This report is based on the information received at the 2009 MRO (Maintenance Repair & Overhaul) Conference held in Grapevine, Texas on April 2009. All data is based on figures known at that time. This MRO (Maintenance, Repair & Overhaul) conference is considered to be the largest in the world where the major players from the MRO and airline industry attend from around the world.
The data delivered is partially derived by the surveys answered by 140 of the major airlines and MRO executives in the world. This was a mix of mainline airlines, low cost carriers, regional and mixed carriers from the North America, Europe and other areas such as Asia, Middle East, and India. Additional data was also received from the traditional sources in the financial market in order to reach the conclusions in the reports presented.
Topics discussed included financial forecasting for airlines and MRO’s, environmental issues, analyst’s view of the financial industry, MRO capacity, greening trends, updates from manufacturers from Boeing and Airbus, commercial maintenance trends, asset availability utilization and management, and an open discussion by the FAA on current issues being dealt with.
It was an interesting conference consisting of discussions, forecasting, and financial data delivered by corporate groups and financial experts to the corporate crowd to allow them to understand and make the appropriate decisions in their environment. From my perspective, in this troubled financial market we are all facing, it was very useful information that allowed me to understand the state and direction of the aviation industry, and the MRO market.
Aviation Financial Market Today
Clearly there are serious contractions taking place around the world, and it’s very similar to the 1982 era. Airlines are flying less, due to the weak economy, with examples given showing many companies seeing a 30% drop in business class travel, a reduction in flying by 11 % in the first quarter of 2009. Generally there has been an 18% drop in business revenue with a 20% drop in Cargo business.
For MRO’s, generally there was an increase of business of about 1% over 2008, while we have seen oil prices go up to $150 and down to $50 a barrel. Most experts do not expect the aviation sector to start recovering until 2010 at the earliest, while most are predicting 2011 or 2012.
The results for the remainder of 2009 will depend on government actions taken. The industry is crying for a freeze in fees, and is looking at the Cap and Trade agreements as problematic.
In the USA, they are looking at the Government to infuse new Technology into the Air traffic control system and introduce new energy policies to prevent oil speculation by investors.
One thing is for sure, this summer will bring great uncertainty on passenger levels resulting from the impact from government actions and due to the economy continuing to decline. The air transport industry always lags substantially behind the economy.
Companies such as UPS have seen an $8.5 Billion loss in 2008, and a $4.7 Bill loss so far in 2009. Most are speculating that fuel prices will increase in 2009, and shipping of goods worldwide will be lower as well. Companies are looking for the cheapest method to ship and are forgoing premium services to reduce costs.
The economy is still expected to get worse in 2009 and airlines are consolidating services, retiring older aircraft, and reducing flights.
Financial experts are predicting a 5.7% drop in passenger levels and about a 13% drop in Cargo for 2009. The wild card is OIL prices!! Very hard to predict accurately when prices will rise…but they will rise and slowly they have started!
There is an increase worldwide in the middle class and is expected to increase by 1.8 Billion more by 2020. Megacities will increase from 19 to 27 by 2025, and as a result consumer buying power is growing.
Interestingly, India, China, Middle East, and Latin America are the fastest growing regions, due to the increase in middle income class.
Growth for MRO will be delayed by one year as a result but it will return to continue growing as predicted in the past at about 4.1% per year until 2019. Aircraft deliveries increased in 2008, and are now flat in 2009 and will likely continue to stay flat and fall during 2010 and 2011.
As a result of this economic storm outsourcing will grow but there are large political forces, especially in the USA that are trying to slow it down. The results are yet to be seen as to whether they will be successful. In the USA, the balance of a company’s need to outsource work to cheaper countries in the world will be balanced by possible Government requirements to maintain this work within the USA at a higher cost. However the end result may be higher employment levels if the “Buy American” movement succeeds.
Key growth areas for MRO airframe work will be for the Embraer 195, Airbus A380 and Boeing 787 aircraft.
The environment is on everyone’s agenda, as the E.U has decided to introduce legislation by 2012, Australia by 2010, and the USA debates when it will introduce it. As a result green initiatives such as engine washes, winglets, painting, weight reduction, and bio fuel modifications will increase and will be required to be provided by the MRO sector.
