As airlines reduce their fleets, expecting it will take years until passenger demand returns to pre-crisis levels, MRO providers have to deal with excess capacity while having to support in-service aircraft under renewed cost pressure.
IATA does not expect air traffic to regain pre-crisis levels before 2023. Against this backdrop, airlines are pushing back delivery schedules and phasing out older, more maintenance-intensive aircraft earlier than previously planned.
Lufthansa Group intends to reduce its approximately 760-strong fleet by 100 aircraft by 2023. The aim is to operate the same traffic volume that year as in 2019, but with a smaller, more efficient fleet, group chief executive Carsten Spohr said earlier this month.
“It certainly looks like we are facing into a prolonged period of overcapacity in the MRO market – locally and globally,” says David Doyle, Lufthansa Technik’s vice-president of corporate strategy, business development and innovation management.
The German MRO provider expects that airlines will reactivate new, fuel-efficient aircraft first and leave older equipment, especially aircraft requiring major checks, on the ground until last – if they return to the air at all. “[MRO] players with access to the new technology fleets [will be] in a better position to ramp up their operations first,” Doyle says.
Air France Industries KLM Engineering & Maintenance senior vice-president business development Johann Panier says that the MRO provider had already been in a “smooth transition” from servicing legacy aircraft types to new platforms, like the Boeing 787 and Airbus A350, before the pandemic, which has “accelerated” that process and will “transform” the MRO market.
But it is not just older aircraft that are facing early retirement – A380s are perhaps the most prominent example of still-young equipment that will not return to the skies at the same numbers. Cirium data shows that all but four aircraft of the global fleet of 239 A380s were parked on 21 May.
Air France and Lufthansa – two of the type’s three European operators – have accelerated their A380 retirement plans. Air France has terminated their entire A380 fleet with immediate effect, while Lufthansa reduced its from 14 to eight aircraft. The German carrier still views the reactivation of the remaining aircraft merely as “an option”, it says.
Doyle acknowledges that “the A380 and A340 were the workhorses of the Lufthansa long-haul fleet, so we will feel the impact if they don’t return to service”. Lufthansa Technik’s efforts in recent years to expand its service capabilities for the A350, 777 and 787 will be beneficial, he says.
Overcapacity will hurt
Irrespective of specific aircraft types and repair capabilities, however, Doyle warns that an anticipated global fleet reduction will put MRO providers under pressure: “Overcapacity always leads to irrational market behaviour and that will certainly end up hurting some players in the MRO industry.”
Lufthansa Technik’s adjusted EBIT declined to €4 million ($4.4 million) during the first quarter, from €123 million in the same period of 2019, its parent disclosed earlier this month. The group says that lost income from hour-based service agreements with third-party airline customers that are flying less or not all because of the pandemic is “increasingly having an impact on Lufthansa Technik”.
Government-supported furlough schemes have enabled some MRO providers to reduce staff levels in the immediate aftermath of the crisis and to delay decisions about potentially adjusting their operation. But what happens when these government schemes end?
Airlines and manufacturers have already announced job cuts. Rolls-Royce plans to make 9,000 redundant: 17% of its global workforce. Chief executive Warren East said in May: “Our airline customers and airframe partners are having to adapt and so must we.” While governments are trying to assist businesses, he notes they “cannot replace sustainable customer demand that is simply not there”.
Richard Brown, managing director of UK-based aviation consultancy Naveo, says a key issue is lack of clarity how airlines will recover from the crisis. “That [question] is going to impact how many people you need in your business,” he says.
He warns, however, that laying off skilled workers will result in a loss of “knowledge and insight” for MRO providers and that executives must be careful not to “mortally wound the business”.
“If you lay off… experienced mechanics, then that creates a problem when you want to ramp [up] again… They [business leaders] have to be careful about making deep cuts in the actual people that do the work, unless they are very confident about bringing those people back – or equivalent – quite quickly when the work returns.”
Either way, maintenance providers will need staying power until the outlook becomes clearer. Panier expects that “the MRO market will take time to recover”. Noting fleet overcapacity, premature legacy-aircraft retirements, and the possibility that airlines will defer maintenance and use green-time engines rather than overhaul engines, he says there is “a lot of uncertainty” surrounding the support of aircraft that have returned to service.
“It’s still too soon to know exactly what will be the level of airlines operations and, as a consequence, how the [carriers] will manage their maintenance and what will be the impact on the MRO business.”
Doyle notes the likelihood that a wave of used serviceable material (USM) could become available as not all parked aircraft will return to the air. While this might reduce demand for maintenance on these aircraft, Doyle argues that increased USM availability could be advantageous for MRO providers. “This is an opportunity for MROs to work with airlines to effectively utilise the pool of surplus material they are sitting on,” he says.
At the height of the lockdown measures in April, Lufthansa Technik disclosed that it had sold a substantial volume of rotable components to US spare-parts specialist AvAir. The equipment, which included 9,000 line-replaceable units, represented a majority of the MRO group’s rotable “overstock” and had become available for sale because of improved spares management, Lufthansa Technik said at the time, noting that the sale had been arranged before the onset of the coronavirus outbreak.
In Doyle’s view, Lufthansa Technik’s international network does not represent a high risk despite the hiatus of airline operations. He says the MRO provider’s comparatively large footprint and broad range of capabilities has provided “some balancing portfolio effects” as the crisis affected some operations more than others.
