By now, we are all painfully aware of the COVID-19, commonly known as “Coronavirus”, which has been deemed a global pandemic by the World Health Organization in March. Since then, the aviation market as a whole has, well, completely tanked to be perfectly honest. It was flying at a critical angle of attack, and now is in an unbroken stall, maybe even a spin. This is a critical and honest appraisal of the MRO industry, as well as associated support markets (namely GSE), and where they are headed by the numbers.
MRO Facilities: Types, Sizes, Specialties, and Locations
To make a blanket statement of “MRO Facility” and assume that as a universal explanation of what they do is erroneous. MROs cover every square inch of all commercial aircraft or every type, but they do not all do the same thing. While there are a few MRO operations who employ many thousands of employees, supporting the major legacy air carriers, the bulk of MRO facilities are small businesses.
Large MROs by Global Region
MROs are going to largely reflect the overall economic state of the global region in which they reside; aviation is a truly global market, but MROs are a fixed feature in a fluid and dynamic industry. In order to explore their outlook and futures, we will break down the major MROs by geographic region.
According to Boeing’s Services Market Outlook, the North American market is by far the largest services market in the world, over double that of their closest competitor, Asia-Pacific. However, the irony in this is the Asia-Pacific outpaces the rest of the world by nearly all other metrics in commercial aviation, particularly aircraft acquisition. But, it does make sense that the services market is heavily embedded in North America when it is taken into consideration that around half of the globe’s airliner fleet is designed and manufactured in North America.
The real driving force behind North America’s booming services market is military spending, which will likely be largely unaffected by any global crisis. According to Boeing, around 25% of military aircraft will be retiring over the course of the next decade, a sure sign of an aging fleet. North America is in a unique position where it’s service spending is forecast to be roughly double that of commercial applications, whereas the other global markets show military spending as around half that of commercial spending, not twice that.
Some of the largest MRO facilities in North America are owned by the Department of Defense, so they will be most unaffected by the global pandemic which is presently dessimating aviation. There are three U.S. Air Force Air Logistics Centers (ALCs) spread across the U.S., of which each employ between 7,000-10,000 personnel, creating very large economic footprints in the North American services industry. And these facilities are very large: the Oklahoma City ALC sprawls across over 60 buildings and over 8 million square feet! For perspective, the American Airlines Tulsa Maintenance Facility is roughly 3.3 square feet. The AA MRO is the largest commercial MRO in the world, and is dwarfed by the Oklahoma City ALC, at roughly one third the size.
Why is this important? To illustrate the money in the North American aviation services market. The U.S. spends more on defense than anyone else in the world, and by a wide margin. So, while commercial aviation continues to plummet, aviation services in North America, to include GSE service and acquisition, will not plummet as severely as the rest of the world; the U.S. military still relies heavily on civilian contractors and service providers for much of their primary structures, component repair, sub-component repair, and especially software systems.
The Asia-Pacific region has been booming for a number of years, rapidly outpacing everywhere else in the world, and is on pace to continue their rapid growth, or at least they were.
The Coronavirus pandemic struck asian airlines first, which was predictable considering its origin. According to BBC Business, Chinese air travel plummeted over 80% in February which amounted to nearly $3bn drop in revenue. With the IATA predicting a 2nd quarter cash burn of over $61bn industry-wide, this seems consistent.
Most, if not all, Asia-Pacific airlines are parking their fleets in temporary storage to stop the bleeding, most of which have slashed nearly 90% of their scheduled flights. Jetstar Asia, Air Asia, and AirAsia X are all completely grounded indefinitely.
The Asia-Pacific airlines are not foreign to dealing with issues of illness; the Coronavirus was initially likened to the SARS outbreak of the early 2000s, which grounded significant portions of Asian airliner fleets. But in the past few weeks, it has become very clear that this is not SARS. SARS never became a global threat in the way that Coronovirus presently is.
Air travel has rebounded somewhat, up 20% in March, but still a 40% departure from average. The ramifications of this for the MRO industry is obvious, though: airplanes which do not fly will not be accruing flight hours to necessitate many of the inspection and repair cycles. The maintenance required of the jets for temporary storage will be conducted largely by line mechanics. Many of the MROs which are not part of a larger parent airline group, such as HAECO, are not publicly traded so it is difficult to know just how hard of a downturn they have taken, but if the major air carriers of the region are any indicator, it is bleak at best.
Europe is still very much in the thick of the battling the COVID-19 pandemic, and is behind Asia in terms of recovery. Most of the continent remains on a hard lockdown with highly restricted or flat-out banned travel between them.
We could continue to quote sources on cancellation rates, but the effects are already well known: basically, all of the world is looking at 80% cancellation rates, give or take a few. Jets are flying empty. Major air carriers across the globe are flying their passenger aircraft as dedicated cargo carriers for the first time in decades.
The Effects on MRO
We have to be perfectly honest here: it is hard to determine right now the immediate effects of the economic downturn on MROs themselves. We can assume that when Lufthansa drops 55% in a quarter, their MRO subsidiary, Lufthansa Technik will probably befall a similar outlook.
There may be some potential upsides to this which we have yet to discover, at least as far as MROs are concerned.
Fairly all markets and industries have become used to a fat global supply chain. We have Amazon Prime and we have come to expect our deliveries to be within the prescribed 24-48 hours window. MROs have been operating the same way, operating on exact timeframes with very low on-hand inventories. The Coronavirus has readjusted how we look at logistics. In almost no time, the world went from almost no lead time on parcel deliveries, to double-digits in terms of delivery days.
It does not appear that this is going to be a short-term hiccup; this is going to stretch out for months, if not years. It is going to disrupt many service industries, and they will have to either adapt, or perish.
Another wild card in this mess is governmental oversight, as well as governmental controls. The seal has now been broken and governments have now implemented extremely strict controls for both industries and private individuals. In future epidemics and crises, it takes no imagination to believe that governments will act faster and under less duress in the future.
MROs will have to provide their own buffers in order to insulate themselves for the future. This might take shape in a variety of forms.
- Large inventory on hand. The most immediate solution to a lagging supply chain is to close the loop and keep inventory on hand. In order to do this, MROs will need to put a fair amount of cash forward to build the inventory, but once it is established, the supply chain will be able to focus on replenishing existing stock rather than delivering necessary items on a one-for-one basis.
- In-house manufacturing. This is not viable for all parts, but additive manufacturing is opening doorways for the local production of a variety of interior parts and airframe components.
Positive supply and logistics accountability through advanced technologies. Blockchain has been knocking on the door of aviation maintenance, and this crisis may be the catalyst which pushes it into the mainstream. It affords all authorized users the ability to provide a secure ledger for all activity on any given part, and conduct transactions free from potentially invasive oversite.
Conclusion to the future of MROs amid a global crisis
The times are trying and the way ahead is very uncertain. We do not know what the future holds for aviation, although we can be assured that it will not go away. But when it does return, it will not be ‘normal’. The future landscape of aviation and aerospace is going to look different than it does now. It will be sleeker, with a smaller, more agile footprint. Purchases will be scrutinized for current demands and future viability. Items which make operations more efficient will be highly valued. One thing is for certain: the world as we know it is changing in front of our eyes.
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