Toward a leaner, more agile MRO industry

Derek Costanza, PartnerBrian Prentice, Partner

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INTRODUCTION

In its second decade, the annual Oliver Wyman MRO survey is an industry standard that samples the attitudes and strategies of executives from across the aviation industry as they address key trends and emerging issues in the maintenance, repair, and overhaul (MRO) sector. Last year, we were about to release the 2020 MRO Survey, when it became clear that COVID-19 would render it immaterial. In this year’s survey, we focus on the long-term challenges that the pandemic has created, together with ongoing industry challenges. As in past years, we have leveraged the latest Oliver Wyman Global Fleet and MRO Forecast to provide additional color.

More than 160 global aviation professionals responded to this year’s survey, drawn from a cross section of airline operators, airline and independent MROs, original equipment manufacturers (OEMs), and others. Approximately half of respondents were senior executives (C-suite, vice presidents, or above) and nearly 70 percent were director level or above. And this year’s survey was truly global, with over half of respondents’ companies headquartered outside of North America.

Exhibit 1: Global MRO spending forecast through 2030US$ billions

9196 97 100 103

108115 120 124 127 130

115112112110108 10810410291

68

83

2019Actual

50

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Post-COVID-19 2021 forecast Pre-COVID-19 forecast

Source: Oliver Wyman analysis

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THE BLACK SWANCOVID-19 was a black-swan event for the MRO industry. Our revised forecast anticipated MRO spend dropping by 39 percent in 2020, and survey findings were in line with our projections (Exhibit 1). Respondents reported a decline in revenues of 35 percent on average; 27 percent cited revenue declines of more than 50 percent.

The impacts of the crisis remain severe but recovery does now appear to be underway. Two-thirds of respondents expect MRO demand to recover to 2019 levels in 2022 or 2023, in line with Oliver Wyman’s forecast of recovery to pre-pandemic levels in 2022. Notably, airline respondents generally expect a slightly earlier recovery than MRO respondents (Exhibit 2). Regionally, Western European survey respondents were more pessimistic than respondents in North America and other parts of the world on how long recovery will take.

Exhibit 2: “When do you believe that overall MRO demand will return to 2019 levels?”Percent of survey respondents by region

2021 2022 2023 2024 2025 or later

0

10

20

30

40

50

North America Western Europe Rest of World

Apr

Note: Does not include “don’t know”: 9 percent for North America and 3 percent for rest of world Source: Oliver Wyman 2021 MRO Survey

TOP DISRUPTORS

As always, we asked respondents about the top disruptors for the industry over the next five years. Changes to fleet plans and strategies surged to the top of the list, outpacing even concerns about the supply/demand impacts of COVID-19 — but of course these are correlated. The impacts of early retirements, prolonged depression of international/

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widebody flying, and strategic shifts in business models (such as from full service to lower cost) are clearly top of mind for the industry.

Despite making up only 20 percent of the fleet, widebody aircraft made up 35 percent of retirements in 2020. Recovery of widebody flying is expected to take longer and will grow more slowly than narrowbody flying into the future. These shifts will have profound impacts on the MRO industry.

Other top disruptors naturally stem from uncertainty in the market. We note what appears to be a shift toward “back to basics”: more concern about labor/material cost management and less with regard to game-changing technologies (Exhibit 3). The focus for the next five years is more likely to be building back and creating lean, adaptable businesses, rather than on emerging disruptors.

Lurking just below the surface are perennial industry concerns, such as the competitive positioning of OEMs versus MROs in the aftermarket and labor availability. These are all issues that will impact recovery as companies seek to both build back and manage costs.

Exhibit 3: Top disruptors: ranking of importance, 2017-2021As ranked by survey respondents

Changes to fleet plans/strategies

2017Rank 2018 2019 2021

Growth in OEM aftermarket presence

Maintenance tech labor shortage

Game-changing technology advancements

Labor/material cost management

Aftermarket industry consolidation

Business impact/capital access dueto oil prices/interest rates

Lessors becoming more activein MRO selection

1

2

3

4

5

6

7

8

Reduced supply/demand dueto COVID-19 impacts

9N/AN/A N/A

Note: No ranking available for 2020 Source: Oliver Wyman 2021 MRO Survey

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RESPONDING TO COVID-19

The MRO industry responded in remarkable fashion to COVID-19, using nearly every lever at its disposal. Out of 12 distinct levers we asked about in the survey, ten were used in some way by more than half of respondents. As expected, operational efficiency measures were used by nearly all respondents, with over half indicating they used them significantly.

