MRO - Whitepaper

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Transcript of MRO - Whitepaper

White paper on MRO opportunities

Dated : 19 November 2011 Author: Ramesh Nathan

What is MRO ?MRO is a term used in the Aircraft Industry and it stands for Maintenance, Repair and Overhaul of aircrafts. MROs can be broadly split into four parts. They are Line Maintenance, Engine Overhaul, Airfare and Component Repair. Currently the MRO market is dominated by OEMs (Original Equipment Manufacturers) like EADS, Boeing, Honeywell and Engine manufacturers like Pratt & Whitney, GE, Rolls Royse, Major Airlines and third party operators. Driving maintenance costs down, faster turnaround, increasing aircraft unitization, at the same time increasing reliability and operational integrity, constitute core of MRO business from airline point of view. MRO expenses @ 10% of total costs are the second highest cost item for airlines after fuel. Generally speaking, there are two types of maintenance in use for MRO: 1. Preventive maintenance, where equipment is maintained before break down occurs. This type of maintenance has many different variations and is subject of various researches to determine best and most efficient way to maintain equipment. Recent studies have shown that Preventive maintenance is effective in preventing age related failures of the equipment. For random failure patterns which amount to 80% of the failure patterns, condition monitoring proves to be effective. 2. Corrective maintenance, where equipment is maintained after break down. This maintenance is often most expensive because worn equipment can damage other parts and cause multiple damage. Necessity of MRO in the Airline Industry Airlines are required to spend 10 man hours for ground maintenance of an Aircraft for each flying hour. The time frame for maintenance procedure is based on combination of the numbers of hours the aircraft flies, the number of take off and landings (refered to as cycles), plus the age of the aircraft. With such labour intensive nature of MRO, it is not surprising that most of the leading MRO companies, aircraft engine OEMs as well as almost half of the US airlines has outsourced heavy maintenance work. Yet, many airlines continue to subsidize their in house MRO operations, in the name of safety.

Categories of Maintenance Checks Aircraft maintenance checks are periodic checks that have to be done on all aircraft after a certain amount of time or usage. Under FAA oversight, each operator prepares a Continuous Airworthiness Maintenance Program (CAMP) under its Operations Specifications or "OpSpecs". The CAMP includes both routine and detailed inspections. Airlines and airworthiness authorities casually refer to the detailed inspections as "checks", commonly one of the following: A check, B check, C check, or D check. A and B checks are lighter checks, while C and D are considered heavier checks.

PS Daily Check Every aircraft is checked every day in its Periodic Service (PS) check. The aircraft is visually inspected and its maintenance log book is checked for entries and maintenance needs. PS check averages approximately two man hours.

A Check This is performed approximately every 500 - 800 flight hours. It is usually done overnight at an airport gate. The actual occurrence of this check varies by aircraft type, the cycle count (takeoff and landing is considered an aircraft "cycle"), or the number of hours flown since the last check. The occurrence can be delayed by the airline if certain predetermined conditions are met.

B Check This is performed approximately every 3-6 months. It is usually done in 1-3 days at an airport hangar. A similar occurrence schedule applies to the B check as to the A check. B checks may be incorporated into successive A checks, ie: A-1 through A-10 complete all the B check items.

C Check This is performed approximately every 1521 months or a specific amount of actual Flight Hours (FH) as defined by the manufacturer. This maintenance check is more extensive than a B Check, as pretty much the whole aircraft is inspected. This check puts the aircraft out of service and until it is completed, the aircraft must not leave the maintenance site. It also requires more space than A and B Checks - usually a hangar at a maintenance base. The time needed to complete such a check is generally 1-2 weeks. The schedule of occurrence has many factors and components as has been described, and thus varies by aircraft category and type.

