MRO Market Now Pegged at $45.7B
By Frank Jackman 
With near record numbers of aircraft parked in the desert and airline passenger and cargo traffic flat or down sharply, the worldwide commercial jet transport MRO market grew by just 1.4% over the past year to $45.7 billion, according to the annual MRO Forecast produced for O&M by TeamSAI and Ascend. If not for inflationary pressure on the cost of materials and on labor rates, the value of the MRO market, comprising airframe heavy maintenance visits and modifications, engine overhaul, component repair and line maintenance, actually would have fallen 2.3% from 2008's level of $45.1 billion, according to TeamSAI and Ascend. Last year, before airlines began slashing capacity because of soaring fuel prices and then because of the global economic crisis, the worldwide commercial jet transport MRO market had been expected to grow more than 4% to $46.8 billion by early 2009.
Looking out over the next decade, TeamSAI is predicting a compound annual growth rate (CAGR) of 4.1%, which isn't too far off of last year's prediction of 4.3% through 2018. But unlike last year, when annual growth was expected to be spread out evenly over the 10-year forecast period, this year TeamSAI says that CAGR will be just 3% during the first five years of the current forecast, and then will accelerate to 5.2% per year over the second half the decade. Given those revised expectations, the MRO market now is predicted to grow to $53 billion in 2014 (down from last year's prediction of $56 billion in 2013) and then to $68.2 billion in 2019, which would be a modest decrease from TeamSAI's previous analysis that MRO would increase to $68.6 billion by 2018.
The forecast is a function of a variety of different inputs, among the most important of which are the size of the worldwide, Western-built, commercial jet transport fleet, expected aircraft utilization and airline passenger and freighter traffic (which were up 1.6% and down a startling 4%, respectively, in 2008), maintenance man-hours, and labor and material costs.
The size of the worldwide, Western-built commercial jet fleet increased 2.7% in 2008 to 19,330 aircraft, according to Ascend. A year ago, the fleet was expected to grow at a compound annual rate of 4.6% over the 10-year forecast period. That prediction now has been scaled back to a 3.5% CAGR until 2019, with much of the growth backloaded. Fleet growth over the next five years is expected to fall more in the range of 2.2% per year and then jump to 4.6% CAGR in forecast years six through 10.
As has been well documented, record high fuel prices last year prompted many airlines to slash capacity and ground older, more maintenance intensive aircraft. Later in the year, fuel prices came down, but the deteriorating worldwide economic condition and flat to falling passenger and cargo traffic exacerbated an already bad situation.
According to Ascend, from the beginning of 2008 to the beginning of 2009, the number of commercially operated jet transports placed in storage rose 64% from 620 aircraft to 1,019--a jump of 399 aircraft. Overall, Ascend counts more than 2,300 aircraft in storage, including turboprops, transports used for VIP/head of state or business aviation purposes and non-Western-built aircraft, and Chris Seymour, the firm's head of market analysis, says the number is growing steadily. "We are at a record level in terms of actual numbers," Seymour said. "We haven't quite gotten to the percentage of share [seen post 9/11] which was 13% of the fleet, but it is heading toward 13% by the end of the year. I would expect us to pass the 3,000 mark," he said.
To date, the rate of new aircraft being delivered has not declined significantly, but Seymour believes that could happen later in the year as the ability to find financing becomes more of an issue. Carriers already have financing lined up for deliveries during the first half of 2009, but money could be more difficult to obtain in the second half and into 2010 if current traffic trends continue, he said.
TeamSAI described as "dramatic" the inflationary pressures experienced by the market last year, but those have begun to lessen, particularly in terms of labor rates. The consultancy said it polled airlines and MROs about the average rates they received or offered across the various world regions and said its findings indicate that rates in Western Europe still are the highest in the world, although they have come down slightly from a year ago. Labor rates in Eastern Europe have increased and may have surpassed those in North America due to limited regional capacity and the euro-dollar exchange rate, TeamSAI said. Rates in North America and the Asia-Pacific region increased modestly, while those in India and the Middle East rose more sharply. The lowest rates in the world continue to be found in Africa and Latin America/Caribbean, the consultancy said.
There also is evidence that the slowing of the MRO market as a whole is helping to temporarily alleviate industry concerns about a shortage of qualified technical manpower, particularly in higher growth regions like Asia and the Middle East.
What is going to happen with material prices remains unclear. "Early last year, we were seeing some very, very high commodity prices, which translated into higher finished goods costs in lots of different industries. Aerospace was no different," said David Marcontell, EVP of TeamSAI. "Now that these commodity prices are coming back down, it is not clear yetýýýwhether finished aerospace products are going to see a reduction in price," he said.
While it may not be clear, Marcontell's opinion is that prices on finished productions, i.e. spare parts, are not going to come down. "Suppliers are already experiencing volume decreases due to less demand for their products," he said. "Suppliers are not going to pass on manufacturing and material savings down through the supply chain at the same time that they have less volume."