Airlines made liberal use of parking/cannibalizing aircraft and renegotiating existing vendor supplier agreements (Exhibit 4). Interestingly, only two-thirds of airline respondents said they reduced headcount, likely owing to government support. MROs, on the other hand, with direct labor as a larger portion of their cost base and less government support, had to reduce headcount more.

Exhibit 4: “Airlines — what measures has your company taken to respond to the COVID-19-related economic downturn?”Percent of airline survey respondents, selecting all that apply

Introduced operational efficiencymeasures

Renegotiated existingvendor/supplier agreements

Reduced, postponed, or cancelledplanned expansions/innovations/capex

Parked/cannibalized older aircraft

Reduced headcount

Cancelled/deferred aircraft upgrades

Deferred non-essential maintenance

Reduced/held back compensation

Increased swapping of green-timeengines

Decreased inventories

More aggressive outsourcing

Increased alternate parts repairs

0% 25% 50% 75% 100%

Have not usedUsed moderatelyUsed significantly

Source: Oliver Wyman 2021 MRO Survey

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For airlines, levers that could have generated or preserved cash in the short term, like swapping green-time engines and decreasing inventories, were not used as intensively as we would have expected. While the shock to the market created a glut of serviceable engines and used serviceable materials, the severe and abrupt drop in flying drastically limited demand. As the market recovers, we fully expect excess engine time and materials to be consumed.

On the MRO side, few businesses have attempted to pursue other revenue streams during 2020, such as military MRO and other adjacent markets (Exhibit 5). Longer term, as MROs emerge from the crisis and plan for the future, we expect proactive MROs to diversify more, so as to reduce the impact of future shocks to their core commercial airline business.

Exhibit 5: “MROs — what measures has your company taken to respond to the COVID-19-related economic downturn?”Percent of MRO survey respondents, selecting all that apply

Reduced client service levels

Expanded into adjacent spaces outsideof traditional aerospace MRO

Pursued more military MRO

Reduced/held back compensation

Renegotiated existing vendor supplieragreements

Decreased inventories

Reduced headcount

Introduced operational efficiencymeasures

Reduced, postponed, or cancelledplanned expansions/innovations/capex

0% 20% 40% 60% 80% 100%

Have not usedUsed moderatelyUsed significantly

Source: Oliver Wyman 2021 MRO Survey

TECHNOLOGY INVESTMENTS

Overall, most respondents indicated that they had cut back on planned expansions, innovations, and capital expenditures. Traditionally, capex reductions are achieved through cuts to large information technology (IT) efforts. But when asked specifically about COVID-19’s impact on planned software and hardware investment in 2021, many in fact said that they were increasing investment, particularly in remote work tools and mobile handheld computing.

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Exhibit 6: “Has COVID-19 changed your company’s level of monetary investment in the following software technology solutions planned for 2021?”Percent of survey respondents, selecting all that apply

Remote collaboration tools

Remote technical training

Production control

Predictive maintenanceapplications

Supply chain

Support functions

Engineering

Planning

Line production

Finance

Tool control

Staff management

None planned + DecreasingNew Initiative + Increasing

1072

1751

1645

2344

1542

1740

1939

2033

2729

2626

2424

2624

Source: Oliver Wyman 2021 MRO Survey

The industry seems to be realizing the critical importance of software systems to its operations, as shown in Exhibit 6. The market continues to be uncertain regarding predictive maintenance, with 44 percent indicating increasing or new investment but nearly 25 percent indicating decreasing or no planned investment. On the hardware side, disruptive emerging technologies appear to be more likely to be put on the back burner, for now, while the industry retrenches (Exhibit 7).

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Exhibit 7: “Has COVID-19 changed your company’s level of monetary investment in the following hardware technology solutions planned for 2021?”Percent of survey respondents, selecting all that apply

Mobile handheld computing

New repair technology

Virtual/augmented reality and wearables

Artificial intelligence

Robotic technologies

Composite repair capabilities

Additive manufacturing

Drone-supported maintenance

Barcoding

RFI

1645

2136

3536

4431

4630

2128

4528

4723

3217

16

None planned + DecreasingNew Initiative + Increasing

Source: Oliver Wyman 2021 MRO Survey

REGIONAL DIFFERENCES

While the impact of COVID-19 on business was similar globally, the responses to the pandemic for North America versus other regions were surprisingly different. Western European survey respondents indicated that they made more use of the 12 levers to respond to the downturn than their North American counterparts. This was particularly pronounced for airlines. For example, 89 percent of Western European airline respondents said they reduced headcount, while only 40 percent of North American airline respondents did so. There were similar patterns across a range of other levers (Exhibit 8).

