What worries aviation MRO players today? [Q4 2023 update]
The aviation MRO (Maintenance, Repair, and Overhaul) industry is responsible for the maintenance and repair of aircraft to ensure they are safe and reliable to operate. As 2023 ends, does the COVID-19 pandemic still impact the industry? Workforce shortage, inflation, growing environmental concerns... What do MRO players dread the most? In this article, we will discuss their top Q4 2023 worries.
Rising material and labor cost
According to an Oliver Wyman report, 97% of respondents reported increases in material costs - something they attributed mainly to OEMs. MROs overwhelmingly attribute this additional operating expense to annual OEM material price increases and restrictions they place on the direct sale of OEM-designed parts because of their IP ownership, the report states.
As it looks now, this trend is likely to continue. According to the same survey, most executives feel OEMs will continue to grow through imposing more significant usage restrictions on existing IP and licenses.
The cost of labor is also increasing—due in part to a lack of labor supply, driven by an aging workforce, coupled with a dwindling supply of newly educated ready to take on a role as a maintenance technician. Without a stark change, this trend can be expected to continue for the foreseeable future.
The highest wages can be seen in Western Europe at $70 for the average billed airframe labor rate; the lowest amount could be seen in South Asia at $43. In the US and Eastern Europe, it's in the mid to low $50s, with China and Latin America dolling out rates in the mid-40s. In other words, the current landscape is, as the Oliver Wyman report indicates, a very competitive, global marketplace.
Further OEM expansion
The heightened presence of OEMs in the aftermarket is not exactly new; it has been a reality for the MRO industry for the past several years now. As of late, however, OEMs within the MRO sector have seen immense growth and have ambitions for even more.
Companies such as Airbus and Boeing have set tremendously ambitious goals for themselves—Airbus set a goal to double their aftermarket spending by 2035, adding up to a total of $1.8 trillion by 2035, or an annual growth rate of 4.6 percent. Similarly, Boeing set the goal of tripling its MRO revenue over the next decade. The ability for OEMs to rapidly seize market share in the aftermarket is thanks, in large part, to their hold on intellectual property (IP). Primarily true of engine and component manufacturers, at the moment, MROs are fearful of the possibility that OEMs try to recapture even more IP, using it as leverage in a push for even greater market share.
The aviation MRO industry is capital-intensive, and MRO companies require significant equipment, training, and maintenance investments to remain competitive. Although the COVID-19 pandemic is not at its peak anymore, it has significantly impacted the financial health of MRO companies. At the time, aerospace traffic reduction led airlines to cut back on maintenance spending, reducing demand for MRO services. As we speak (Q4 2023), the air traffic has fully recovered. But, as it took time for the aerospace industry to return to normal, it also took time for MRO services to regain their pre-pandemic revenue and profitability.
Of course, the financial challenges MRO companies face are also compounded by access to capital. It was already the case during and after the pandemic, but the current recession trend of the market leads financial institutions to tighten their lending standards. As a result, MRO companies struggle to access the capital they need to maintain operations and invest in new technologies.
The aviation industry constantly evolves, with new technologies and processes emerging regularly. MRO companies must keep up with these advancements to remain competitive. However, the cost of implementing new technology can be a concern for MRO companies, particularly for smaller companies. Additionally, the need for industry standards for new technology can create uncertainty and additional costs for MRO companies.
Implementing new technologies can also require significant investments in training and infrastructure. For example, adopting predictive maintenance technologies requires substantial investments in data analytics and software, as well as the training of technicians to use these technologies effectively.
According to the final installment of the Intergovernmental Panel on Climate Change's (IPCC) Sixth Assessment Report (AR6), gathering the world's most authoritative scientific body on climate change, drastically cutting emissions will require dramatic planning that minimizes the need for travel, as well as investments in zero-carbon fuels for shipping and aviation and more.
In this context, the aviation industry faces increasing pressure to address environmental concerns, and MRO companies are not exempt from this trend. Like their fellow aviation companies, MRO players must comply with regulatory requirements while balancing the need for sustainability with profitability. Many MRO companies are investing in sustainable practices to reduce their environmental impact, such as using more fuel-efficient engines and adopting sustainable practices in their operations.
