Podcast: Will MRO See Even More Growth in 2024?
Aviation Week editors James Pozzi, Lee Ann Shay, Lindsay Bjerregaard and Sean Broderick discuss the outlook for the commercial aftermarket.
At 4:10 during discussion of VSE Corporation’s acquisition of Desser Aerospace, it is stated that the acquisition signals confidence in PMA parts. However, it should be clarified that VSE concurrently sold Desser’s PMA business to Loar Group.
James Pozzi: Welcome to the MRO Podcast. I'm James Pozzi, MRO editor for the EMEA regions. And in our final MRO podcast recording of 2023, which you'll be listening to of course in early January 2024 when it's released, we'll be looking at the year that was, and also forward to 2024 and what may lie in store for the commercial aftermarket in the new year. So joining me today are Lee Ann Shay, who is executive editor for MRO and Business Aviation at Aviation Week. Lindsay Bjerregaard, who is managing editor MRO at Aviation Week, and Sean Broderick, who is of course Aviation Week's safety editor.
Everyone, thanks for joining me today to look at the year that was, and also into the new year of course as well. Lee Ann, what did you see in terms of aftermarket recovery in 2023, continuing on from, I guess a much improved 2022 the year before?
Lee Ann Shay: Thanks James. Great question. 2023 definitely saw revitalization as international traffic picked up. It's definitely affected by different regions. China international traffic is not back, but in the U.S. and Europe in particular, that's bounded back. So the travel demand is there. International travel for the most part is back, but that's going to really fully recover; it's anticipated in 2024. Airlines are still continuing to refleet, which is great. The travel demand is there, but that has meant that there's a bigger fleet and the OEMs are still having a hard time getting new aircraft and engines out the door. So some of the older aircraft have stayed in fleets longer, which has all led to a big demand for MRO. Airframe capacity is tight, engine capacity is tight, and then you've got the teething problems for the engines. There's just a whole lot of demand for MRO and that's just going to continue to increase in 2024.
Their capacity has been a big issue in 2023 and it'll continue to be going on in 2024. And the MRO market is still very fragmented, which has led to further M&A in this space. I'd like to highlight a couple of big acquisitions. AAR in March announced it was going to purchase Trax for $120 million. That was a two-prong thing, both to get internal efficiencies and then also try to generate new digital revenue capabilities. And then Heico purchased Wencor. That deal closed in August for $2 billion, so that was one of the big, big, big, big ones. And then just today, December 21st, AAR announced that it planned to acquire Triumph Product Support for $725 million. So going forward to 2024, I do anticipate more M&A activity.
James Pozzi: Yeah, it's very interesting about that. It's been quite, I guess pretty slow. Slow and expected since, certainly since the pandemic, the M&A, so it's interesting that you think that'll pick up further in 2024 after some of those, as you said, really significant deals that took place in 2023. Let's look at some of the main stories you reported on over the last year. Maybe starting with yourself, Lindsay, what were some of the significant or important stories you reported on in terms of industry impact?
Lindsay Bjerregaard: Thanks, James. Well, I'd really quickly like to go back to the M&A topic that Lee Ann brought up because that is something that really stood out to me this year. On the technology acquisition side, in addition to AAR acquiring Trax, Lufthansa Technic brought Swiss AS's AMOS software and flydocs underneath its Aviatar digital maintenance platform. So that was a pretty big one in terms of bringing together a bunch of these different technologies onto one platform. And in addition to Heico acquiring Wencor Group, we also saw another big acquisition: VSE Corporation acquired Desser Aerospace, and that's a similar type of acquisition because both of those companies, they work in PMA parts. So I think between those two acquisitions, AAR announcing that they're planning to acquire Triumph Product Support, which also does PMA parts, I think that's maybe signaling confidence and demand for PMA parts as the industry continues to deal with supply chain issues. So, I'll be curious to see moving through 2024 if this continues.
In terms of technology as well, 2023 was the year where I think we finally started to see advanced air mobility get serious about MRO. There were several announcements and partnerships throughout the year that showed that these companies are starting to get serious about maintenance progress. So EHang, the Chinese eVTOL developer, partnered with HAECO to cooperate on maintenance, continued airworthiness, digital platforms and technician training. Speaking of AMOS software, Volocopter signed a deal with Swiss-AS to integrate that AMOS maintenance software into its eVTOL fleet. We saw AFI KLM E&M announce at MRO Europe that they're planning to start offering dedicated maintenance training for AAM starting in the first half of 2025. So that's a little bit further down the line, but they're starting to think about it and develop plans for it.
