MRO consolidation: “if” or “when”?

Points of mass

According to TeamSAI, the air transport MRO expenditure will climb over $60bn per year in 2015. The growing market is being propelled by an ever increasing demand for new aircraft, as the current global fleet of more than 23,000 will reach almost 33,000 by 2024. Furthermore, during and afterwards of the recession, airlines have tightened their belts and initiated several mergers that, as pointed out a representative of Kingman’s Airport Authority, have left just 4 airlines responsible for 85% of US market. The position acquired from the mergers has allowed airlines a very favourable position in negotiation with MROs. Therefore, how is the MRO market reacting to the industry changes?

Scattered support

Undoubtedly, the economic recession and political instability in last decade has caused the MRO industry to experience volatile budget bumps. However, the market is still full of players and new ones are entering the ranks of competition every now and then. PwC indicates that the market fragmentation is especially strong at the moment, with just more than 10 companies each owning over a percent of the market share. Every other player in the market has a small share and takes the competition head on.

From the first look of it, the MRO market is ready to follow the airlines’ footsteps and consolidate in order to rationalize available network and increase pricing power. However, a business consultancy group Visiongain gave an example of resilient players seen in PMA market, saying that “although over the years there were many mergers and acquisitions in the PMA community that formed a few larger companies, but still, the general PMA manufacturer is relatively much smaller compared to an OEM manufacturer.”

Joining forces

MRO’s of developed countries would benefit from economies of scale. In addition, South East Asia, Europe, and South America have rapidly increased demand, says part manufacturer AeroKool, therefore markets leading in the MRO expansion would see a greater synergy between the available products and services. This, in turn, is exactly what the growing airline industry requires.

The complete service package – nose-to-tail center, took a strong ground in the market and is usually preferred over managing several providers. A one-stop shop is being offered both by OEM’s and third-party MRO providers; therefore for many smaller companies joint ventures and mergers are a viable option to achieve the necessary competitive advantage.

The trail of merger

Entering a joint venture, merging and acquiring has obvious benefits. These include control over costs, possibility to combine the capabilities, know-how and expertise of specific technology. It also serves as a bridge to new clients and potentially convenient locations. In other words, it provides horizontal and vertical expansion combined with service area increase. Some of the larget recent mergest included Boeing, Airbus, Lufthansa and other giants. Ironically, although these actions are taken to mitigate risks, the path is not always smooth. In fact, every merger and acquisition will likely have a trail of mismanagement and confusion led issues. The problems may arise from integrational challenges as simple as labor integration and cultural differences, or as complicated as possessed technology and standardisation.

To sum up, the mergers of airlines and the centralization of demand points may leave just a few leverage points for MRO providers to negotiate with. Therefore industry consolidation may likely be more a question of “when” than “if”.