Aviation, Aerospace & Defense
Airline Economics Are Transforming
the MRO Landscape
Wave of Outsourcing
Subsides, but Airlines
Demand More
Integrated Services
and a Total-Cost-of-
Ownership Approach
Oliver Wyman, in conjunction
with Aviation Week, recently
surveyed 130 airline and mainte-
nance, repair, and overhaul (MRO)
provider executives. Respondents
represented a global mix of main-
line, low-cost carrier (LCC), regional,
and mixed-format carriers, pri-
marily from the U.S. and Europe
but including other major regions
such as Asia, the Middle East, and
India. Respondents came from all
levels of management, with over
half at the director level or above.
Highlights of the Study
„ MRO spend is almost universally expected to increase, at just over
6% annually over the next five years.
„ Outsourcing of new MRO activities, while still widely popular, has
peaked.
„ Work is shifting to low-cost-labor regions as airlines seek deeper cost
reductions, limited primarily by the availability of skilled mechanics
and technical resources in these regions.
„ Airlines are pursuing the next level of savings, raising demand for
maintenance program, reliability, and material solutions to comple-
ment the repair work outsourced.
„ To drive further cost reductions, airlines are looking to develop
sophisticated materials management solutions, reduce investments
in inventory, and improve airline operations and reliability.
„ To manage diverse, geographically dispersed supply chains,
airlines are expanding the size and sophistication of their supplier
management functions.
„ MRO providers are expanding their geographic reach and capabilities
in a bid to become regional and global full-service providers.
„ This expansion is being fueled by acquisitions, with great interest
among private equity and other outside (non-strategic) investors.
„ To increase their competitiveness, providers are increasing their
investments in technology and Lean, and already have realized
substantial improvements.
MRO Forecasts Continue to Grow,
but Outsourcing Levels Off
Not surprisingly, survey participants almost uni-
versally agreed that MRO spending is expected to
increase over the next few years, with growth coming
from all major categories. Oliver Wyman estimates
that the global market for engine, airframe, and com-
ponent maintenance will grow at 6% per year, reach-
ing $43.3 billion by 2013 (Exhibit 1).
While considerable growth is expected across all
maintenance categories, the drivers for growth vary
by airline type. Mainline carriers expect increases in
maintenance spend primarily driven by aircraft aging,
which is estimated to account for 43% of the increase,
and price escalation, which makes up the remaining
57%. On the other hand, regional carriers and LCCs
expect to see the lion’s share of new spending to
come from fleet growth—80% and 87%, respectively.
Outsourcing of maintenance activities, a popular trend
over the past five years, appears to have leveled off.
Only mainline carriers plan to increase the percent-
age of maintenance spend that is outsourced over
the next three years—from 68% to 70%. Over the past
several years, airlines across the globe have optimized
their in versus out mix, and are now focused on driv-
Exhibit 1 Survey and model of forecast MRO spending
Maintenance spend forecast
($ billions)
$45
$38.8
40
35 $32.2 9.7
30
8.3
25
13.4
20
10.7
15
10
13.2
15.7
5
0 in this segment choose to retain line-maintenance
2008 2011
Engine Airframe Components
Note: Includes internal and external MRO spend.
Source: Oliver Wyman forecast model.
2
ing second-order benefits, such as wrapping reliability
and materials management services around their core
services. Nonetheless, outsourcing remains the pre-
dominant choice for nearly all airlines. LCCs, the big-
gest users of outsourced maintenance services, expect
to spend, on average, 80% of their maintenance cost
with outside providers.
Airline Capital Constraints and a Focus on Core
Operations Have Caused Two Segments to Grow
Disproportionately
The wave of outsourcing has likely led to underin-
vestment in MRO assets by airlines. Oliver Wyman’s
survey found that almost 50% of respondents believe
that the MRO organization is not a high priority on
the investment agenda of their companies despite
MRO spending being the third-largest cost category
after fuel and labor. Furthermore, almost two-thirds
of respondents believe that this lack of financial
commitment is adversely impacting company perfor-
mance, inhibiting growth of third-party business and
support of core airline operations (e.g., planning and
production control systems to reduce aircraft cycle
times), as shown in Exhibit 2.
Two factors account for this lack of investment.
First, carriers facing further capital constraints rank
customer-facing initiatives over other capital invest-
ments. Non-essential MRO investments thus slide
down the list. Second, airlines are trying to simplify
their business by focusing on core operations. Many
airline MRO executives struggle to prioritize their
CAGR
$43.3 6.1% requirements within a capital-constrained carrier.
As a result, even the most attractive investments may
10.3 4.4 % go unfunded.
Given this landscape, three dominant airline MRO
14.8 6.7 % business models have emerged:
„ Outsource all. This segment is dominated by
LCCs, regional carriers, and other start-up carri-
ers, which maintain a virtual base maintenance
18.2 6.5 %
function with only oversight and management
functions housed inside the airline. Many carriers
2013
activities within their own operations. This seg-
ment is growing disproportionately, fueled by the
emergence of LCCs around the world.
Exhibit 2 Airline underinvestment in MRO adversely affects performance
Prioritization of MRO for investment Under-investment in MRO
Percentage of respondents answering Percentage of respondents who said the lack of MRO
investment adversely affects performance