And then I've also had MRO providers tell me both on and off the record about plans to either break into the AAM segment or about conversations that they're having with eVTOL developers and vertiport specialists about potential collaboration opportunities. So I think we're going to see more of that activity next year and we'll be covering it more in depth in Inside MRO, so stay tuned for that.
And then one more thing on the technology side as well. Obviously drone inspections has been something we've been writing about for a few years at this point, but it seems like 2023 was the year where airlines started to get really serious about it. So here in the U.S., Delta Tech Ops recently said that they've confirmed viability of drone based inspections and they're working with the FAA to get approval for that technology. Korean Air, which is unique because they developed drone swarm technology to speed up, even further, the efficiency of those drone inspections. They received government support this year to help further develop that technology. And then speaking of drone swarms, at the recent Dubai Air Show, Emirates signed an MOU with Boeing to collaborate on digital maintenance. And a big part of that from what they told me is drone inspections, and they said that they're very interested in using drone swarms. So I think we might be seeing more development in that area in 2024 as well.
James Pozzi: Very interesting how that segment's developed specifically. And we look forward to obviously more reporting in 2024 on things like AAM and see what further developments take place in the new year. Okay, thank you Lindsay.
Sean, of course, you've been a pretty regular contributor to these podcasts over the last year and we talked about a lot of the things you've been working on and reporting on, obviously some very weighty stuff in industry terms. What would you highlight or pinpoint as some of the key stories you've worked on over the last year and their industry impact?
Sean Broderick: I'm still taking in the idea of drone swarms flying in the airport environment and how that's going to gain approval and what that's going to mean for my safety coverage in 2024 and beyond. As for 2023 stories for me, it is pretty easy. When you overlap the safety part of my beat onto MRO, really two or maybe even three big stories that I can think of. The biggest one of course is the geared turbofan situation with the PW1000G family and the impact of maybe 600 to 700 accelerated inspections that Pratt is going to need to do on this engine family over the next three years. Most of those inspections are happening between now and the middle of 2024. It's not just a product reliability story or a capacity constraint story. Really, it spreads into other parts of the MRO world when they're keeping older airplanes flying to make up for the capacity that these grounded mostly A320neo family planes making up for the lost capacity airlines that can source some older narrowbody lift, keep those flying. Also, it's having an impact, I think, on used serviceable material and keeping those airplanes out of the retirement pool. And so that prolongs, I think, the inventory pressures that USM has been seeing now for a few years.
The second story, of course, was the AOG Technics paper records falsification scheme. Taking what we know at this moment, December 2023, it looked like a simple but brilliant scheme to find used parts, forge some necessary paperwork and pass them off as new. And they got thousands of parts out there using hundreds of falsified records and it's created a major headache for the industry with the burden falling mostly on the OEMs involved that have had to help their customers track these down and the MROs and airlines that have the parts. The regulators have done precious little to step in and stop this company. I think the UK finally got around to raiding the office about four months after this was discovered.
There have been some interesting comments from sources in the industry that say, look, on the one hand, this isn't a major safety issue because of the redundancy built into airplanes, no critical parts and lots of reasons. On the other hand, what's going on with nobody on the law enforcement side's moved a muscle for a long time. The FAA took, I don't know, six or eight weeks to put out a suspected unapproved parts notice on the thing. So it's an interesting dynamic there. I think the bigger picture ramifications from this is you may see this reason added to the list of reasons to get more serious about digital tracking of assets, not to solve this particular issue, but this is just one that we can add to a list. This is something that Lee Ann has been covering for seemingly years. The desire to have traceability on parts, be they new or used, and this is just an added benefit for that.
