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Aviation MROs
Delivering long-term value in a transformed aftermarket

As the Maintenance, Repair and Overhaul (MRO) landscape is disrupted by the emergence of new technologies and thegrowing presence of Original Equipment Manufacturers (OEMs) in the aftermarket, we examine these challenges andpropose a framework by which the MRO service providers can continue to deliver value.

The aftermarket provides a variety of critical services,
including engine, components, base and line maintenance,with engine maintenance accounting for around 40% of total
maintenance cost. These services have largely been provided
by in-house (‘captive’), airline third party and independent
MRO service providers, with OEMs playing a more limited
role. However, aggressive forays by engine and airframe
OEMs into the aftermarket is re-shaping the sector, forcing
traditional aftermarket service providers to re-evaluate their value
propositions.
After summarizing the key drivers of this phenomenon, thisarticle explores their implications, considering both supply
and demand perspectives. Finally, we present a proposed
framework with which MRO service providers can evaluate how
to deliver value in a transformed aftermarket environment.

i Source: Frost & Sullivan

Structural change in the aftermarket

OEMs

Aftermarket
Design &Manufacture

Operational Life

Airframe OEMs

Airframe OEMs

Engine OEMs

Engine OEMs

Decommissioning

In-house airline MRO
MROs

Third party airline MRO
OEM-affiliated MRO
Independent MRO

Suppliers

Continuous operational efficiency gains, the rise of low-costairlines and the growing convenience of flight booking haveall contributed to the on-going commoditization of air travel.
Despite China’s economic slowdown, IATA still expects global
passenger volumes to more than double by 2034, reaching 7bn,
driving demand for incremental aircraft and generating value
in the aftermarket. Similarly, while there may be early signs ofsoftening demand, Boeing’s long term market forecast for 201534 also foresees a doubling of the number of aircraft in service,
to reach 43,560 by 2034, with 56% of orders accounting for
growth; such growth is expected to see the global MRO market
expand from $51bn in 2011 to $71bn by 2021i.

OEM component
suppliers

OEM component
suppliers
MRO component
suppliers

OEM and MRO component suppliers

Drivers of change
The aftermarket’s transformation of the aftermarket canbe attributed to a number of factors that are increasing or
decreasing demand for MRO services, or introducing new,technology-led maintenance requirements:
Factors increasing MRO service demand:nn

Growing air travel demand, combined with cheaper fuel, isdriving capacity growth and demand for aftermarket services

nn

The low fuel price is delaying the fleet renewal process,extending the need to maintain ageingnn

The relaxation of foreign ownership rules pertaining toairlines and their subsidiaries is encouraging airlines to
outsource ‘captive’ maintenance activities

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Factors reducing/displacing MRO service demand:nn

As new aircraft are introduced, improvements to on-wingtime are delivering longer maintenance windows, reducing
overall maintenance needsnnVariable charging regimes and ICAO emissions standards
encourage airlines to retire older fleets and deploy greener
aircraft that require less maintenancenn

The Middle East is displacing demand in traditional
maintenance hubs

Technology factors impacting maintenance needs:nn

A more modern fleet promises improved reliability, but also
increased maintenance complexity, requiring different skills
that not all MROs can providenn

The shift to advanced materials, namely composites, mean
new strategies, techniques and schedules are needed
compared to the more mature metallic MRO processesnnSimilarly, advances in data analytics and the shift topredictive maintenance are introducing new requirementsthat now all providers will be well-placed to meet

Demand-Side Perspective: the search by Airlinesand Leasing Companies for ever more flexible andefficient maintenance solutions
Airlines: the low cost model has had a transformative impact
on the aviation supply chain, exposing all carriers – regardless of‘type’ – to much greater levels of cost pressure. Airlines, which
typically spend in the region of 10-15% of annual revenues on
direct maintenance costs, face significant unit maintenancecosts: for example, according to IATA, the average maintenancecost in 2013 was $1,167 per flight hour, $3,021 per flight cycle
and $3.1m per aircraft per annum. Furthermore, as fleets age
and carriers start to incur the costs of major maintenancemilestones, such as C and D checks, airlines become exposed
to a growing maintenance burden.
Maintenance functions have been far from immune to cost
cutting pressures, as airlines seek to improve the efficiency
and flexibility of maintenance operations and more effectively
manage opex and capex outlays to achieve improved margins(i.e. contribution per block hour, or CPBH) and total lifecycle
costs. Airlines can only reap the full benefits of their respective
network and fleet strategies if they have a robust and flexible
maintenance regime in place: carriers that lack this fundamental
cornerstone risk a higher frequency and duration of Aircraft On
Ground (AOG) events, with obvious implications for On-Time
Performance (OTP), operating costs and customer satisfaction.
In their search for flexible solutions, traditional time andmaterials contracts are being challenged. In their place, carriers
are becoming more interested in innovative dollar-per-flight-hour
agreements, whereby maintenance providers assume greater
financial risk and are incentivized to maximize availability and2