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Exhibit 8: Selected airline COVID-19 response levers by regionPercent of survey respondents, selecting all that apply

45

8781

Reduced/held backcompensation

38

7883

Decreasedinventories

45

8289

Cancelled/deferredaircraft upgrades

45

8993

Deferred non-essentialmaintenance

40

8993

Reducedheadcount

North AmericaWestern EuropeRest of World

Source: Oliver Wyman 2021 MRO Survey

What could explain this variance? First, many carriers outside of North America were forced to cut capacity much more severely than North American carriers: In February 2021, available seat-miles in Europe for example were down 76 percent year-over-year, compared to a 50 percent drop in North America. This reduction in capacity due to travel restrictions forced carriers outside of North America to make greater changes to their cost structures to align with their substantially smaller operations. Second, the US government provided (and continues to provide) direct payroll support to airlines, allowing them to avoid large involuntary layoffs.

As a result, carriers outside of North America may emerge from the crisis with leaner costs and lower headcounts than their North American counterparts. The impacts these divergent paths will have on airlines’ ability to respond to upswings in demand and compete head-to-head in key markets will be interesting to watch.

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OEMS IN THE AFTERMARKET

Competitive positioning for MROs versus OEMs in the aftermarket continues to be one of the largest potential market disruptors. Our survey confirmed that OEM presence in the aftermarket will likely continue to grow, with 64 percent of respondents anticipating that OEM aftermarket focus will increase over the next one to three years (Exhibit 9). We believe however that this growth will continue to be concentrated, as it has been to date, on new platforms rather than legacy platforms.

Exhibit 9: “Following the end of the COVID-19 pandemic, how do you see OEMs’ aftermarket focus changing over the next 1 to 3 years?”Percent of survey respondents

Increase slightly36%

Decrease significantly7%

Increase significantly28%Decrease slightly

17%

Stay the same12%

Source: Oliver Wyman 2021 MRO Survey

Our survey also confirmed that OEMs are likely to be most focused on the engine and component aftermarkets, rather than airframe. Interestingly, airlines and MROs generally believe OEMs have more significant aftermarket aspirations than OEMs themselves indicated.

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For engine MRO, 67 percent of respondents expect OEMs to increase share slightly to significantly in newer platforms. For mature engines, only 19 percent expect OEMs to increase share, and nearly half of respondents believe OEM share will decrease (Exhibit 10).

Component MRO follows a similar pattern, with survey respondents overall expecting OEMs to focus on newer platforms. When we look at OEM survey responses specifically, however, OEMs show more interest in mature platforms in component MRO than engine MRO. This is likely tied to what was arguably an oversupply in the market of component MRO shops prior to COVID-19.

Finally, we asked about the potential moves of airframe OEMs (such as Boeing, Airbus, and Embraer) in the airframe MRO and component aftermarket. Survey respondents said they expect significantly more focus by airframe integrators on the component aftermarket than the airframe MRO market.

Exhibit 10: “How do you expect OEM market share over the next 1-3 years to change for the following markets?”Percent of survey respondents

Newer aircraft

Mature aircraft

Newer aircraft

Mature aircraft

Component aftermarket

Airframe MRO

Decrease significantly Decrease slightly Stay the same Increase slightly Increase significantly

0% 25% 50% 75% 100%

OEMs in engine MRO market

OEMs in component MRO market

Airframe OEM participation in:

Source: Oliver Wyman 2021 MRO Survey

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EXPANDING THE WORKFORCE

Labor scarcity has been top of mind over the past several years for operators and MRO providers responding to our survey and continues to be a major concern. COVID-19 is expected to grant only a temporary respite. This year, 71 percent of respondents indicated that it would be moderately to extremely challenging to secure required aircraft mechanics and technicians once demand returns to pre-COVID-19 levels. This represents only a slight decrease from the 2019 survey, where 83 percent of respondents said finding staff would be challenging — during a time when MRO demand was booming.