Moderate
Agree
High
23% 27%
Disagree
36% Not highly prioritized: 46% 36%
Under-invested: 59%
9%
Low

14% 32% 5%
18%
Strongly
Among lowest agree Strongly
Among disagree
highest

Source: Oliver Wyman/Aviation Week & Space Technology MRO Study.

„ Optimize mix. The second fastest-growing segment
includes carriers that selectively outsource across
their fleets, selecting lines of business or platforms
of repair to retain while outsourcing the majority of
the remaining work.
„ Insource and grow and/or divest. While this seg-
ment has shrunk, select carriers have made sig-
nificant investments in their MRO operations to
both retain their own work and grow third-party
revenue. Some carriers have successfully built
extensive, robust third-party revenue from their
MRO operations. The natural culmination of this
model is the divestiture of the MRO business,
typically with the airline maintaining an equity
position in the new company.
Impact of the New Business Models on
MRO Providers
There are three important consequences of these
evolving airline business models. First, a significant
portion of global MRO activity is now performed by
non-airline providers, creating a strong independent
and OEM aftermarket.
Second, airline segments that predominantly out-
source their maintenance are increasingly seek-
ing integrated offerings from providers. Carriers
are increasingly seeking fully integrated solutions
bundled under cost-per-hour programs, which
provide appropriate levels of risk transfer and cer-
tainty. Demand for broader service offerings was
highlighted in this year’s survey, with breadth of

Exhibit 3 Importance of supplementary services to airlines

Value of services to airlines

Relative importance, percent answering

Reliability management 45% 22% 18% 8% 7%

Materials management/logistics support 25% 46% 18% 11%

Rotables pooling/leasing 23% 36% 15% 15% 11%

Engineering maintenance programs 20% 34% 22% 8% 6%

Technical publications 21% 29% 21% 15% 14%

Project engineering 18% 31% 31% 9% 11%

High High - Medium Medium Low - Medium Low

Source: Oliver Wyman/Aviation Week & Space Technology MRO Study.

3
support services ranked similarly to price and turn-
time in how airlines select a provider. In addition, air-
lines have become more vocal about the services they
value most, including reliability management, mate-
rials management, and engineering/maintenance
program services (Exhibit 3).
And third, the demand for these services and offer-
ings has become truly global, as shown in Exhibit 4.
In response, capabilities are growing in domestic
markets to meet local needs. Also, disproportionate
growth is occurring in lower-cost regions for selected
MRO activities to meet international demand (e.g.,
wide-body airframe maintenance in Asia, narrow-
body airframe maintenance in Latin America, and
engine maintenance in Europe and North America).
Within this context, MRO providers face several chal-
lenges. First, it is important to identify the appropri-
ate platforms to build or acquire and the regions in
which to expand, as missteps can be costly. MROs
must target customer segments and regions methodi-
cally, understanding that certain business models
more effectively serve different segments of the
market. Second, with a broader portfolio of service
offerings typically comes an increased fixed-cost
structure. Companies will be pressed to build scale
to maintain or enhance margins. Third, the develop-
ment of technicians and other technical resources
is becoming an acute issue that will constrain the
growth of the industry, not simply individual compa-
nies. Those companies that address this issue head
on will have preferred access to superior talent.

Providers clearly recognize these effects and are
responding. By 2011, 40% of respondents expect their
business model to be defined as an integrated offer-
ing, compared to only 28% in 2008. Providers cited
several methods for evolving their business designs
in both service offerings and geographic presence.
Some 32% of providers cited acquisitions as the
preferred method of growth, with 25% highlighting
joint ventures or partnerships as the chosen path for
expanding and growing capability and capacity. These
responses support the rapid consolidation occurring
in the industry, often supported and initiated by pri-
vate equity investment.
Finally, integrating companies and building broader
offerings is a complex undertaking, and there are
many stories of failed mergers, as promised synergies
get lost in implementation. Many MROs understand
the basic business model they strive to create, but
struggle with how to get there. There are many dis-
crete and substantial investment decisions involved,
each with profound long-term consequences.
Providers that anticipate and address these chal-
lenges successfully will see disproportionate value
creation compared to their peers.