Aviation MROs: delivering long-term value in a transformed aftermarket

minimize the occurrence and duration of AOG events. In a
cost-conscious environment, airlines will also be keen to reduceinventory carrying costs, than according to IATA can represent
as much as 20% of inventory value, by outsourcing inventory
management responsibilities.
However, the implications of heightened cost sensitivity are
not uniform, and hinge on the maturity of airlines and fleets,and decisions on core competency. For example, whilst an
established FSA like Lufthansa may retain their own third party
maintenance function, Lufthansa Technik, for smaller airlines,
maintenance cost certainty may be the overriding consideration,
leading them to seek outsourced ‘power-by-the-hour’ solutions.
For instance, the Indian start-up, Vistara, recently entered into a‘nose to tail’ OEM solution with Airbus to support its fleet of 20
A320 aircraft, leaving the airline to focus on its core business.
Leasing Companies: given that over a third of the global fleet
is now leased, aircraft leasing companies also have a key role toplay in shaping the aftermarket.
As residual asset value is determined by a number of factors,
but not least by the overall maintenance condition of the aircraft,leasing companies have a strong vested interest in ensuringthat the maintenance regime is designed to protect asset
value. In the case of a wet lease, whereby the lease includes
the provision of the aircraft itself, plus crew, maintenance andinsurance (ACMI), the OEM may incentivize the lessor to enter
into an all-inclusive ‘aftercare’ package, rather than engage
with different MROs on a case-by-case basis. Lessors may be
receptive to the additional choice and, arguably, the reassurance
that the OEMs have brought to the aftermarket.

Supply-side perspective: the OEM quest to capture
a greater share of aftermarket value
Engine OEMs
While there is some variation between manufacturers, theengine OEMs have historically been relatively successful
in cultivating strong aftermarket positions. By leveraging
the technical complexity and material-intensity of engine
maintenance activities, significant barriers to entry have been
established in both the wide-body and rapidly growing narrowbody markets:nn

Wide-body: Rolls Royce is an acknowledged aftermarket
leader and in 2014 held 24% of the wide body market
by engine volumesii. As of 2014, 83% of its commercial
transport engine fleet was covered by its TotalCare service,with 52% of civil aerospace revenues (£3.5bn) derived fromafter-sales services.

nn

Narrow-body: the GE-Snecma joint venture, CFM,
accounted for 51% of total deliveries in 2014, and controls
around a third of the aftermarket services business for
its productsiii. Significantly, around 80% of CFM’s nextViewpoint

aircraft, the MROs have decades-long execution experienceof responding to AOG and other maintenance events.

generation LEAP engines are to be bundled with long-term
service agreements.
The high penetration of engine OEMs in the aftermarket,
including the faster-growing narrow body segment, restricts
the ability of non-affiliated MRO service providers to compete.
Where OEM support extends to the provision of spare engines,
there may also be implications for the engine leasing market.

nn

Flexibility: for airlines with more complex maintenancerequirements, for example due to hybrid short haul / long
haul fleets with many aircraft variants, MROs may be able toprovide a more tailored solution.

nn

Cost-Consciousness: while replacing components withnew will remain necessary in many cases, MROs should use
serviceable used parts programs and alternative repairs toemphasize cultural alignment and help the operator reduce
its total maintenance bill.

Airframe OEMs
By contrast, the airframe manufacturers have traditionallyheld lower aftermarket shares: Boeing’s GoldCare offering, forinstance, covers around 1,600 aircraft, equivalent to only 15% of
Boeing’s total active fleetiv. However, motivated by the need torecover heavy development costs and capitalize on the projected
growth in MRO revenues, the airframe OEMs have redoubled
their efforts to secure Long Term Service Agreements (LTSAs)
at the point of aircraft sale. Combined with the technologicalcomplexity of the latest airframe designs, restrictive licensing
agreements and strategic IP advantages, these offerings make it
more difficult for non-affiliated MROs to compete.

Delivering value in a transformed aftermarket

2. What is my partnering strategy?
In a consolidating market where, for structural reasons, thecost advantage has shifted in favor of the OEMs, achieving
operational scale is key. Therefore, the development of effective
partnering strategies will be essential for all MRO players,
regardless of size.
There are a number of partnering options for the MRO, which
could include one or a combination of the following:nn

Partner with OEMs: as as the airframe, engine andcomponent OEMs cement their presence in the aftermarket,
the development of collaborative OEM-MRO partnerships
will be essential for MRO survival, dramatically reducing
the time and investment required to remain competitive.
Not only this: on the OEM side, as Rolls-Royce’s strategic
partnership model demonstrates, the development of a
select pool of MRO partners can be essential to achieve
operational reach, achieve cost-effective inventory
management and de-risk maintenance portfolios. Similarly,
for airframers, limited MRO partnerships are a way tomeet the service requirements of a rapidly growing fleet,especially in the narrow-body segment.

nn

Partner with MROs: partnering with a fellow MRO
service provider may be attractive where the MROs bringcomplementary skill sets to the table that can be used totarget specific niches. For example, in 2015, SR Technics,
a leading third party MRO, signed an MOU with AerFin,a specialist in end-of-life fleet solutions, to deliver a new‘Beyond Fleet Services’ bundled offering to the aftermarket.
The offering is focused on mature A340 fleets, and helps
overcome challenges related to engine, airframe andcomponent maintenance, and inventory management.

nn

Partner with Suppliers: to offset the OEMs advantage
in material costs, and optimize material throughput times,
MROs need to forge partnerships with aftermarket
component suppliers. This may include partnering with PMA
parts manufacturers, like HEICO, to reduce dependence on
OEM components.