This is echoed by Panier, who describes AFI KLM E&M’s international network as a “strength”. He argues: “The MRO market needs reliable players backed by a global network… Our worldwide shops and logistic centres have allowed us to bring adapted solutions to our customers in order to ensure them the best support.”
However, AFI KLM E&M admits it has been a challenge to maintain pre-crisis service levels while the workload sharply decreased amid widespread fleet groundings. Panier notes that the reduction of flight activity has given MRO providers opportunities to complete certain maintenance tasks on parked aircraft, but says also: “Definitively, we prefer to let the aircraft fly and adapt our maintenance programme to the airline operations instead of maintaining grounded fleets.”
Like other airline-affiliated MRO providers, AFI KLM E&M will thereby likely be in a better position than third-party maintenance specialists because the group has immediate access to its parent’s fleet. However, airlines battling with liquidity will think twice about completing maintenance on aircraft that are not in service and won’t return to the air soon.
Uptick in MRO activity
Still, Etihad Airways Engineering reported earlier this month an uptick in MRO demand as customers “from around the world” reacted to the grounding of aircraft by bringing forward maintenance work “that was initially planned towards the end of the year”.
The work includes C-checks, major structural modifications, passenger-to-freighter conversions, painting, and – for the MRO provider’s Abu Dhabi-based parent carrier – a cabin-refurbishment programme spanning 96 aircraft.
“We have been doing our best to find the opportunity amidst the crisis,” states Etihad Engineering vice-president technical sales and customer service Frederic Dupont. “We have taken advantage of the grounding period and used it to carry out maintenance services to ensure the entire fleet is operating at its optimal and will be uninterrupted by maintenance requirements as services return.”
The MRO provider says its activity includes “preservation maintenance” for its parent and third-party customers that parked aircraft in Abu Dhabi.
Airlines that do return aircraft to the air will likely put renewed pressure on MRO providers and other suppliers to save costs. In late May, SAS chief executive Rickard Gustafson sounded a warning that ramping up flight operation after widespread fleet grounding would be a “costly” process for all airlines and could spur further industry consolidation.
Speaking during a financial results briefing on 28 May, Gustafson highlighted that costs would increase as airlines reactivated aircraft and routes, while passenger demand might not recover until later. “There will be some costs initially where you very quickly get your full costs back while it will probably take some time before demand and revenues catch up.”
In order to conduct the ramp-up as efficiently as possible, SAS has structured its operation in what Gustafson describes as “blocks of activity” that can be gradually build up – or withdrawn again – depending on demand. Referencing maintenance costs among other operational costs – for example those relating to aircraft provisioning, crewing, airport and ATC services – Gustafson said those aircraft that were flying must be operated with “maximum” efficiency.
The pandemic seems set to accelerate consolidation among airlines, and Brown is certain it will have a similar effect on the MRO sector. Pointing out that OEMs typically have better access to capital, a broader range of activities – often spanning both the civil and military arenas – and superior profitability to independent MRO providers, Brown foresees that the latter will come under pressure.
“History has shown OEMs are able to weather the storm,” he says.
Brown acknowledges that small, independent MRO providers might be more flexible and able to respond to individual customer requirements and perhaps also provide lower costs than OEMs or larger MRO competitors. But he believes that the independents will be “very exposed” to the crisis, having, in the past, found it “tough in a downturn”.
He expects to see increased merger and acquisition activity. “There is a lot of private equity capital that is still very anxious to invest in aerospace,” he notes, so it will not, in his view, be a challenge to find buyers – though finding buyers willing to pay the asking price may prove more difficult.
Brown also wonders whether the unprecedented scale of disruption and the likely downturn could lead to a more fundamental power shift. Citing government bailouts for several airlines and manufacturers – even while some also announced large-scale job cuts – he posits that governments may be in a stronger position now that they can provide much-needed lifelines, or may simply be faced with the prospect that businesses will go under without help. “Do politicians have more of an impact now… or is this the time when politicians will accept it [restructuring]?” he asks. “Is this the time that unions are at the weakest?”
Doyle expresses optimism that the upheaval will ultimately result in new opportunities for service providers like Lufthansa Technik. “Crises always bring about a rethink of strategies,” he observes. “I expect to see a lot of airlines making radical changes to their MRO and procurement strategies.”
Those providers with a comprehensive range of service will benefit more than specialists, he suggests. Noting that other transportation sectors have moved to “broader risk and reward models”, he says: “We could see some airlines outsourcing larger parts of their MRO budgets to single providers in performance-based contracts.”
Panier sounds similarly hopeful that the AFI KLM E&M could ultimately benefit from the downturn. He says that keeping maintenance costs under control and protecting cash positions will be central for airlines. Given that new-generation aircraft like the 787 and A350 require “huge investment” in spare-parts stocks, he argues that MRO providers can lighten the load by delivering access to scale effects and equipment pools.
“Each airline may have a different approach as far as fleet status and own challenges are concerned. With our advanced processes and our state-of-the-art engineering expertise, no option will be out of the reach,” says Panier.
He warns that MRO providers must be able to tailor their services to airlines’ requirements – especially given the uncertainty in the aviation sector and wider economy, and vows: “We must adapt and be ready to support our customers in a changing environment.”
This analysis is written by Michael Gubisch, part of Cirium’s London-based reporting team