State of Affairs in Helicopter MRO Industry...

The following Article by By Paul Seidenman & David J. Spanovich published recently in Aviation Week, provides a good analysis of Current Status of Helicopter MRO Industry:

The once-high-flying civil helicopter market is having its wings clipped by the global financial crisis, as operators cut back flying hours and more rotor craft hit the resale market. For those who service and repair helicopters, that means having to make some adjustments in their business planning, as demand for MRO declines along with flight hours.

To get an idea of the potential impact of the current global economy on the helicopter MRO industry, it is necessary to look at some numbers. In the summer of 2007, consulting firm AeroStrategy released a global helicopter MRO market study that predicted $5.4 billion in spending for 2008. Hal Chrisman, a principal of the firm, explained that the study looked at airframe work, engine and component overhaul and repair, and modifications, and took into account all civil helicopters, including those specially modified for military or paramilitary use. Excluded were those purpose-built for military roles.

"Prior to the global financial crisis, we projected a 3% increase in the international helicopter MRO market for 2009, putting it at $5.6 billion," said Chrisman. "But given today's economy, we are now estimating anywhere between a 5% and 10% decline in helicopter MRO sales for 2009, compared with our 2008 projections." Driving this trend, said Chrisman, is utilization. "There is no question that, even before the global economic meltdown occurred, high fuel prices began to impact at least some segments of the helicopter operating sector.

"In fact, we talked to some [operators] who told us that helicopter utilization in industries other than EMS (emergency medical services) and oil and gas exploration has dropped as much as 15-20%." Airframe, engine and dynamic component repair, he pointed out, are the segments of the helicopter MRO market that are driven mostly by flight hours, or what Chrisman referred to as "utilization." In fact, dynamic components, those which are directly involved with transferring power from the engine to the rotors, make up the largest segment, 48%, of the helicopter component repair and servicing market, with avionics the next largest segment at 12%. Hydraulics, he said, was in third place at 10%.

Chrisman added that all components make up 40% of the total helicopter MRO business, with airframe, engine and modifications making up 30%, 22% and 8% of the MRO market, respectively.Modifications are not driven by utilization. "Most modifications are discretionary and include green completions, painting, interior work, and avionics upgrades, which in some cases can be regulatory driven," he said. "A big piece of the modification market is involved with completions." Danny Maldonado, SVP, customer support services for Ft. Worth-based Bell Helicopter Textron, reported that helicopter utilization began to decline in the fourth quarter of 2008. He predicted that this could lead to "what will likely be a slight decline in demand for maintenance services" in 2009.

"Many helicopter operations run by municipal governments are facing budget cuts, and with much lower energy prices, many oil and gas producers believe that initiating new exploration projects is not worth it now," said Maldonado. "Very possibly, EMS will also be impacted, especially if some operators are more community, as opposed to insurance-funded."

Although cutbacks in mining and energy exploration will curtail some helicopter operations, John MacDougall, president of Vancouver-based Vector Aerospace Helicopter Services, a major North American helicopter MRO firm, believes that there are a few bright spots.

"There will be some reductions in utility flying, especially in the forestry and mining sectors, but we believe that paramilitary operations, such as border patrol and law enforcement, will remain strong," he said. "We also see continued strength with EMS and electronic news gathering."

For many operators, the near-term trend may involve a shift from new aircraft acquisitions to continued usage of older models, according to MacDougall. "A lot of operators are postponing plans to acquire new aircraft due to the non-availability of credit, in some cases, as well as their own uncertainty about future work," he said. "Commercial firms and some military agencies, as examples, will hold onto and modernize their existing fleets, with upgrades such as modern glass cockpits."

An increase in the demand for system upgrades of older helicopters has, in fact, been noted by Tina Cannon, general manager of Phoenix Heliparts at Falcon Field in Mesa, Ariz. "We are taking advantage of our focus on the MD helicopter family, which is once again emerging as a major force in the market," said Cannon. "That will strengthen our position as an MRO company, because more MD helicopter operators are choosing to refurbish and upgrade their aircraft, as opposed to buying something new. For example, a number of MD 500-E operators have chosen to re-engine their aircraft with the Rolls-Royce 250-C20R, which has better high altitude performance than the original Rolls-Royce 250-C20B engine. "Phoenix Heliparts, said Cannon, currently is doing about 80% of its MRO work for international civil and military operators. So far, she said, business has been steady.