Faced with these threats to the long-term viability of theirbusiness models, and changing customer expectations, there
are specific questions for MRO service providers:
MRO value delivery framework
1. Define USP
and Market
Positioning

2. DefinePartnering
Strategy

4. Invest in
Resources
and Systems

3. Invest in
Capabilities

1. What is my USP and market positioning?
In this new environment, the successful independent MROs willbe those with a clearly identifiable USP and market positioning.
Given the OEMs’ advantage in material costs, and the narrowing
gap between labor costs in developed and developing markets,
it is unlikely that cost will remain a sufficient differentiator. So,
MROs will need to seek out new ways to differentiate themselves when competing in a mixed MRO-OEM market, tooccupy distinctive market space, such as:nnService: OEMs are likely to focus on clients with a minimum
critical mass. Smaller entities, like regional airlines and niche
lessors, could be receptive to the MRO’s more personalized
customer service.

nn

Practical in-field experience: while the OEMs have thelead in terms of technical understanding of next-generation

ii Source: Flightglobal		

iii Source: Flightglobal; Société Générale		iv Source: Aviation Week
Aviation MROs: delivering long-term value in a transformed aftermarket 3

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nn

Partner with Airlines and Lessors: given the outsourcing
trend, MROs need to find ways to secure a greater
proportion of maintenance activities at the point of aircraft
selection, through new sources of differentiation. For
example, MROs may be willing to assume greater levelsof maintenance risk, or offer more flexible contracts.
Digital innovation, in the form of remote support solutions,
including cloud-based MRO platforms, and other new repair
technologies also have a role to play in re-defining the USP of
MROs and fostering more intimate customer relationships.

3. What capabilities should I invest in?
The introduction of next-generation aircraft is shifting thematerials mix, away from the dominance of metals to a future
where there might be a 50:50 split between metallic andcomposite repairs. In parallel, the expansion of aircraft-toground data flows is creating new possibilities for predictive
maintenance, generating demand for advanced digital
capabilities. MROs therefore need to develop the required
leadership and technical capabilities, and work flow, to satisfy
time, quality and regulatory requirements, and realize thesubstantial opportunities that both advanced materials, anddigital capability present. Bearing in mind that many of thetechniques for composite MRO and predictive maintenanceare still being formed, it is important that MROs avoid a genericapproach, and develop and/or hire technical skills in specific subsegments of the aftermarket.

with aggressive OEM competition, the inevitability of fleet
replacement and radical advances in technology – both in the airand on the ground – MROs that stand still and do not embracepartnering to challenge existing business models, and achieve
the required operational scale, are likely to face a bleak future.
Yet even in such a disrupted environment, possibilities forbusiness transformation exist. For those MRO service providers
that succeed in delivering long-term value to the aftermarket,
this transformation will be based on finding robust responses
to the questions posed, and developing and implementing acompelling ‘future of operations’ vision.

Contacts
Russell Pell

Delphine Knab

UK, Hong Kongpell.russell@adlittle.com

Franceknab.delphine@adlittle.com

Ralf Baron

Klas Anderlind

Central Europe
baron.ralf@adlittle.com

Nordics
anderlind.klas@adlittle.com

Antoine Doyon

Jésus Portal

China
doyon.antoine@adlittle.com

Spainportal.jesus@adlittle.com

Kurt Baes

Saverio Caldani

Belgiumbaes.kurt@adlittle.com

Italycaldani.saverio@adlittle.com

Authors
4. What systems and processes should I invest in?
As next-generation aircraft and engines are increasingly
capable of generating the data required to enable the shift fromreactive to predictive maintenance, enabling MRO systems
and processes also need to evolve. In addition to developing
the required skill sets, MROs will need to be able to effectively
interface with and interrogate these new data flows so that, asin the case of AJW’s Reliability and Maintenance Program,ownership of a proprietary MRO data set becomes a source ofcompetitive advantage. However, making a successful transition
to predictive maintenance is not just a case of investing insystems and processes: it also requires a cross-supply chain
culture shift at the shop floor level, so that all parties understandand buy into the reasons for replacing a consumable part before
the time of failure, as part of a digitally-led prognostics approach.

Conclusion
In a new market reality, characterized by the permanent
presence of the OEMs, rapid technological change and the
evolving maintenance and cost requirements of aircraft
operators, aftermarket consolidation is inevitable.
While strong demand for air travel and step-change reductions
in fuel price may offer some respite for non-affiliated MRO
service providers, such relief will only be temporary. Faced

Andrew Smith, Russell Pell, Delphine Knab, Willem
Romanus

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