on components and powerplants with the OEMs at the time of aircraft acquisition," he says. However, a recent Oliver Wyman survey co-written by Spafford shows that only about 41% of airlines lock in these long-term maintenance contracts when acquiring aircraft - when they have the most leverage.