"We did not witness a slowdown in our MRO business in 2008, due to the fact that many of our international customers are military operators," she said. "Also, a lot of our civil operators outside the U.S., especially those based in Europe, are sending airframe maintenance to us in order to take advantage of the favorable exchange rate on the U.S. dollar versus the euro."

Basically, the company's international business has offset the softer domestic helicopter MRO market. But while Phoenix Heliparts may have seen growth last year, there was about a 10% drop in the volume of worldwide helicopter MRO activity, specifically engine removal and repair, from 2007, according to Clarke Mouncher, the global Rolls-Royce 250 program director for BBA Aviation Engine Repair and Overhaul in Portsmouth, U.K. This, he said, is directly related to the downturn in helicopter utilization.

"Declining utilization has been the most pronounced among corporate operators, and others whose helicopter use is discretionary, especially when some other form of transportation is available," Mouncher said. "Into 2009, we will probably see the same level of flight activity that we saw in 2008, but it will involve missions other than discretionary flying, such as oil and gas support, and EMS. Those missions will stay pretty constant, since there will still be a need for emergency medical flights and a requirement to move people on and off oil and gas drilling rigs."

The result of the cutbacks, explained Mouncher, is that in some cases, helicopters are being parked at the end of their engine overhaul intervals.

However, he added, there are still opportunities to provide "part-life"modules and engine exchanges, even as full overhauls drop off. "Operators are saving money by exchanging engine components that have come to the end of their overhaul cycle, or complete engines that have not been fully overhauled, but are still serviceable," he said. "In fact, we have seen a significant increase in demand for part-life engines and components, especially in Europe, the Middle East and Africa. On the Rolls-Royce 250, this is very practical, because the engines are highly modular." In tandem with this, Mouncher said some operators are holding back on repairs of spare parts as a cost-savings measure.

"Before, they would have removed the components [from] the aircraft that needed repair and sent them, immediately, into an MRO shop. Now, they are holding the inventory rather than having it repaired immediately. That trend is not only a result of the global economy, but the exchange rate on the U.S. dollar, which is not as favorable as it was early last year against the euro and British pound. In the world helicopter MRO industry, repair services are normally priced in U.S. dollars, and with the strengthening dollar, some repairs are as much as 25% more costly on the same components than they would have been a year ago."

Doug Kult, director of helicopter sales for engine and avionics OEM Honeywell, noted that today, helicopter operators are trying to defer maintenance events as long as possible, because it is one of the ways they can save cash. MRO companies, he explained, are trying to help by looking for ways to extend component maintenance cycle times. For example, Kult said that due to customer requests, the hot section inspection interval for the Honeywell LTS101 engine, which powers the Bell 222, and Eurocopter BK117 and AS350 models, will be increased to 2,400 hours, from the current 1,800 hours.

"We have actually gotten more requests for a program of this kind as the economy has deteriorated. While the maintenance for this engine is already on-condition, we will be helping the operators that much more by increasing the hot section interval times." That inspection interval, explained Kult, is expected to be approved by FAA in the fourth quarter of 2009. The agency already has signed off on the testing plan for the extension, which Honeywell expects to initiate during the first quarter of this year.

As cash-strapped operators seek further ways to save on repairs, one question that arises is this: Are more of them at least looking again at PMA? The short answer is that the jury is still out. "There is definitely more of a demand for PMA parts in the U.S. than there has been in Europe," said BBA Aviation's Mouncher. "At least with the Rolls-Royce 250 engine family, that has remained pretty consistent, and I do not see a change in that, at least for awhile."

Interestingly enough, that observation was borne out by Phoenix Heliparts' Cannon, whose company does a lot of international work. "Particularly on the Rolls-Royce 250 engines, I am getting more requests for quotes from customers to include PMA," she said.