Exhibit 4 Diversity of geographical presence

Engine MRO spend Airframe MRO spend Component MRO spend

% by region % by region % by region
1% 1% 5%
5% 5% 9% 5% 6% 8%
7% 8%
10% 10% 10% 6%
9%
15% 11% 11%
17%
17% 24% 17%
21%
27% 23%
30%
41% 34%
31% 27% 30%
31%
25%
30%
28%

35% 40% 38% 38% 38%

33% 32%
27%
22%

2008 by 2008 by 2013 by 2008 by 2008 by 2013 by 2008 by 2008 by 2013 by

operator MRO MRO operator MRO MRO operator MRO MRO
geographic geographic geographic geographic geographic geographic geographic geographic geographic
origination fulfillment fulfillment origination fulfillment fulfillment origination fulfillment fulfillment

Latin America Middle East Asia/Pacific Europe North America

Source: Oliver Wyman/Aviation Week & Space Technology MRO Study. Oliver Wyman forecast model.

4
The Complexity of a Global Repair Network
Creates Added Supply Chain Management
Challenges for Carriers
With rising levels of international outsourcing,
airlines must manage an increasingly global net-
work of suppliers, which raises various challenges.
Respondent airlines that have ventured into emerg-
ing-economy regions identify complicating factors
that include currency variability, operational over-
sight, cultural differences, and regulatory require-
ments (Exhibit 5).
MRO providers can effectively address these issues
with their international airline customers through
solutions such as the following:
„ Pricing agreements in the customer’s domestic
currency (balancing currency risk with a hedging
program)
„ Putting transparency into operational performance
through the use of balanced scorecards with
defined Key Performance Indicators (KPIs) and
regular reporting structures
„ Working openly and collaboratively with the
airline in their dealings with regulatory agencies
„ Providing appropriate language and cultural
training to select employees
Exhibit 5 Sources of complexity in managing a global supply base
Sources of difficulty
Percent responding “significant” or “very significant”
Currency variability
Effective operational oversight
Cultural differences
Regulatory requirements
Customs
Technical requirements
Language barriers
Time zones
Source: Oliver Wyman/Aviation Week & Space Technology MRO Study.
Airlines also recognize the part they play in more
effectively managing their supply base, in particular
their international suppliers. Some 82% of airline
respondents say their supplier management func-
tion has increased in importance in the last three
years. Still, at many carriers, the supply chain per-
sonnel are too focused on running the day-to-day
operation and putting out fires, rather than on
more strategic activities like supplier management
and supply chain/inventory optimization. Carriers
need to strike a better balance to ensure that value
doesn’t leak out of the supply chain. Furthermore,
59% of carriers have increased the size of their sup-
plier management function. This data underscores
the shift in organizational priority of many carriers
and the realization that much of the potential value
in new MRO networks lies in effectively managing
the global supplier network.
Inventory Management Proves Fertile Ground
for Improvements
Nearly 75% of airline respondents believe that their
inventory planning processes are insufficient to
meet organizational goals, and 95% describe their
inventory management capabilities as “basic.”
“Material/part availability” is described by 82% of
airline respondents as a “significant” or “very signifi-
cant” challenge, and more than 40% say that parts
availability significantly hinders their operations.
Moreover, nearly two-thirds of airlines realize that
41%
32%
27%
23%
23%
18%
14%
14%
5
they hold excessive amounts of slow-moving or
obsolete inventory (Exhibit 6).
A senior maintenance executive at a major North
American carrier commented, “In completing a
comprehensive review of our inventory practices,
we found that we held too much of non-critical
parts and too few critical parts. In optimizing our
inventory management practices, we were able
to reduce our total investment in inventory and
improve service levels.” Clearly, there is substantial
opportunity for carriers, MROs, and material pro-
viders such as OEMs, PMA manufacturers, and dis-
tributors to enhance the effectiveness of the mate-
rial supply chain.
Airlines acknowledge their general lack of exper-
tise in materials management and are willing to
partner with providers or other specialized supply
chain companies to overcome these deficiencies.
Moreover, vendor-owned inventory programs are
gaining acceptance as capital-constrained carriers
look for means to liquidate their inventory posi-
tions; 59% of carriers note that capital constraints
have been a substantial driver of their increased
focused on enhanced material management. As
MRO providers move to become fully integrated ser-
vice providers, they will be increasingly called on by
customers to provide inventory management and
materials support functions.
Exhibit 6 Airline inventory management
Airlines: Effect of inventory
availability on operations
Percent of respondents answering
31%+
21 - 30%
Hinders
41%
11 - 20%
Enhances
45%
6 - 10%
Neutral
14%
<5%
Source: Oliver Wyman/Aviation Week & Space Technology MRO Study.
6
Experience with Lean Techniques Is Producing
Significant Value
Regardless of the business model adopted by an MRO
provider, operational excellence lies at the heart of
success. Lean principles play a key role in achieving
better quality, on-time delivery, and lower costs—all
attributes core to airline’s MRO selection criteria.
Survey results highlight that providers are further
down the Lean path than their airline MRO counter-
parts. Some 41% of airline respondents, compared
with 21% of MRO respondents, are not using Lean to
their benefit. These responses are consistent with
general investment in internal MRO operations by
airlines and the propensity for selected airline seg-
ments to outsource their MRO activities.
Those firms that have made significant investments
in Lean are seeing tremendous rewards; these
respondents report average benefits of between
25% and 50% in cycle-time improvement, on-time
delivery improvement, reductions in rework, reduc-
tions in inventory, and increases in labor productiv-
ity (Exhibit 7). To be sure, the Lean journey requires
substantial investment and fortitude. Respondents
note “changing mindsets and behaviors,” “availabil-
ity of resources,” and “poor or conflicting measure-
ment systems” as the most challenging barriers to
overcome in implementing Lean. An integrated, stra-
tegic approach is therefore critical.
Slow-moving or obsolete inventory
Percent of airline respondents answering
9%
High/
27% inefficient
27%
27% Sweet spot
Low/risky
9%
Exhibit 7 Realized benefits from Lean