Respondents indicated that instability in the industry will be the top factor increasing the challenge of securing labor, closely followed by competition from other industries, lack of qualified applicants, and a reduction in long-term labor supply (Exhibit 11). Several of these factors form a vicious cycle, as continued instability (or the perception of instability) in the industry has the potential to depress labor supply and prevent qualified applicants from joining or remaining in the field. All of this has the potential to make rebounding demand extremely difficult to meet — particularly if the supply of AMT’s is not increased.

Exhibit 11: “How much will the following factor into the challenges of securing required aircraft mechanics and technicians over the next five years?”Percent of survey respondents, selecting all that apply

Lack of stability in the industry

Competition from other industries

Reduction in long-term labor supply

Lack of qualified applicants

Benefit demands

Competition from othermaintenance providers

Wage demands

Cost of living near maintenancelocations

Cost of technical training

Little to no challengeModerate challengeSomewhat to very challenging

0% 25% 50% 75% 100%

Source: Oliver Wyman 2021 MRO Survey

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Survey respondents indicated that they believe apprentice programs are the most effective way to attract and retain talent, followed by partnerships with technical schools (Exhibit 12). Both of these directly address the supply concerns outlined above, while other measures, like recruiting or even increasing compensation, simply do not address the core need to expand overall labor supply.

Exhibit 12: “How is your company currently attracting/retaining aircraft mechanics and technicians?”Percent of survey respondents, selecting all that apply

Apprentice programs

Partnerships with technical schools

Increasing compensation

Internet-based recruiting platforms

Searching for candidates outside region

Working with government

Third-party recruiting companies

Attracting from other industries

Not effective Slighty effective Moderately effective Very/extremely effective

0% 25% 50% 75% 100%

Source: Oliver Wyman 2021 MRO Survey

MORE WOMEN, MORE TALENT

When asked to rank progress on inclusion and diversity (I&D) initiatives, 40 percent of respondents stated that they are making good to excellent progress (Exhibit 13). Yet across maintenance and engineering organizations, women make up only 12 percent of staff and 8 percent of those in leadership roles. This aligns with the number of respondents to the survey who identified as women (8 percent) — all of whom are senior members of maintenance organizations.

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Exhibit 13: “How would you rank your company on its progress toward inclusion and diversity goals?”Percent of survey respondents

Excellent progress7%

Good progress33%

No progress1%

Little progress11%

Average progress48%

Source: Oliver Wyman 2021 MRO Survey

On the front lines where labor supply worries are most acute, women were reported to represent only 5 percent of airline maintenance technicians and 3 percent of leads. Over 40 percent of respondents indicated that 1 percent or less of their technicians were women and nearly 70 percent that 1 percent or less of their leads were women.

Survey respondents in large part said they support I&D as “the right thing to do”; a source for developing leaders; and a way to improve decision making, innovation, and problem solving (Exhibit 14). But the industry does not appear to appreciate how I&D could be used to fill out the talent pool, since only 9 percent of respondents indicated that they see it as a lever for combating labor shortages.

Increasing the participation of women in the maintenance field seems like an obvious opportunity to address labor challenges. And nearly 80 percent of respondents indicated that they have initiatives to improve I&D — but without much apparent progress in terms of putting boots on the ground. A forthcoming report by Oliver Wyman on women in aviation has found that I&D programs often are ineffective if they do not involve the target groups in developing programming, such as female AMTs and women at technical schools.

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Sponsorship, mentoring, and coaching also are critical in attracting more diverse talent. Furthermore, I&D must be seen as a strategic business imperative and its goals as fundamental to business success. As with any other critical business function, progress must be closely tracked and success (or failure) must have consequences. For example, only half of survey respondents noted that their companies tie executive compensation to I&D goals.

Exhibit 14: “What are your company’s goals in pursuing inclusion and diversity efforts?”Percent of respondents, selecting top three

Supporting inclusion and diversity is the right thing to do 76%

Identify and develop leaders from within 60%

Improve decision making, innovation,and problem solving 45%

Corporate-wide requirements 28%

Fulfill external requirements withcustomers or regulators/wingovernment contracts

23%

Increase retention 10%

A way to combat labor shortages 9%

Source: Oliver Wyman 2021 MRO Survey

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CONCLUSION

The economic and personal impacts of COVID-19 on the MRO industry will not be soon forgotten and will weigh on the industry for years. Although the recovery will take longer than the initial decline, the MRO market should return to pre-pandemic levels within the next two to three years. As the market rebounds, perennial challenges, such as labor shortages and aftermarket competition, also will return, potentially exacerbated by the crisis. Further, how each company responded and continues to respond to COVID-19 will have consequences for how much they are able to take advantage of the market recovery.

