Avoiding A Mid-Life Crisis: Why OEMs Must Target The Mature Aircraft Aftermarket

Aftermarket revenue growth is a major priority for OEMs these days. Airbus would like to triple its air transport services revenue to €6 billion ($7.3 billion) by 2020. Boeing recently announced a monumental goal of achieving $50 billion in civil and military services revenue with its new Global Services business unit. Most aeroengine and component OEMs also have aggressive growth targets. New-generation aircraft are a logical growth target, but it is mature aircraft that hold the key to meeting these targets. Why? In 2017, airlines spent some $70 billion on maintenance, repair and overhaul (MRO). About 23% of this spending was on aircraft in the “sunset” portion of the life cycle, which includes vintage aircraft such as the Boeing 737 Classic, MD-80, 747 and 757.

At the other end of the life cycle, current- and next-generation aircraft such as the Boeing 787, Embraer E-Jet, and A350 XWB and A380 comprised just 7% of MRO spending. Aircraft in this group are young and reliable, and many are still under warranty. The lion’s share of MRO spending—some 70%—is on mature aircraft models with 1990s-vintage technology, including the Airbus A320 and A330 and Boeing 737NG and 777. 

Herein lies the dilemma and challenge for OEMs. Operators of mature aircraft are typically much more price-sensitive than those with new equipment. They demand flexible maintenance work scopes that make maximum use of component repairs and used and serviceable materials (USM) to minimize overhaul costs. They also value rapid turnaround times from maintenance suppliers. It is not surprising that independent maintenance suppliers such as AAR and MRO integrators like Lufthansa Technik capture most mature aircraft business. In contrast, OEMs are historically known for “gold-plated” work scopes that make maximum use of new parts (to boost margins) and mediocre-to-poor repair turnaround times.

To close the gap, OEMs are innovating and creating new value propositions to address the meaty part of the MRO market. Consider Rolls-Royce, which built an enviable business model by signing up most Trent operators to long-term TotalCare cost-per-hour maintenance agreements. It recently rolled out TotalCare Flex, a service designed specifically for customers seeking economical management of mature engines. It features installation of used and serviceable parts to reduce maintenance expenses and tailor the life of the engine to the operator’s specific fleet plans. TotalCare Flex customers include Cathay Pacific Airlines, BMI regional, South African Airways and AerCap.

Rolls-Royce is not alone. GE and Pratt and Whitney have similar offerings through their TrueChoice and EngineWise overhaul services. 

Another OEM tactic to capture mature aircraft revenue is to sell OEM-branded used and serviceable parts—analogous to Amazon peddling both new and used books to its customers. Today, some $3.5 billion is spent annually on USM parts, and operators of mature aircraft are the largest customer group. Engine OEMs have become major players in this business over the last decade: Today they control more than one-quarter of the market. 

Component OEMs are also expanding their participation in USM parts. Rockwell Collin has built Intertrade into a leading USM trader in components and engine parts. UTC Aerospace Systems recently signed an agreement with VAS Aero Services to provide OEM-certified serviceable parts. And many other component OEMs have set up internal trading groups to buy and sell surplus parts. 

Airbus and Boeing are also targeting the USM business. Airbus is offering USM parts through its subsidiary Satair and Boeing is partnering with several leading parts traders to sell USM through its PART Page Marketplace.

The benefit of these trading operations goes beyond the incremental revenue of USM parts sales; it reconnects OEMs with operators of older equipment that have long since found other suppliers of parts and services. It also provides valuable market intelligence for pricing new spare parts. 

Finally, OEMs need to focus on improving the performance in their own repair centers to reach mature aircraft customers. Too often, the productivity and turnaround times in OEM service centers are poor relative to nimble independents. 

Capturing the mature aircraft aftermarket may lack the cachet of repairing sexy new aircraft such as the A350XWB and 787, but it will be essential if OEMs are to reach their aggressive aftermarket growth targets. Look for more aftermarket innovation and acquisitions of MROs with mature aircraft capability in the years ahead as OEMs seek to avoid the aerospace equivalent of a “midlife crisis.”