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The Ground Handling Blog

Mototok's blog for Hangar Professionals

Written by Mototok on April 12, 2018 // 2:30 PM

MRO Business Model: A Comprehensive Guide

mro

Maintenance, Repair, and Overhaul facilities, known in the vernacular simply as “MROs” are a major gear in the cog which keep airplanes in the air safely and reliably. But what exactly goes into an MRO? Or more broadly, what are the different types of MROs and MRO business models, and how do they differ? This comprehensive guide to MRO business models sets out to research and explain the nuance of MROs.

Different MRO business models: 31 Flavors

Okay, this is not a famous ice cream shop chain and there are not exactly 31 different types of MROs. But there are six.

The definition of an MRO covers a broad swath of industry territory in aviation maintenance circles. Any facility which engages in and conducts aircraft maintenance professionally falls under the broad umbrella of an MRO, although their specific business models vary considerably. Here are the six different models commonly seen throughout the world:

Major airlines

The segment of the civilian MRO market which has the biggest market share of mechanics and technicians, with roughly 66% of aviation technicians working for commercial airlines.

There is no specific business model for MROs owned by commercial air carriers because they exist solely to support the fleet of their owner. In fact, the largest commercial MRO facility in the world is owned and operated by American Airlines in Tulsa, Oklahoma.

These monstrosities are generally located at an airline’s major hub in such a way that it is advantageous to the organization as a whole, much like the Qantas MRO recently opened at LAX. While LAX is not their main hub, it made the most sense because they could perform maintenance there while the aircraft and crew were on mandatory dwell time on location.

MROs owned and operated by airlines provide all services from minor repairs and servicing, to isochronal inspections, to full-scale depot-level overhaul and repair.

While MRO facilities owned by major airlines generally do not subcontract work for competing airlines, it does not mean they steer away from it entirely. Some parts are so obscure, costly, or just difficult to come by that it makes no sense for a private MRO or the manufacturer to stock them. United Airlines United Technical Operations facility holds a stock of components which they readily lease to other airlines on request.

Regional airline MRO facilities

Regional airlines abide by the same federal standards as their larger brethren regarding inspection and repair cycles, both abiding to 14 CFR Parts 91, 119, 121, 125, 129, 135, and 136 standards in the U.S.

Repair and inspection costs are not dramatically different between the aircraft used by regional operators vice those used by major airlines, and while profit margins for regionals tend to be slightly higher than the majors, their infrastructure budgets are not as deep and often their fleets are smaller.

These smaller outfits have become creative in mixing and matching services to stay in the black for maintenance and repair costs. Many regional carriers even breakdown repairs on systems (i.e., engines, avionics, etc.) and contract between in-house work and subcontracted work by the level of maintenance required. Line checks and minor isochronal are often performed by airline employees at airline-owned maintenance centers, while higher-level repairs are sent on to large, contracted repair centers.

The other difference in the regional airline model vice major airlines is the nature of regionals, which do not tend to operate from major hubs. Instead, regional airlines operate out of smaller, regional airports frequently. Regional airline-owned MROs tend to reflect this, being smaller operations scattered across the operating area of the airline instead of one, massive facility.

In-house Corporate flight departments

Private jet ownership is very costly, and smaller organizations which desire private jet travel often opt for chartered services. To provide a baseline, it is still cheaper to charter flights for up to $30,000 per flight sometimes than to own and operate the same private jet.

Some corporations are large enough and broad enough (think: Amazon, Walmart, etc.) to own and operate a fleet of corporate jets. Their aircraft are used with enough frequency to consider the option of an in-house MRO with company staff mechanics and operations support.

The benefit of this model is that maintenance staff are on hand 24/7 to work issues and get the aircraft serviceable. The downside is the cost of supporting this staff, the facility, and the cost to own the fleet.

Military

While it is overlooked by private industry professionals since it is utterly inclusive, militaries around the globe are some of the largest purveyors of MROs, and certainly some of the most prolific buyers of aerospace ground equipment, tools, and maintenance facilities.

The military possesses and employs enormous MRO assets and facilities to service a huge variety of aircraft for several levels of maintenance. Militaries around the world commonly employ several distinct, broad categories of aircraft in their inventory, all of which are defined by specific, defining characteristics. Here are a few of those:

Tactical aircraft

Tactical aircraft are comprised of interceptors/fighters, attackers, and bombers. These are general distinctions and cannot fully encapsulate all of the varieties of tactical aircraft in every military, but you get the point.