Performance improvements at MROs

Reported savings range by percent of respondents

Reduction in cycle time 31% 31% 22% 16%

Improvements in on-time delivery 34% 34% 6% 17% 9%

Reduction in rework 42% 23% 16% 10% 10%

Reduction in inventory 52% 29% 13% 6%

Increase in labor productivity 31% 31% 33% 3% 3%

0-10% 11-25% 26-50% 51-75% >75%

Source: Oliver Wyman/Aviation Week & Space Technology MRO Study.

Shotgun approaches to Lean don’t work. The win-
ners are the ones who are executing disciplined,
comprehensive plans that address changes in
mindset, are supported from the top and imple-
mented from the floor up. Data from the survey
highlights that those that stay the course realize
benefits disproportionate to others who have made
more modest investments, supporting the old
adage “you get back what you put in.”
***
This year’s survey clearly highlights that shifts in
the MRO landscape that have emerged over the pre-
vious four to five years are here to stay. To succeed
in this new market, MRO organizations will need to
critically evaluate the effectiveness and relevancy
of their current strategies. Central to this evaluation
in developing a strategy for global capabilities and
supply chain management, plus making focused
investments in selected geographies, aircraft/engine
platforms, and capabilities. Agility and access to
capital will prove critical success factors in moving
to quickly develop and expand these global MRO
networks. Finally, effectively deploying highly lever-
aged operational investments, such as Lean, will
prove the differentiating factor in profitably meeting
ever increasing customer demands.
While the evolving market presents great opportuni-
ties for MROs, the complexity of decisions and mag-
nitude of risk have never been greater.™

7
About Oliver Wyman
With more than 2,900 professionals in over 40 cities around the globe, Oliver Wyman is the
leading management consulting firm that combines deep industry knowledge with spe-
cialized expertise in strategy, operations, risk management, organizational transformation,
and leadership development. The firm helps clients optimize their businesses, improve
their operations and risk profile, and accelerate their organizational performance to seize
the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies
[NYSE: MMC]. For more information, visit www.oliverwyman.com.

About Oliver Wyman’s Aviation, Aerospace & Defense Practice

Oliver Wyman’s Aviation, Aerospace & Defense practice works with OEMs, commercial
passenger and cargo carriers, MROs, other service providers, and government entities
to develop and implement business growth strategies, improve operational efficiencies,
and maximize organizational effectiveness. We have successfully completed hundreds
of engagements for aviation, aerospace, and defense clients over the past five years, and
have consulted to nearly three quarters of the Fortune 500 firms in these sectors. The
practice serves the industry worldwide with consultants based in North America, Asia,
Europe, and the Middle East.

The principal author of this survey is Chris Spafford, a partner at Oliver Wyman.
He can be reached at christopher.spafford@oliverwyman.com.

For more information on Oliver Wyman’s MRO capabilities, please contact:

Roger Lehman, roger.lehman@oliverwyman.com

John Seeliger, john.seeliger@oliverwyman.com
Tim Hoyland, tim.hoyland@oliverwyman.com
Rob Cords, robert.cords@oliverwyman.com

www.oliverwyman.com

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