Oliver Wyman has five questions that MRO businesses should ask as they begin to look ahead to recovery:

1. What are the key challenges your customers are facing as they look to recover from the pandemic? What can you do to both help your customers and increase your stickiness?

2. What short-term improvements and investments in remote working technology used to respond to COVID-19 should be engrained longer-term into the business? What changes need to be rolled back to respond to demand?

3. What levers that were less used during the pandemic have the potential to unlock value in the medium term? For example, increasing participation in the USM market, increased use of PMA/DER, or the pursuit of new business lines?

4. Does your company have a clear outlook on your labor capacity for different demand scenarios? What is being done to secure required labor (short and medium term)?

5. How can you fundamentally improve the business by making inclusion and diversity strategic imperatives? What is being done to increase the number of women in the talent pipeline and make your company more attractive to diverse candidates?

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RECENT PUBLICATIONS FROM OLIVER WYMANFor these publications and other inquiries, please visit www.oliverwyman.com

Global Fleet and MRO Market ForecastOur annual 10-year outlook for the commercial airline transport fleet and the associated maintenance, repair, and overhaul aftermarket

Navigating the Long Haul to NormalcyScenarios for achieving threshold immunity to COVID-19 and getting back to normal

Global Guidelines for Safe & Seamless Traveller JourneyBiometric digital identity solutions for the travel and tourism sector are being created for travelers across multiple touchpoints. Written with the World Travel & Tourism Council

Anticipating the Travel RecoveryThe second edition of our traveler sentiment survey, which examines traveler views during the pandemic

To Recovery and BeyondA report on the future of travel and tourism in the wake of COVID-91. Written in conjunction with the World Travel & Tourism Council

Global Risks Report 2020Annual report on major threats to global prosperity, published by the World Economic Forum and Marsh McLennan

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Making the Invisible VisibleOur research uncovered four hidden barriers each directly affecting a company’s ability to win through talent and build a sustainable culture for all

Aviation Relaunch and RecoveryIndustry experts discuss the recovery path for the aviation sector post-pandemic. Based on a session at Farnborough Connect

Drones: Packages Before PeopleOur experts on challenges drones must overcome to achieve full commercialization

Automotive Industry at the CrossroadsA collection of articles examining needed changes and investment to help prepare the automotive industry for a new world of electrification, autonomy, and less ownership

A Digital Substitute for TravelA look at how digital substitutes to travel may thrive even after the pandemic is over and what that means for the travel industry

Aerospace Recovery Post COVID-19 Part 3A podcast on what aerospace and the MRO aftermarket might look like after COVID-19

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Oliver Wyman is a global leader in management consulting with offices in 60+ cities across 31 countries. Our aviation, aerospace, and defense experts advise global, regional, and cargo carriers; aerospace and defense OEMs and suppliers; and airports, MROs, and other service providers in the transport and travel sector to grow shareholder and stakeholder value, optimize operations, and maximize commercial and organizational effectiveness. The team’s capabilities also include: CAVOK, technical consulting on safety and compliance, maintenance programs, and certification (www.cavokgroup.com); PlaneStats.com analytical data tools; and strategies and modeling for market share, network, and fleet planning analyses via our Network Simulation Center. This deep industry expertise and our specialized capabilities make us a leader in serving the needs of the sector.

Oliver Wyman is a wholly owned subsidiary of Marsh McLennan [NYSE: MMC].

For more information, visit www.oliverwyman.com. Follow us on Twitter @OliverWyman.

For more information on this report, please contact:

Substantial contributors: Sam Sargent, Principal; Anna Ramundo, Engagement Manager

Editor: Rebekah E. Bartlett Designers: Melissa Ureksoy, Daniela Romo

Copyright ©2021 Oliver Wyman

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The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.

Derek CostanzaAviation Partner and Lead Authorderek.costanza@oliverwyman.com

Brian PrenticeAviation Partner and Co-Authorbrian.prentice@oliverwyman.com

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