Bell Helicopter Textron's Maldonado said that there always will be an interest in PMA, although he is not seeing any great increase in demand. "If operators' budgets start getting cut, more of them will look at PMA for non-flight critical parts. But, right now, we are not seeing a strong interest in the demand for PMA, since many operators will want to stay with OEM parts, at least during the warranty periods."

Still, he pointed out one helicopter MRO trend is toward more turnkey, fixed price maintenance plans. "Given today's economy, more people are turning to MRO vendors to provide turnkey maintenance solutions at a predictable [fixed] cost," he said. "That not only helps those who have to stay within annual budget constraints, such as a local government funded operations, but also operators bidding contracts to energy and mining companies."

Maldonado also predicted that more operators will focus on keeping their current fleets flying, rather than looking at replacements. "At least for now, more operators will conclude that it's cheaper to keep their older aircraft in service and maintain them, than to go out and buy something new."

Closely related to that is a growing potential MRO market for the large inventory of helicopters currently on the used market. "If you look back to 2007, anybody looking for a used helicopter found that the market for anything decent was tight. Frankly, you couldn't find one," said AeroStrategy's Chrisman. "But now, our sources have told us that of the 22,000 civil helicopters in service worldwide, nearly 50-100 aircraft per week are going onto the resale market."

According to Mark Clancy, president of Minneapolis-based HelicopterBuyer, a dealer and broker in turbine powered helicopters, as of mid-December 2008, there were some 650-670 turbine powered helicopters for sale on the global used market. "If you include those units available for sale, but not being actively marketed, that increases by another 25-33%, giving you a total of nearly 900," he explained. "That number is approximately 80% greater than it was at the start of the 2008, and represents a 134% increase in the number of used helicopters being marketed between December 2005 and December 2008. In fact, over the past six months [June-December 2008], we have seen more resale helicopters on the market than was the case over the past two years."

Clancy attributes the rise in used aircraft numbers partially to the banking and financial services crisis and the uncertainty in the markets, which unfolded last year. "People were still able to get financing for new helicopters, but for the most part, the banks were no longer willing to finance a used aircraft purchase," he said. "The first signs of problems really began with the corporate market, where there was a buildup in the number of pre-owned Sikorsky S-76s available last spring and early summer.

It's a very popular corporate model that tends to be used by large corporate owners. Other sectors started slowing as fuel prices soared last summer, which started to affect demand. Since then, there has been an overall increase in used helicopters for sale across the sector board."

The helicopter MRO companies, he said, will stand to benefit if efforts being made to shore up the financial sector once again make money available for the purchase of used helicopters. "We believe that by the spring, and into the summer, there will be some increase in the purchase of used helicopters, as operator contracts are issued or renewed and more sources of funding become available," said Clancy.

He also noted that for the time being, the MRO industry still has about a three to six month backlog of work on new helicopters as buyers send in "green" aircraft for initial completion work. "And, as funding for used aircraft becomes more available, people will find that they can get some very good helicopter deals, and will look to the MRO shops to do the repair, refurbishment and reconfiguration work."

Along this line, he predicted that there will be "significant growth" in leasing of both new and pre-owned helicopters. "There will probably be more leasing over the next 12-18 months than there has been over the past 18 months, as some buyers will prefer to lease rather than to own additional assets. As the helicopters move from one lessee to another over the next few years, the leasing companies will have to update and possibly reconfigure the helicopters for their next customer mission profile, and that translates into repairs, refurbishments, and component and engine work."

At the same time, as more people consider buying used aircraft, the MRO shops will sense opportunities to market their services, as Clancy pointed out. "At the height of the market, the lead times for new helicopters out of the factory was anywhere between two and five years. When you start seeing new model lead times drop to less than 12 months, it will eventually translate into a slowing down of new completion work at MRO shops that specialize in those specific new model completions," he said. "Those shops likely will more aggressively promote themselves to the owners of used equipment, over a wider array of makes and models, for refurbishments and upgrades."

