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Airline MRO Providers Under Pressure (Jan. 30)

LONDON --- A struggling airline industry, ongoing pressure on profits and intensifying competition are transforming the EUR 8.5 billion European commercial maintenance, repair and overhaul (MRO) market. The resultant trends toward outsourcing and industry consolidation are expected to force market participants to redefine their competitive strategies.

Several major, low-cost and regional carriers are today outsourcing their maintenance work. As airline maintenance units strive for third-party work due to compulsions of overcapacity, aggressive competition is expected to result for some of the newly generated outsourced businesses. Even as the contest between airline maintenance units and independent MRO companies heats up, the entry of original equipment manufacturers (OEMs) is expected to further aggravate competitive pressures.

“Maintenance providers are being challenged to fulfill flexible short-term contracts and long-term total service packages to grasp the benefit of the general tendency towards outsourcing,” says Frost & Sullivan Aerospace & Defense ( Manager Manuel Magalhaes.

“In particular, MRO providers who are able to provide total service packages or develop the capability to offer such packages should be able to gain maintenance contracts from the booming low-cost carriers sector,” he adds.

Passenger-to-freighter conversion is also poised to drive the European commercial MRO market. Spurred by lower costs of acquisition and conversion, passenger-to-freighter business is set to expand. With profit margins typically higher than in established segments such as airframe maintenance, conversions are set to be an attractive segment.

The shift towards further use of IT-based integrated information, process management and logistics systems is also anticipated to boost the overall capability and general reliability of MRO services. This, together with macro factors such as a strengthening economic environment and the growth of air traffic is expected to positively impact commercial MRO volumes and revenues. By 2012, the overall market is forecast to generate EUR 11.5 billion.

As the market expands, competition among the trio of commercial aviation MRO operators -- airline operators, independent service providers and OEMs -- is set to intensify. Airline maintenance companies currently account for nearly 60 percent of market share, followed by independent maintenance companies and OEMs.

Mergers and consolidations are likely to continue as a result of increasing competition and pressure on profits margins. “MRO business models of diversification include increasing horizontal integration through globalization and greater vertical integration through adding services at all levels of the supply chain,” comments Magalhaes.

While mergers and acquisitions are anticipated to help market participants broaden capabilities and offer a total services solution package, joint ventures are anticipated to provide cost savings and risk sharing in terms of economies of scale, new market shares and regional presence.

“The process of consolidation will continue until a leaner, more efficient MRO operation structure emerges. It is clear that airlines, MRO providers, OEMs and suppliers will cooperate more closely and, over time, OEMs will play a more important role,” remarks Magalhaes.

Resource limitations are expected to restrict the number of companies that can adapt to these changing dynamics. In the meantime, MRO providers must design and implement internal strategies to accommodate external change. High performance in crucial areas such as turn-around time and quality, flexibility and technical capability in offering total service solutions as well as reduced costs to benefit both MRO providers and the airlines will be central to such strategic initiatives.

Frost & Sullivan, an international growth consultancy, has been supporting clients’ expansion for more than four decades. Our market expertise covers a broad spectrum of industries, while our portfolio of advisory competencies includes custom strategic consulting, market intelligence and management training. Our mission is to forge partnerships with our clients’ management teams to deliver market insights and create value and drive growth through innovative approaches. Frost & Sullivan’s network of consultants, industry experts, corporate trainers and support staff spans the globe with offices in every major country.

Outsourcing, Consolidation Trends Compel Commercial Maintenance Providers to Rethink Response