Declining demand for parts can be traced to the increase in parked aircraft and, to some degree, to declining utilization of aircraft as airlines reduce capacity in response to falling traffic. The International Air Transport Association (IATA) currently is predicting a 3% year over year decline in passenger traffic and a 5% drop in cargo traffic for 2009.
MRO unit costs, the cost of MRO per 1,000 available seat miles, spiked sharply upward in 2008 as airline capacity growth slowed dramatically from 2007 and total MRO spending increased, brought about at least in part by upward pressure on labor rates. TeamSAI said the change in ASMs this year is expected to be less dramatic and the pressure on labor rates has eased, so unit costs are expected to decline from 2008's level of $12.60 per 1,000 ASMs to $12.20 per 1,000 ASMs this year.
The Numbers By Segment
For purposes of the forecast, TeamSAI divides the MRO market into four categories, heavy maintenance visits (HMVs) and modifications, engine overhauls, component repair and overhaul and line maintenance.
The engine sector, at $18.5 billion, easily is the largest sector and is expected to account for about 40% of global MRO spending this year. Engine MRO is expected to grow at a compound annual rate of 3.1% over the next five years and then pick up to 4.8% CAGR in the second five years of the forecast period. Interestingly, the size of the engine market between this year and next actually is expected to retreat 1.5% due to lower utilization driven by the economic slowdown. The utilization slowdown is of particular interest to powerplant OEMs with cost per flight hour contracts with their customers. Fewer flight hours means less revenue.
The next largest segment is HMV and mods. TeamSAI said it will continue to be the low-growth segment, increasing annually at about 2.7% through 2014. Its rate of growth will more than double in the second five years of the forecast period. Driving that increase will be aircraft delivered during the early 2000s coming in for their second round of HMVs while aircraft delivered in the 2008-2010 period start having their initial heavy checks.
While those waves of checks obviously will have an impact on the market, that impact will not be as significant as it would have been 10 or 15 years ago. According to TeamSAI's Marcontell, "technology is starting to impact, fairly dramatically in some areas, the cost of maintenance" of 777-era aircraft as they get older. In this case, technology refers to the increased use of composites and the maturing of smart electronics. TeamSAI has consistently predicted that the number of man-hours required to maintain a 777 or aircraft of similar vintage would grow at a slower rate as the equipment ages than previous generation aircraft. But data recently collected from MROs and operators on 777s coming in for their second round of heavy checks shows labor escalation even slower than predicted. "They are not requiring as many man-hours as previous generations were at the same age of their life," Marcontell said. While hesitant to make an apples to apples comparison, he did say that man-hours required for a 777 heavy check are significantly less than those required for a 767 heavy check, despite the fact that the 777 is a larger aircraft.
Engine costs, on the other hand, continue to climb due to the price of materials and the technology being put into the engines, Marcontell said. Of course the tradeoff for technology being put into the engines, essentially coatings and materials and design characteristics developed to keep parts cooler and better able to withstand higher temperatures, is that the engines are more fuel efficient and stay on wing longer. "So, the net operating cost of the engine continues to be favorable," said TeamSAI President Chris Doan.
Component MRO and line maintenance comprise the other two sections. TeamSAI values the current component market at $9 billion and line maintenance at $8.3 billion. Both are expected to grow at a compound annual rate of about 3.1% through 2014 and then 5.4% a year over the second half of the forecast period. Of the four MRO sectors, line maintenance is the activity that is outsourced the least. Only 29% of line maintenance work is outsourced, compared to 68% for HMV/mods, and 80% each for engine overhaul and component MRO. There is, however, some growth among third-party line maintenance providers as airlines pull back resources to concentrate on larger stations, TeamSAI said.
Regional Perspective
Over the next five years, the number of aircraft in the North American fleet is expected to decline 0.8% from 7,209 this year to 7,019 in 2014. Carriers in North America have been very aggressive in cutting capacity and grounding older aircraft, but have placed few significant orders for new aircraft. MRO spending in North American over the first half of the forecast period is expected to decline about 0.6% per year, going from $16.1 billion this year to $15.6 billion. Growth will resume in the second half of the period at a rate of 3.9% per year, until the value of the North American market reaches $18.9 billion in 2019.
China is expected to be the world's fastest growing MRO region over the next five years, increasing at a compound annual rate of 10.4%. Other rapidly growing regions include Eastern Europe at 9.2% CAGR and India at 8.6%. Slow growth regions include Western Europe at 2.6% and Africa at 1.2%.
Despite its slight shrinkage, North America will remain the largest MRO region over the next five years at $16.1 billion, followed by Western Europe at $11.6 billion, and Asia-Pacific at $7.1 billion. Ten years from now, North America will still be the largest region, but its share of the overall market will have decreased significantly. North America currently accounts for 25% of the worldwide market. In 2019, its share will have fallen to 28%, followed by Western Europe at 24% (down slightly from its current 25%) and Asia-Pacific at 15% (vs. 15% currently).
This article appeared in the April 2009 issue of Overhaul & Maintenance.