MRO Business Priorities

MRO providers shift their priorities
DATE:28/10/08
SOURCE:Airline Business
By Niall O'Keeffe

Margins are tightening in airframe maintenance. The consequence is a clear trend among major maintenance, repair and overhaul providers to prioritise the more lucrative areas of component and engine maintenance. However, the labour-intensive spanner work cannot simply be abandoned. "We are not excluding anything because our customer cannot exclude some of the services," says August Henningsen, chief executive of Lufthansa Technik, which draws 60% of its maintenance volume from third-party customers. "He simply has to have a partner which is able and in a position to competitively service the whole range of services needed to safeguard his operation."

Lufthansa Technik's solution has been to push airframe work from its Hamburg base to lower-cost centres in Hungary, Malta, Bulgaria and the Philippines, as part of its "global network" strategy. A similar evolution has occurred at Europe's other colossal airline-affiliated MRO provider, Air France Industries, which merged with KLM Engineering & Maintenance in 2004, and which today draws 35% of its volume from third parties.

"There has been a shift from part of the services we used to provide the market with to other, more profitable services in Europe," says Air France Industries executive vice-president business development Bruno Delile. "And at the same time we entered into some partnerships to find solutions for heavy airframe maintenance. In components, we grow our business 15% every year. This impact is somehow hidden by what we do on the airframe side."

Airframe maintenance appears to be losing its allure not just in Europe, but in the US: Delta Air Lines' maintenance unit Delta TechOps has entirely sub-contracted its heavy maintenance, with Aveos (formerly Air Canada Technical Services) among the beneficiaries. However, some operations in South America and Asia are looking to scale up their airframe capabilities. In 2007, ST Aerospace sought to capitalise on China's low labour rates when it launched Shanghai Technologies Aerospace Company (STARCO) as a joint venture with China Eastern Airlines, investing $38 million in a new hangar at Pudong Airport. Scheduled to open in mid-2009, the hangar will be capable of simultaneously accommodating three narrowbodies and two widebodies (including the Airbus A380). It will bring ST Aerospace's total hangar capacity to 45 narrowbody and 27 widebody slots.

Meanwhile, VEM, the Brazilian MRO ¬provider that emerged from the bankruptcy of Varig, plans to open a new hangar capable of accommodating six widebodies in Rio de Janeiro in 2010. Portuguese airline TAP acquired a controlling interest in VEM in 2005, and uses its facilities to achieve airframe volume growth that is impossible at its capacity-constrained Lisbon facility, at a lower labour cost.

"Our main interest is full-maintenance contracts," says Jorge Sobral, TAP's director of maintenance, who oversees a business that draws 50% of its volume from third parties. "We do need the airframe business because it's very interesting from the point of view of a package. But if you take it in segments, the airframe business is not that interesting...We count on VEM to do some airframe work - there is the same margin for it there."

Characterising Latin American airlines as particularly price sensitive, VEM vice-president of sales and marketing Nestor Koch puts a figure on his target margin: "When we reach 10% we are really happy."

Amid the boom in aircraft orders from its petrodollar-rich, state-owned airlines, the Middle East has been mooted as a major maintenance hub of the future, partly due to the grand plans of Dubai Aerospace Enterprise (DAE), a bold, $15 billion attempt to build an aerospace giant from scratch.

LOSING DIRECTION

DAE served notice of its MRO ambitions with the acquisition of US providers Standard Aero and Landmark Aviation. However, one industry commentator expresses concern that the organisation has lately appeared "rudderless" after the exit of senior executives and the abandonment of plans to establish a DAE University. One MRO chief executive even suggests that "the whole thing is unwinding".

Yet DAE was one of the three members of a consortium that acquired MRO giant SR Technics for $1.35 billion in 2006, the others being state-owned Dubai investment house Istithmar and Abu Dhabi equivalent Mubadala, which also owns Abu Dhabi Aircraft Technologies (ADAT), formerly GAMCO. The Mubadala link perhaps raises the prospect of an ADAT/SR Technics merger.

A familiar theme emerges when ADAT chief executive John Byers explains the ¬strategy the company has pursued since its rebranding in May 2007. "We're trying to refocus the company on being much more of a total-care provider," he says. "Previously the company has been very airframe-maintenance-centric so we're trying to move the model to being much more across the value chain of MRO - engineering support, fleet management, configuration control."
Local competition is intensifying, says Byers, noting that JoRAMCo is firmly established, and that ST Aerospace, Lufthansa Technik and Air France-KLM have been eyeing opportunities in the region. "Bees are attracted to a honeypot, aren't they?"

