Euro MRO firms brace for downturn, skill shortage
European maintenance, repair and overhaul (MRO) service providers expect a downturn in air transport, and analysts say consolidation in the support market will likely result from this trend. Paradoxically, at the same time a skills shortage looms as forecasters predict global MRO spending to increase over the next five years at roughly 6 percent annually, growth primarily attributable to outsourced MRO services, expected to reach $43 billion in 2013.
“However, rising fuel prices forcing retirement of less fuel-efficient fleets will likely impact this growth,” consultant Olivier Fainsilber told AIN. “There will be a shakeout.” The downturn might translate into smaller fleets with a higher proportion of more modern, less maintenance-intensive aircraft, particularly in the U.S., while strong growth in India and the Middle East should help offset the effect of the North American downturn, he suggested.
“However, engine MRO service providers in Europe will probably keep this highly technical business at home,” he said. Labor-intensive work “will continue to take place in low-cost regions: Eastern Europe for narrowbody aircraft; Asia and Latin America for widebody aircraft,” added a spokesman for Lufthansa Technik (Hall 4 Stand E10).
At SR Technics (Hall 4 Stand B9), the outlook seems gloomy. “The European MRO market is still very scattered,” said a spokesman for the Swiss-based group. “There are many smaller MRO providers, with limited capabilities, that offer their services when they have surplus capacity. This causes overcapacity in a market surrounded by low labor rates.” As a result of the anticipated downturn, MRO facilities will receive less work, he predicted. In SR Technics’ view, this will prompt European airlines to either sell or merge their in-house maintenance facilities. The spokesperson dubbed this eventuality “overdue rationalization.”
Snecma Services deputy chief executive Jean Massot agreed that a downturn looms, but he said he didn’t expect it to affect his company–an engine MRO specialist–too severely. “The big difference with the previous downturn is that the installed base of engines is huge now,” said Massot.
He also claimed that long-term prospects, over a 20-year period, call for continued growth. “There were 2,320 engine shop visits in 2007 and we forecast this number to reach 3,500 to 3,700 in 2015,” he said. Snecma Services (Hall 4 Stand B12) claims a 15-percent market share and expects that to stay in the 15- to 20-percent range. Some 40 percent of the Safran subsidiary’s business comes from European customers.
An Air France Industries (AFI) spokesperson agreed that consolidation will happen soon. The French-based company has benefited a lot from previous consolidation. Since Air France merged with Dutch group KLM, their respective maintenance subsidiaries have reorganized. For example, KLM Engineering & Maintenance takes care of the group’s Boeing 747s and 737s, while AFI is in charge of the 777s. Subsequent savings estimates totaled $108 million in 2007.
Despite their generally subdued outlook, European MRO companies continue to expect modest revenue growth in the coming years. For the next three years, LHT anticipates “slight growth” in its annual revenues, which reached ?3.6 billion ($5.5 billion) last year. Meanwhile, Snecma Services’ Massot said he has become less bullish than he was a few years ago. He now estimates annual growth of 3 percent for the near future. The company’s revenues last year were ?700 million ($1.1 billion).
AFI, quoting an Aerostrategy study, estimated that the European MRO market will grow by an annual rate of 1.5 percent over the next decade. That projection reflects only part of the market for European MRO companies, since they also service aircraft from other regions. The AFI spokesperson noted that the weak dollar continues to stifle growth.
According to the LHT, Eastern Europe still needs new Western-built aircraft. Therefore, the European fleet and the accompanying MRO market will grow, the German company anticipates. Europe now accounts for 27 percent of the global MRO market, according to AFI numbers.
Workforce acquisition and retention will continue to pose a critical challenge in the five years to come, Fainsilber estimated. MRO firms, therefore, endeavor to make themselves attractive to would-be employees. “They partner with academies and universities, and they also set up their own training centers,” he said. Strong competition for skilled staff comes from the Middle East, where local investors are starting MRO businesses. Competition also comes from other industries that offer high-tech jobs. As a result, the industry already suffers from a shortage of some skills, according to LHT.
In France, AFI’s efforts to “look at its workforce’s demography” has led to the establishment of an apprenticeship program. Last year, the company hired 250 apprentices as staff members. Meanwhile, LHT is establishing a training center in Abu Dhabi, in cooperation with local investment group Mubadala.
Another recurrent challenge MRO firms face centers on the fact that while new-generation aircraft need less maintenance than older airplanes, companies must invest in more expensive maintenance equipment to perform the kind of high-tech work the new equipment requires. That can present an opportunity, however. “The new equation is different but not necessarily less favorable,” Fainsilber said. For example, the added value of maintenance services increases with technology and skill levels, he said.
“We will focus more on high-tech services, those requiring intellectual performance. As a result, we need people who can theorize, build models,” Massot explained.
Current investment in equipment and facilities in Europe go first to the Airbus A380’s entry into service, Fainsilber said. For example, LHT has recently opened A380 maintenance hangars in Frankfurt and Beijing. In Arnstadt, Germany, the so-called N3 engine overhaul facility should be ready for Rolls-Royce Trent 900 engines next year.
More investment has gone into expanding geographic reach. In Belgium, Sabena Technics took over U.S.-based Barfield in 2007. Two months ago, Sames, a joint venture with Spanish engine specialist ITP and local carrier Mexicana, inaugurated facilities in Queretaro, Mexico. In Chengdu, China, another joint venture, under the CFM banner, is expanding. The joint CFM-Air China workshop today performs 50 CFM engine shop visits a year. It plans to expand its facilities to reach an annual capacity of 200.
In Milan, Italy, Lufthansa established another base for its component services in 2005. SR Technics opened a second component overhaul facility in Spain last October. The Swiss-based company is now owned by Dubai Aerospace Enterprise and has started cooperating with Abu Dhabi Aircraft Technologies.
More generally, high-tech equipment is finding its way into a number of workshops. “Our entire network will soon be equipped with high-speed grinding machines,” Massot said. Machinists use such tools to set blade tip clearances.
A survey conducted by management consultants Oliver Wyman revealed that airlines identified material and parts availability as their most significant maintenance challenge. So what about increasing parts production? “This would increase inventories. You cannot afford it,” Fainsilber answered. Rather, he sees a great potential in improving the supply chain. “It is a matter of having the right part at the right place, just in time,” he said. He deemed the MRO industry extremely sensitive to supply chain performance.
How hard are airlines pushing for lower prices? “The market has become more transparent, so cost awareness among customers has increased,” the SR Technics spokesman answered. In addition, he noted that airlines want the best of both worlds. “They wish to enter into long-term relationships with their MRO providers and at the same time many are also looking for a high degree of flexibility,” he said.
Oliver Wyman published similar findings. Airlines demand more integrated services and a total-cost-of-ownership approach, according to the survey. “Today, whole aircraft fleets can be managed in an integrated way. This leaves airlines free to sell seats and fly their network schedules,” the SR Technics spokesman said.
There are several ways to respond to the airlines’ ever-increasing pressure on the cost of ownership. For engines, increasing time on wing by cleaning turbomachinery, for example, maintains aerodynamic profiles for longer periods. Another way might involve performing on-wing some repairs that traditionally get done at the workshop.
“For example, you can open a casing in a high-pressure compressor,” Massot explained. “You can then mend a blade tip that has been damaged by gravel.”
Similarly, AFI has set up a “quick intervention” organization at Paris’ Charles de Gaulle Airport for the Boeing 777’s General Electric GE90-115B engine.