The third one that maybe was under the radar a little bit, but that I think is going to have pretty big ramifications worldwide, is the retrofits of 737NG nacelle parts. So there was two major in-service occurrences including a fatal accident here in the U.S. in April 2019 involving a Southwest 737-700. Both of the occurrences were 737-700s. Fan blade failure caused a chain of events that lead pieces of the nacelle to break away and cause significant airframe damage. The NTSB and the FAA took a look at this and said the certification standards that we applied back when these airplanes were certified in the late nineties or the engine, the engine nacelle combination, the engine is part of the engine certification rules, then this cell is airplane. So part 25 and 33, you marry them together and I think the regulators realized that maybe there were some design standards that needed to be changed to prevent this from happening because you're not supposed to have pieces of nacelle flying off the airplane and damaging fuel tanks or cabins or any of that stuff. And so we had that.
The FAA finally approved Boeing's plan to get the entire fleet retrofitted. It looks like the deadline is end of July 2028. It's a series of service bulletins. I think it's going to be three, might end up being four that every operator around the world that wants to fly 737 after that date most likely is going to have to comply with. The FAA obviously only governs registered airplanes here in the U.S., probably going to be a global mandate, 6,000 plus airplanes, maybe depending on retirements. It’s a pretty big story that's taken a while to come to fruition. But we finally got the i's dotted and the t's crossed so that's in place. So those three things kept me quite busy.
Lee Ann Shay: Hey Sean, I would love to ask you, I agree with you, the engine story, AOG, huge this year. I'd also add Lufthansa Technik deciding not to have an additional shareholder. I think that speaks volume right there. But going back to the regulatory piece, I think we need to point out that EASA has a new executive director, FAA has a new administrator and FAA, the backlog has been huge. From a regulatory standpoint, what do you see in 2024?
Sean Broderick: I think it's going to be interesting in terms of getting the new permanent heads of EASA and FAA together. It's good news for the FAA because they finally have somebody in place that's going to serve the five-year term that the FAA administrator is supposed to serve. And it's been a while since Steve Dickson left about halfway through his term in March of 2021, I'm losing track now, 2022, whatever it is. I’ve got to do the math. But the FAA has struggled, I think, to maybe regain its place as a global leader whereas EASA with Patrick Ky who served two terms, he served basically 10 years. EASA was really smooth and steady at that time.
Now with the new leadership in place on both sides and starting roughly here at the same time, I think they're going to get an opportunity to not just solve maybe some of the conflicts that we've had. And there are certainly some conflicts in different areas, certification certainly being one of them, but also to come together and maybe move forward in more lockstep because we recognize the issues they work on are long-term issues. And so it takes more than a meeting or a series of meetings over a year to get things done. And I think that the big opportunity that the two regulators have now is to look at some outstanding issues. And again, and there are handfuls of them and more emerging with AAM and the emerging technologies. Give them an opportunity to start from the same place and maybe move in more lockstep than we've seen over the last five years, particularly with say the 737 MAX and maybe the 777-9 certification. So it's definitely two huge developments coming around the same time that should benefit industry as a whole.
Lee Ann Shay: Sounds good.
James Pozzi: Okay. We might have to keep this a bit brief to time constraints, but maybe going back to Lee Ann and work our way around the guests. What has really taken you by surprise in the MRO segment over the last year? Has there been anything, any story or announcements that stood out that you were surprised by?
Lee Ann Shay: I think we've already talked about it. The AOG Technics was a big one. Not too many surprises. I think I'd rather forward pitch it to 2024. I think supply chain is going to still be a headache, but it's going to be a little bit better. I think some of the demand signals are improving, although at the top levels it seems like there's a little bit of acrimony now a little between tier one and tier two. So does that mean we're going to take a step back? I'm not quite sure.
I think margins is something to really look at. If there's wars around the world and airlines are making more money than they did during the pandemic, but margins are still tight and the MRO margins are tight, so there's not a lot of room for fault there, so I think that's the thing to watch. So tying those things together. I do think digitalization, it still has a long way to go, but I think we could see some headway. And back to Sean's point about parts tracking, I do think there might be more news around blockchain. Blockchain seems to have a love or hate relationship, but we could see more in that space.
James Pozzi: Very interesting. Yeah, of course blockchain seemed to, as I recall four or five years ago, seemed to be a real buzzword term in the industry around that time. But we'll be able to see how that develops next year and what goes on there, of course.
Lindsay, have you noticed any surprises over the last year? Is there anything taken you by surprise and also maybe following on from Lee Ann, is there anything you foresee for 2024 in terms of industry developments?
