Ahead of the ap&m Europe Expo, held at Olympia, London on 26-28 May, a selection of independent companies involved in the MRO sector explain how their service offerings are evolving to meet customer demands. In an industry which already has excess capacity in some areas, independent MROs are facing increased pressures across the globe – from OEMs targeting the aftermarket to low cost carriers squeezing margins; from the increasing availability of surplus spares to the challenges of new, ‘smarter' aircraft platforms.
So how should the independents respond? One approach is to expand and diversify the service offering in order to add value. Ian Bartholomew, managing director, Monarch Aircraft Engineering, one of the exhibiting companies at ap&m Europe in May, has commented: “As operators face rising costs and a shortage of technical expertise, they are increasingly looking to MROs who can offer full solutions to manage more of their organisation's requirements. These opportunities will only be realised by those MROs who are continuingly improving and innovating to ensure customer experiences meet and exceed expectations.”
The range of additional services that some independent MROs are now offering is wide ranging. Peter Chapman, vice-president and chief commercial officer of AAR Corp, and a speaker at the forthcoming ap&m summit, references “paint, line service and tiger teams that provide off-station support for an AOG.” Bartholomew adds “fleet technical support, design services and spares provision."
Dimensions and intentions
The supply of parts has taken on a new dimension as fleet retirements increase and the availability of used serviceable material burgeons. Indeed, the market in surplus parts is now estimated at some $3 billion per annum. Similarly, the provision of inventory management services is expanding.
For example, Micheal Armstrong, CEO of Armac Systems has commented on the importance of “marrying technology with add-on services such as planning and data analytics, trading and financing." Whilst different airlines have different approaches, depending on criteria such as their business model and their fleet size and composition, the fact remains that they are all seeking to make their assets work harder.
Another potential area of diversification, already adopted by FL Technics, is that of training. In an opinion piece on the MRO Network website, Sarah-Jayne Russell, editor of Aircraft Technology Engineering & Maintenance writes: “With a shortage of skilled engineers in the sector, particularly in growth regions such as Asia Pacific and Latin America, MROs could be drawing on years of experience to create and export training programmes."
There is, however, an important question to raise at this point. Does diversification automatically constitute added value? Chapman makes an interesting argument: “‘Value added' has been a buzz word for years, just as ‘partner' has been. The real value added is in the eyes of the customer, not the supplier. For the most part, the more the supplier can do for the customer to impact operations, the more value added. For instance, the supplier is the single source for repairs or takes on the administrative burden of handling warranty claims. As long as the supplier is meeting or exceeding the three fundamental expectations with regards to quality, turn time and cost, the ‘add' comes from relieving the airline of non-core activities wherever possible."
In other words, what really matters is that independent MROs should adopt a customer-centric approach, not a service provider mentality. That said, diversification within the MRO sector looks set to continue and it's a process that is changing the shape of the industry.
Vertically unchallenged
We are, for example, seeing significant vertical integration within the MRO sector. Micheal Armstrong, CEO of Armac Systems, comments: “These integrations are becoming more prevalent as parties in the supply chain look to grow and protect revenue streams and market share." The extension of OEM activity into the aftermarket has already been mentioned and as Chapman observes: “Airbus and Boeing can only sell so many aircraft each year, so they offer full service programmes when you buy their aircraft to generate additional revenue."
Not that vertical integration is being driven entirely by the likes of Airbus and Boeing. As Chapman further points out: “AAR is a good example of a vertically integrated company starting at the top of the food chain - including aircraft/engine sales and leasing, airframe and component repair and overhaul, OEM parts distribution, parts sales and engineering services." Elsewhere in the aviation industry, aircraft lessors are also looking for opportunities to achieve vertical integration.
Traditionally lean organisations focused on placing aircraft and leaving end-of-life activities to third parties. Some of them are now establishing partnerships with businesses experienced in the parting out of retired aircraft. One such example is the purchase of aircraft teardown and parts supply company, AeroTurbine, by International Lease Finance Corporation, now part of AerCap.
New layers of complexity
These changes in the extent and structure of the MRO offering are also having their impact on the ways in which contracts are tendered and awarded. As Chapman says: “Just when you think you have the contracting trend figured out, it changes and becomes more and more complicated." It used to be the case that contracts were awarded purely on the basis of turnaround times, pricing and quality. Increasingly, however, bundled offerings in the form of total support agreements with volume discounts are proving to be a more attractive proposition for airlines – a development that creates a new layer of complexity for those independent MROs who have been slow to adapt to a changing business environment.
A further consequence of these broader, more comprehensive arrangements is that both sides – customer and supplier; the airline and the MRO – are looking for mutual benefits over an extended period of time. Lifecycle costs, or total value, are coming into play and counting for more than one-off low cost alternatives. A simple contract tendering process is being replaced, in Chapman's words, “by an exhaustive back and forth negotiation which will lead to a long-term contract."
The MRO service offering is evolving, and in more ways than one. Whilst there is no simple, universal recipe for success for any independent MRO, it does seem clear that those who fail to adapt to the changes taking place are likely to find it increasingly difficult to compete.
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