Tactical aircraft are notoriously fickle and sensitive, and their mission capability rates are generally much lower than their unarmed brethren in the airlift and cargo categories. This is primarily due to the high levels of complexities on tactical aircraft from their arrays of offensive and defensive avionics suites, and particularly their weapons employment systems.

Whereas a civilian MRO focuses on airframe, powerplant, and avionics systems (again, an oversimplification), tactical military aircraft MROs also have to deal with dedicated offensive and defensive avionics systems, guns and associated systems, bomb and missile launch systems, flare and chaff dispensing systems.

Airlift/cargo

Military airlift and cargo aircraft MRO requirements are the most similar to that of commercial airlines because of their similarity in design to commercial aircraft (sometimes they are clones of commercial aircraft).

The only big difference here with airlift over civilian aircraft in terms of MRO requirements are that facilities may not compatible between the two varieties. Otherwise, typical MRO practices will prevail.

Reconnaissance

This is an interesting subset of aircraft that are specific only to military services. What makes recon aircraft so unique is that the basic airframe is usually a derivative of some sort of commercial cargo aircraft. Where it diverges is what is placed inside the aircraft, generally teaming with ultra-complex radar and radio systems, as well as high-definition video systems. To further complicate these platforms, these aircraft generally have enormous power requirements for their surveillance systems even though the aircraft itself is a derivative of a commercial platform, such as a Beech King Air, or B-737.

Helicopters

A mainstay of every military since at least the Vietnam War, helicopters are a permanent fixture on military bases due to their great versatility and portability. From the MRO perspective, helicopters are very labor intensive and costly so their support infrastructure must be a robust one.

Independant repair stations

Independant repair stations make up a considerable portion of employment in aircraft maintenance. These facilities are often small, owned and operated by a handful of employees, but some are also owned by giants like General Electric and bill enormous projects.

The small MRO stations often specialize in one or two niche areas, which is how they remain viable. The FAA maintains a database of all repair stations in the U.S., which is in the thousands, and breaks them out by specialty. They often specialize in areas like fabric covers, aircraft interiors, etc., to maintain relevance. No, they are never going to go through periods of exponential growth, but these niche areas are not anything that major players like GE are interested in getting into because there just is not enough demand to warrant the initial investment.

Fixed Base Operators

The old adage states that you cannot realistically operate an FBO without being an A&P first. Why there is no data to confirm or deny this, it is probably deeply rooted in truth. Mirroring the majority of airports worldwide, which is to say small, rural, and uncontrolled, the FBOs reflect the airport.

Some FBOs are full-service repair facilities which can handle any aircraft on station, which is the entire purpose. FBOs at large non-commercially centric airports will scale to fit the aircraft on stations because those aircraft will go off-station for support if necessary.

That being said, the bulk of FBOs are geared to support the most common denominator, which is the general aviation community on location. General aviation aircraft require surprisingly little in terms of infrastructure to conduct even extensive overhaul and repair, really no more than a typical automotive garage. Many of the tools are even completely compatible between the two.

Taking a closer look at MRO business models

The second installment in the MRO series is going to be a deep dive into business models used, support infrastructure for each, investments and venture capital acquired for start-ups and growth, and how each level of MRO can scale up. Also, we will explore the ever present pitfalls which claim so many casualties in the aviation market.

How do MROs make money?

Now that we have dug into the different types of MROs, we can dive deeper into what they do, how each different subset fills a specific niche or void, types of equipment and infrastructure necessary, how a developer might go about raising capital, and essentially how to make a profit in the industry.

Aviation is a marathon, not a sprint

Aviation is a slow-and-steady market, seldom (if ever) punctuated by erratic behavior. It has grown slowly but steadily over the years, and looks to grow at a modest 2.8% annually over the next two decades.

This is a double-edged sword for MROs and potential startups. On the one hand, if your business is established, the work can be remarkably steady. On the other hand, it is a terribly slow market to enter as a startup, especially a startup which requires extensive equipment and inventory of parts and supplies.

The other variable for a startup is the lack of new airports being built. The most recent international airport constructed in the U.S. was Denver International which opened in 1995. Due to the terribly high cost of construction and enormous amount of regulatory guidance which must be adhered to, as well as urban sprawl, it is very rarely advantageous to build a new airport vice renovating existing infrastructure. This stovepipes much in the way of growth for new MROs.

MRO business models by category

Commercial airline-owner MROs

Commercial airlines are generally in the position to put out large outlays of cash for their own infrastructure. Much of this is because they have strict timelines which must be adhered to in generating maintenance for their aircraft. Any time a third party is introduced into the equation, a weakened link is also introduced. This is not to say that private-party MROs are an inherently weak link, but instead that they introduce a potential liability in terms of a facility which the airline cannot directly control the pace and rhythm in.