The adoption of sustainable practices may require significant investments in infrastructure, such as the installation of solar panels or the use of electric-powered ground support equipment. However, these investments can help MRO companies reduce operating costs over the long term
Supply Chain Disruptions
MRO companies rely on a global supply chain for parts and materials, and disruptions can impact their operations. As demonstrated by the COVID-19 pandemic, unforeseen events bring out the vulnerabilities of the aviation supply chain. For many MRO players, this has translated into delays, critical parts shortages, and costly expedited services.
MRO companies need to adopt new strategies to build a more resilient supply chain and mitigate the impact of future disruptions. This may include developing relationships with multiple suppliers, increasing inventory levels, and implementing new technologies to improve supply chain visibility and flexibility.
MRO companies must comply with a complex set of regulations governing the aviation industry. The cost of compliance can be significant, particularly for smaller companies with limited resources. The regulations can also change frequently, creating additional costs for MRO companies as they work to keep up with the latest requirements.
To remain compliant, MRO companies must invest in training and education for their employees, as well as new technologies to support compliance efforts. MRO companies must also maintain records and documentation to demonstrate compliance with regulatory requirements.
Cybersecurity has become a global problem, with implications in a number of different industries. Experts estimate that there are around 300,000 professional hackers worldwide, costing global economies more than half a trillion US dollars annually. With access to major airlines and engine component parts makers, the MRO industry makes a perfect target. While MROs themselves might only be an entry point, their position in the large, intricate, and global supply chain of airlines makes it possible to go through them to cause real damage—potentially even to international commerce. While the carriers and OEMs may sometimes be the ultimate targets of the cybercriminals, hackers may decide that access through a vendor in the MRO supply chain may be easier to achieve. Ultimately, MROs must closely consider their cyber security—not just for their own sake, but for the industry and global economy.
Geopolitical instability can create significant challenges for the aviation MRO industry. Political tensions (to say the least) such as those between Ukraine and Russia or Israel and Palestine illustrate it: the context can evolve unexpectedly. Event less extreme events, such as sanctions, trade disputes, regulation changes, and trade policies, can still impact the global supply chain, disrupting MROs' operations.
To plan for the future despite these disruptions, MRO players must be flexible to adapt to changes in the political and regulatory environment. This may require them to develop new relationships with suppliers, expand their operations to new regions, or adjust their business strategies to align with changing market conditions.
Additionally, MRO companies must maintain strong relationships with their customers and suppliers to ensure they can navigate geopolitical challenges.
The average age of the global commercial aircraft fleet is increasing, and MRO companies must adapt to the changing needs of their customers. Older aircraft require more maintenance, and MRO companies must invest in the technology and expertise to service these aircraft. Additionally, the demand for newer, more fuel-efficient aircraft may reduce the demand for maintenance on older aircraft, creating additional challenges for MRO companies.
To remain competitive, MRO companies must invest in the training and development of their technicians to keep up with the latest maintenance practices for older aircraft. They must also be prepared to adapt to changes in the market as airlines continue to upgrade their fleets to newer, more fuel-efficient models. MRO companies must balance their investments in older aircraft maintenance with the need to stay competitive in a rapidly evolving industry.
The aviation MRO industry is undergoing a period of consolidation, with larger companies acquiring smaller players to gain market share and expand their offerings. This consolidation can create challenges for smaller MRO companies, as they may struggle to compete with larger, more established players.
MRO companies must focus on developing unique capabilities and niche offerings to remain competitive in a consolidating industry. They must also invest in technology and process improvements to reduce costs and increase efficiency. Additionally, smaller MRO companies may consider partnerships and collaborations with other players in the industry to expand their offerings and gain access to new markets.
Consolidation can also create opportunities for MRO companies, particularly those with solid capabilities in specific areas. MRO companies that can differentiate themselves through their expertise or unique offerings may find themselves in high demand as larger players seek to expand their offerings and gain a competitive advantage.
The COVID-19 pandemic and, more recently, the tarnishing of the global economic context have significantly impacted the aerospace MRO industry, decreasing demand and financial challenges. MRO companies must adapt to changing customer needs and regulatory requirements while balancing the need for sustainability with profitability.
In Q4 2023, MRO players would still be wise to invest in new technology, attract and retain skilled technicians, and build a resilient supply chain to remain competitive. Despite the challenges, MRO companies are still optimistic about the future, notably because they're working on strategies to mitigate these risks. One of their most shared convictions is that technology, and notably solutions tailored to their needs, will help them forecast and adapt rapidly.