Lindsay Bjerregaard: Sure. So aside from everything we've already discussed, I'm going to pull a little bit of a wild card here on what surprised me. Obviously the workforce shortage issue is not anything new. Sometimes it seems like we're having the same discussions over and over and over again, but there were a couple of things that happened this year on the workforce side that did surprise me. One was that Amazon actually launched an aviation maintenance training program in Lakeland, Florida to help boost its technician workforce at its air hub there. So they're actually providing opportunities to their own employees from other parts of the business to go train and become an aviation maintenance technician. And it's actually pretty heartening to hear from them that there's apparently a long wait list of employees waiting to sign up for the next classes. So for the workforce shortage issue, that's actually really good news and the fact that such a huge giant, like an e-commerce giant is getting involved and trying to boost the workforce on the aviation maintenance side is good.
One thing that also surprised me a little bit, AAR is a company that we talked to quite a bit on the workforce side because they're very involved in a lot of efforts there. But they told me that they've actually reworked their scheduling approach for technicians to allow for more weekends off because apparently there's just been huge demand for that from their workforce. They said that people were leaving and even taking pay cuts to get weekends off, so they moved to an approach where they divide work into four 10-hour days with a small crew on weekends depending on their lines of maintenance. And I will be curious to see if other companies follow suit on that in 2024, particularly as we talk about post-pandemic people having different expectations about work, about flexibility, the attitudes of the next generation when it comes to careers. So that's something that I will be very curious to see if it pans out across industry moving forward.
James Pozzi: Thank you, Lindsay. And finally, Sean, looking ahead, I guess to 2024, we touched on some of this already with some of your insights related to regulatory issues for example, but is there anything that you can maybe foresee in the new year and is there anything you'd like to maybe predict today on this podcast?
Sean Broderick: Well, I predicted RTX's forecast for A320neo groundings reaching maybe 600 or 650 at their peak will come true, because they're certainly headed in that way. Now, I haven't looked today, but the last time I looked they were right around 400. Not all because of the geared turbofan inspection issue, it's a mix of that issues and the long-running durability issues. Airlines that rely on Pratt power, on geared turbofan powered lift, they're going to have a rough 2024, a lot of them. I think that's an easy prediction. The market's resilience, we've talked about the supply chain and the difficulties, and one thing that's been amazing to me is how resilient the MRO market has been. If you look at the year-over-year growth, it's not just because of the comps are easy. Things started to get going in late 2022, so in late 2023, when you're looking at companies with 15% or 20% year-over-year growth on organic sales, it's amazing.
And projecting into 2024, the consensus is going to be somewhere between low single digits to maybe 15% growth market wide. You look at our forecast that just came out, we do a nice flat, well, it's not really flat, but it's 3% year-over-year growth rate over the next decade, but it's not going to be 3% in 2024. It's going to be 3X that, 4X that. And that's despite the labor challenges that the industry is having, and it's despite the supply chain challenges. The MRO folks are finding a way to continue to get it done. One thing Lindsay said too, one thing that surprised me in 2023 that's really pleasant is the MRO companies, providers are getting serious about workforce development. And she mentioned Amazon. That's just one example. I saw some airlines picking out students that are going into A&P schools and putting them through and giving them jobs when they come out on the other side.
They may not be the highest paying jobs in the business or a couple of regional airlines that are doing this, but it's really, it gives the students coming in a place to go, a solid company that's supporting them through their 18 month or two year journey, whatever it is to get their A&P, and it's really creating a nice foundation of certified A&P technicians. It's something that the industry needs. We know we need it. If you look at the Boeing forecasts every year, companies are getting serious about handling it themselves instead of simply poaching from whoever's below them on the supply chain. It'll be interesting to see if that continues into 2024 and beyond. The companies that I've talked to and from reading what Lindsay has written, they seem to be very happy with the success of the early program. So here's hoping it just gets bigger.
James Pozzi: Yeah, absolutely. Of course, more people entering the workforce in aviation is certainly no bad thing. As you highlighted demand there from various forecast, it's pretty big in terms of numbers.
Okay, well, we'll leave it there then for this final recorded podcast of 2023, but technically it'll be the first of 2024 when it goes online in early January. So Lindsay, Lee Ann and Sean, thank you very much for joining me and I just want to wish all our listeners a very Happy New Year to you all and thank you.
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