Still, ADAT has capacity available for local work. "At the moment we're probably doing 1.8-1.9 million man-hours of airframe a year and probably only 40-45% of it is for local consumption. The rest of it we import from western and eastern Europe. There's an awful lot of capacity available here for the region."

ADAT has, however, exercised caution in scaling up capacity to meet forecast demand. Says Byers: "We're looking at reasonably proven demand in our capacity, like this new hangar we're putting in. We don't have any problems in filling that - we know just from demand that we're turning away from this point in time."

A Middle Eastern location carries the benefits of high availability of skilled labour and lack of exposure to the weak dollar, since the UAE dirham is pegged to the US dollar (a benefit until the dollar starts to rise in value, at least). The region's labour rate, meanwhile, reflects its geography: it's roughly halfway between those of Europe and Asia. "We are certainly not as cheap as China," says Byers.

However, western maintenance providers have struggled to gain access to China. "It is a very special market, so for a while we did try it, but then we just gave up," recalls TAP's Sobral. "I'm not saying it's not an interesting market, but it requires lots of patience and lots of money."
David Stewart, a principal at aerospace consultancy AeroStrategy, suggests that China will be "an MRO hub for itself, especially in the short- to medium-term", while Korea and Japan could become centres of excellence for some component and engine work. Airframe maintenance centres might emerge in Latin America and North Africa. "The big question is whether big European carriers will send heavy checks to Asia-Pacific because it hasn't been a very prevalent practice," says Stewart. "It's relatively well-established practice in the US to outsource but the Europeans haven't really got the bug."

FUEL PRICE EFFECT

One theory is that high fuel prices have made airlines reluctant to countenance long ferry flights. However, Delta TechOps chief executive Tony Charaf has no truck with this theory. "I have never witnessed someone saying, 'Well, I'm not going to send it to you because you are far away.' Maybe this used to be said 20 years ago but it's not any more."

In Europe, 47% of airframe maintenance is outsourced, with 76% of that staying in the region and 12% Asia-bound, according to TeamSAI figures published in April. In North America, outsourced airframe work makes up 64% of the total, and 26% of it goes to Asia. Asia outsources 56% of its airframe work, and 93% stays in the region.

Meanwhile, in engine maintenance, North America outsources 77% of work, Europe 71% and Asia 73%. While North America and Europe keep large majorities of outsourced work within their respective regions - 75% and 71% respectively - Asia sends a total of 45% to Europe and 28% to North America.

Globally, 53% of heavy maintenance work is outsourced, compared with 75% of engine maintenance, 77% of component maintenance and 16% of line maintenance.
As to the likely future structure of the ¬maintenance, repair and overhaul industry, Stewart's expectation is that it will ¬consolidate around four or five "global integrators", perhaps comprising Lufthansa Technik, Air France-KLM, ST Aerospace and SR Technics/ADAT. "They will invest to get a global footprint," he predicts. "Over the next 18 months, two years, you might see some reasonably priced acquisitions available, so more changes in ownership are likely."

Delile of Air France Industries likewise sees room for consolidation in the market. "Most of the players have less than 10%," he says. "Even the biggest have less than 10% market share, so there's still room for consolidation in this market." He adds that the need for scale in MRO is such that partnerships between maintenance providers, such as Air France Industries' component partnership with Lufthansa Technik, are starting to become more common.
There's a broad consensus, however, that there will remain room for niche, independent players. But, in the absence of economies of scale, only dedicated, high-margin services would be viable for such players.

AeroStrategy has suggested the intriguing possibility that Boeing and Airbus may look to sell integrated MRO contracts to airlines placing orders for their next-generation single-aisle aircraft. Such contracts might include airframe/component maintenance, rotable logistics and fleet management.

Naturally, many in the market would not welcome such a move. Sobral equates it to competing with one's customers. "There was a serious problem, years ago, when the engine OEMs [original equipment manufacturers entered the MRO business," he recalls. "I think everybody considers that to be a bad experience. So I think it is not going to be repeated." Sobral hails the Airbus MRO Network established by the airframer as "a good approach" to aftermarket involvement.
Meanwhile, Boeing's 787-focused lifecycle management programme appears to be ¬struggling to find favour with customers, and a strategic rethink would seem likely.