MRO General Overview
The MRO industry is reviewing and reducing parts inventory by 10 – 20%. Overhaul has reduced by about 5 – 10% all of this as a result of the present economy. However, all numbers are expected to recover when the economy returns. As an example, back in 2002, a reduction of 4% capacity translated to a 12% reduction in MRO spend.
There has been an increase in R & D in Singapore, while emerging clusters of MRO has been seen in Mexico and Central America for Heavy Maintenance work and also to some degree in Eastern Europe, North Africa, and UAE, as more governments are assisting in setting up shop to attract work to their countries.
Protectionism is on the rise, especially with the FAA in the US where they are trying to impose drug testing and security measures outside of their country. All of this is threatening bilateral agreements which pits the MRO’s who are covered under the WTO rules, against airlines that are not.
It is not expected for MRO’s to see a recovery until 2010 or 2011 with positive growth lasting until 2018.
One of the advantages to be proposed by the MRO industry is to convince airlines that they can assist them in reducing inventory which can amount to as much as 50% of maintenance spend for material costs alone. Presently airlines hold about $800 million of inventory which is a large amount of cash sitting around.
MRO’s are well established in Asia for Airframe overhaul and emerging for component and engine services. Latin America and Eastern Europe are the emerging markets to enter the MRO industry.
What does it mean – Impact
Interestingly, as a result of domestic air services taking longer due to additional security, passengers who turned to flying in the past because of the advantages of being hassle free, low cost and a speedy experience have turned away permanently and found alternate ways of travelling.
Airlines can no longer deliver speed, low cost and efficiency and this reduction in passenger levels on domestic travel has not recovered since 9/11 (2001), which translates into lost revenues of $22 billion per year.
This leaves airlines to either reduce frequencies locally or expand flying internationally, unless they can reduce expenses. Unfortunately this has been pretty well exhausted by most carriers.
To further complicate matters, fuel has increased from 2000 by 230%, and is now the number one cost, while at the same time airlines have maintained fairly flat air fare prices.
Clearly all North American carriers are shrinking and will continue to do so this year both domestically and internationally. One extreme example is Southwest, which for the first time ever, had to shrink by 3.1%.
On top of the above issues being faced is the shortage in credit or financing which has impacted most airlines with poor “BB” ratings with the exception of Lufthansa, Qantas, and Southwest who are higher but still below the “A” rating enjoyed in the past.
Clearly those companies with large cash reserves will succeed as they will be able to upgrade their operations with new technology and expand as more companies start to fail.
It is expected that outsourcing will continue to increase sharply from about 70% in 2008 to about 86% in 2013 as a result of the financial times we are in. As a result service providers (MRO’s) will increase in size as many airlines start to focus on their core functions while leaving others to manage their other functions more effectively.
The aviation industry is predicting a shortage of licensed mechanics, resulting from expected retirements and low supply of new entrants into the field. Recent announcements of layoffs, have temporarily resolved this issue, however, enrolments in schools are down, as they are not able to attract students like in the past. As a result we have a lot of poaching of qualified workers taking place.
One of the big problems schools are facing is that many students are not reaching the required math and science levels needed in order to qualify to enter into aviation training. This combined with a bad picture the aviation has suffered in the last decade has scared many students to other careers.
Once the economic recovery starts we will likely face the shortage dilemma again, as some companies are projecting that as many as 25% of their workforce are ready and capable to retire today. This is putting pressure on companies to rethink how they will attract, nurture and retain qualified workers. We will likely see improvements in workplace behaviour and benefit levels given to employees in order to become more attractive than their competitors.
It is projected that in 5 years from now, the baby boomers will be retiring in large numbers, and aircraft fleets will continue to grow steadily after the economic recovery.
Clearly new and innovative strategies will have to be adopted by companies such as entering into partnerships with schools and perhaps sponsoring students so that they can have a steady supply of workers. This is already the case in many European countries.
What can we learn from this?
Airlines have no choice but to cut capacity as we have already witnessed both domestically and internationally.
Many companies are definitely restructuring and some are downsizing and outsourcing work and inventory, while many new companies are being created to take on this work and inventory.
The economy will turnaround and those companies that survive will emerge stronger and prosper.