It is for this reason that major airlines spend the money to construct their own massive MRO facilities because they control the entire tempo of operations. When time is money (and there are few industries where time means more than the airlines), it pays to conduct heavy maintenance in-house.

Why conduct it in-house when it costs so much to run heavy MRO depots? Because the airlines get to choose the location, often colocating depots with their hubs; it just makes business sense. The airline can then work their maintenance cycles to fly the aircraft directly to a hub with passengers and move it directly from the gate and into the maintenance hangar.

Major airlines are steadily expanding their MRO facilities to take on bigger pieces of the maintenance puzzle, particularly engine overhaul maintenance. If they MRO facility can conduct engine overhauls in-house, it vastly streamlines the maintenance process, and can save millions of dollars in the process in freight alone, not to mention time.

Regional airlines and air taxi services

Regional airlines and air taxi services are not necessarily hampered by maintenance and overhaul, but they cannot follow the same business model as major airlines. This is not necessarily in regards to cost, as real property can often be had relatively cheaply at small industrial air parks and regional airports. It is instead due to the nature of regional airlines.

Regional airlines do not rely on the major hub model to operate; it is the absence of this model on which regionals and air taxis thrive. The aircraft which regional airlines operate are designed to operate in much smaller and less robust locations.

Regional airlines do not fit any specific mould in their business plans because each airline approaches their business model differently depending on areas serviced. Some regional airlines do fly into hub airports in geographic regions relatively highly populated with aircraft technicians and mechanics so it may pay dividends to set up an MRO in said location.

On the other hand, as qualified aircraft maintenance techs are not in any sort of surplus (and that number continues to shrink), a regional hauler may end up contracting MRO work to privately owned MRO facilities as it is not advantageous to try and establish a facility in an area where the required personnel are not already a presence. Aircraft maintenance is a niche skill set and there do not tend to be abundant supplies of qualified and certified techs in all locations.

Aircraft mechanics generally go to where the work exists, not vice versa. It is very costly for a regional airline to set up an MRO outside of an area where there is not already a pool of potential employees, or a trade school set up to produce aircraft mechanics.

In-house corporate flight departments

We will not spend much time on this sort of operation because their MRO business model is not detached from the business model of the company at large.

Corporate flight departments are generally located in as close to proximity to the clientele being serviced as possible. Furthermore, outside of heavy corporate jets, most corporate aircraft require very little, if any, additional space for heavy maintenance as for general and line maintenance. They require no large scaffolding, large hangars, heavy power supplies, or any of the specialized heavy equipment used for commercial jets.

Also, major corporate jet manufacturers offer maintenance programs with on-call mobile maintainers which are paid for as a fixed-rate program, essentially negating the needs for built up MRO framework.

Independant repair stations & FBOs

While making up a much smaller market segment of the MRO market than those of the major airlines, independant stations fill a vacuum in the market. They build their client base often in niches, and very often catering to general aviation aircraft and small commercial operations other than air carriers.

From rebuilding magnetos to installing interiors, independant repair stations offer services which offer no financial incentive for larger, airline owned and contracted MROs to provide.

Rebuilding piston engines and light turbine engines is a prime example. There are many commercial applications which require piston engines to be overhauled, as well as small turbines, but large overhaul facilities have no interest in them because they are not applicable to air carrier operations. However, this is still a service which will always need to be performed in support of light commercial and general aviation. Independant repair centers (which, for this purpose FBOs are being lumped into) are not poised to explode with exponential growth, particularly as general aviation numbers are essentially static with negligible growth.

However, as long as general aviation and Part 135 commercial activity exists, small independant repair stations and FBOs will have steady business. Since the economy as a whole is what drives these segments of aviation (people will continue to fly airlines regardless of what the economy does), as long as it slumps, it will be nearly impossible for start-ups to enter in these segments. When the economy booms, though, people who dream of flying start flying, which will engage FBOs and independant repair stations, and open up the potential for expansion and new services.

Conclusion to MRO business models

The business models vary widely in regard to aviation MROs, based upon the business supported. Airlines position MRO services to coincide with hub locations as much as possible to maximize efficiency. Military MROs are megaplexes which are designed for a very specific role, and while they do not generate revenue, they do provide much support for surrounding areas in high employment figures. There are too many components under the umbrella to give full compliment to, but this is a snapshot into the most prolific businesses and what drives each separate one.

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