D Check This is - by far - the most comprehensive and demanding check for an airplane. It is also known as a Heavy Maintenance Visit (HMV). This check occurs approximately every 56 years. It is a check that, more or less, takes the entire airplane apart for inspection and overhaul. Such a check can generally take from 3 weeks to 2 months, depending on the aircraft and number of technicians involved (it is not uncommon to have as many as 100 technicians working on a Boeing 747 at the same time). It also requires the most space of all maintenance checks, and as such must be performed at a suitable maintenance base. Because of the nature and the cost of such a check, most airlines - especially those with a large fleet - have to plan D Checks for their aircraft years in advance. Often, older aircraft being phased out of a particular airline's fleet are stored or scrapped upon reaching their next D Check, due to the high costs involved in it in comparison to the aircraft's value. Many Maintenance, Repair and Overhaul (MRO) shops state that it is virtually impossible to perform a D Check profitably at a shop located within the United States. As such, only few of these shops offer D checks.

Key Segments of MRO The key segments of maintenance, repair and overhaul (MRO) activity are as follows:

Line Maintenance Airframe Heavy Maintenance Engine Overhaul Components Overhaul Modifications

These four groupings vary enough to be viewed as fundamentally different businesses. They each require a different set of skills and services, and few independent maintenance companies specialize in all. Line Maintenance: This is the activity associated with routine turning round and servicing aircraft up to and including A Checks. Most of the cost of routine line maintenance is labour costs. Typically it now accounts for about 85% of the total costs. Engine Overhaul: This is essentially a material intensive process with labour only accounting for 15-20% of total cost. The OEMs control about 45% of the work with the airlines doing around 35% in-house. This then leaves the remainder (20%) split fairly evenly between airline third party contracts and independent sources.

Components: The largest share of this activity is carried out by the original equipment manufacturer (OEM). They have an advantage with technical knowledge of new products. Techniques and tools developed for the manufacturing process can readily be adapted for maintenance tasks. In addition, it is becoming increasingly beneficial for an airline operator to leave all the work to the OEM, who has the advantage of much larger scale of activity. Contracting-out this work to OEMs also saves the costs associated with procuring spare parts and tooling for a smaller number of items by the airline. Additionally, for reasons of simplicity there is tendency to transfer the ownership of inventory to the OEM or other repair agency and base charges on a per flight hour basis.

Airframe Heavy Maintenance: In airframe heavy maintenance, approximately 85% of the total cost is for labour with only a small element for materials. Table below shows an example of the maintenance requirements of the B737 new generation and of the predecessor classic type.

Share of each segment in MRO In terms of the different kinds of MRO activities, engine overhaul is the largest segment of MRO spends and generates around a third of all demand. Line maintenance and component O&M are the next largest segments.

Source: Boeing Inc The industry used to earlier operate as a captive maintenance provider earlier. However it is now gradually moving towards a total solution provider that includes a variety of maintenance and repair services. In fact airlines have started showing a preference for comprehensive solutions that include scheduled heavy maintenance and engine checks over a fixed number of years, ranging between 2 and 10 years.

CRISIL analysis

Size of the MRO market The following chart demonstrates that nearly $100 billion is spent annually on aircraft MRO. This is more than the value of new aircraft production that is estimated at about $75 billion.

It should be noted that it is not practical to mix military and civil aircraft maintenance and repair activities as the methods, constraints and priorities are very different. MRO suppliers that are involved in both sectors tend to keep military and civilian activity in separate lines or even as separate business units. The air transport portion of the MRO business is estimated to be worth over $40 billion worldwide, of which 50% is outsourced to third party suppliers.

Engine MRO is going to witness the highest rate of growth. The MRO Revenue is expected to reach $ 63 Billion by 2019 and $ 88 Billion by 2029.

The rate of growth of individual activities are expected to be as follows: 2009 - 2019 Modifications Components Engines Line Maintenance Airframe 4.4 % 5.2 % 5.3 % 3.5 % 2.7 % 2009 2029 3.6 % 4.4 % 4.6 % 3.1 % 2.3 %

Types of MRO Supplier There are three types of supplier Third party contractors, either specialist MRO providers or airlines supplying on a third party basis. Original Equipment Manufacturer (OEM) In house by the airline operator itself

The split between these categories varies according to the element of MRO activity. The chart below shows the Global MRO segment by Supplier Type.

Third party Suppliers Manufacturers OEM