STRONG INDEPENDENTS

Shifting focus to the engine maintenance sphere, independents such as MTU, Standard Aero and ST Aerospace are likely to remain "fairly strong", Stewart reckons, but the row over installing non-OEM (or third party spares manufactured) parts in engines will eventually come to a head. "The independents basically have to decide whether they're with the OEM or against the OEM."

In addition to varying by region, airlines' propensity to outsource naturally varies by fleet type. "Obviously the biggest segment of the market in terms of outsourcing of maintenance is the low-cost carriers," notes Tay Khiang Kok, president of ST Aerospace. "So on the narrowbody aircraft you find that the tendency is to outsource. And outsource providers like ourselves are able to offer total solutions, so they don't need to have a big management structure to manage that. For the larger new platforms, while historically most airlines tend to do work in-house on platforms such as the A330, A340, 777, etc, in the last five years I think that there is a trend for ¬airlines to consider outsourcing, the latest being Singapore Airlines' acquisition of 19 A330s from Airbus. Although they have significant in-house MRO capabilities, they have decided to outsource everything on that platform, and the outsourcing is done through Airbus. We are fortunate to be one of the beneficiaries of that, but you see that many other airlines around the world continue to go in that direction."

As aircraft reliability and economics improve, the rationale to invest in in-house capability is reduced. "A third-party provider such as ourselves can make the same ¬investment but support a much larger fleet from a mix of clients," argues Tay. "In that context, the cost ratio makes it uneconomic for people to try to do it themselves even if they want to." By the same logic, the efficiency of the newest airframes has created overcapacity in the mature markets - Europe and the US - with fuel price volatility speeding the process of fleet renewal.

Meanwhile, a new generation of airlines is emerging to which maintenance is decidedly non-core. "The trend is not that people who used to do their maintenance are now outsourcing," argues Sobral. "The real trend is that you are seeing a lot more small airlines popping up and, for them, it doesn't make sense from an economical point of view to do maintenance."

In Delile's experience many airlines still choose to outsource some types of maintenance on an ad hoc basis, rather than sign up to all-encompassing by-the-hour deals in which risk is neutralised under a fixed-price arrangement. "Most of the newcomers are looking for integrated solutions, but at the same time, they still split along the segments," he says.

"They look for by-the-hour agreements for component support but not as much for engines. Being very limited in cash they postpone some cost exposure later in the operations, so they take the risk and go for engine support on a case-by-case, engine-by-engine basis. Total support, or at least support that relies on different segments such as components, engines and airframe maintenance, happen from time to time but are not so common in the end."

MRO IN A RECECSSION

Opinion is divided on how severe will be the impact of the recession on the maintenance, repair and overhaul business. The optimists note that maintenance cannot be deferred for ever, or opine, very optimistically, that the MRO business has been decoupled from the airline industry.
Pessimists point to an oil price that remains punishingly high despite recent drops, and suggest that, combined with the spiralling financial crisis, this could bring airline bankruptcies and mass retirement of aircraft in 2009. Air France Industries executive vice-president business development Bruno Delile raises questions about "the profitability of some 10- to 15-year contracts that were signed in the past years, with optimistic assumptions", though he excludes his own company from such worries.

As ever, hard times will create opportunities for some. Delta TechOps, for example, sees potential for increased lessor business. "The market is shifting a little bit because on one had we can see that reduction in capacity is impacting our by-the-hour [engine maintenance] agreements," notes chief executive Tony Charaf. "On the other hand we see some improvements and growth with the lessors. We're doing quite a bit of work for ILFC, which is repackaging some of its airplanes and engines."

Delta TechOps has won both engine and airframe maintenance contracts from the AIG-owned lessor, and is now seeking to market nose-to-tail, "fleet-complete" maintenance services to the wider lessor community. "That is a very attractive value proposition for the lessors," insists Charaf, adding: "Lessor business can be tremendously complementary when we need it the most."