The Perfect Storm for MROs
The general public has become very familiar with Boeing’s manufacturing struggles. The 737 Max 8 issues that resulted in two deadly crashes put 737 Max 8 delivery on hold in 2018 (1). The delivery backlog this stoppage created was only exacerbated by the COVID-19 pandemic less than two years later. Finally, the Alaska Airlines door incident in early 2024 brought additional scrutiny to the already reeling aerospace giant. Faced with lawsuits and increased government scrutiny, Boeing adjusted their manufacturing process to slow things down. In their Q2 earnings report, Boeing reported a backlog of $437B (over 5,400 airplanes) (2). Airbus, Boeing’s biggest competitor and now the largest airplane manufacturer in the world, can’t keep up with market demand (3). The Boeing problems created a lasting supply shock and the downstream effects are beginning to ripple through the aviation industry.
Demand for air transportation is cyclical, but generally follows an increasing trend as the world’s population grows (4). As a result, the dearth of new airplanes forces commercial leasing companies and airlines to extend the useful life of their fleets. The average age per aircraft flight hour is slowly but steadily increasing, leading to additional maintenance requirements. Business aviation aircraft (private jets) are also aging, although the Boeing slowdown has had less of a direct effect. For obvious reasons, government agencies (like the FAA in the US) heavily regulate the aviation industry, enforcing strict adherence to required recurring inspections. These forces, along with many others outside the scope of this article, indicate that an investment in an Aviation Maintenance, Repair, and Overhaul (MRO) business would provide great investment returns. But every MRO is different. In this brief overview we’ll look at several aspects (certainly not a comprehensive list) of MROs that we have encountered and should be considered when evaluating an MRO acquisition opportunity.
Understanding the MRO Business
An MRO is a FAA-designated (FAA Part 145) maintenance shop dedicated to aircraft maintenance and repair. MROs can complete routine tasks, like changing tires, or conduct comprehensive inspections and engine overhauls. An MRO is much more than a shop for your car. Every tool and process is tightly controlled to eliminate risks to the airframe from shoddy work (see Alaskan Airlines incident above).
This emphasizes the importance of operations personnel, process, and maintenance software. Good operations process and software can be crucial to not only better operating margins, but the ongoing profitability of the company - a single mishap due to bad operational controls can doom an MRO.
The Role of Specialization
Airplanes (like cars) require specific parts and tooling. However, instead of a trip to Ace Hardware to grab a torx bit, manufacturing-specific tooling (Boeing-made wrenches for removing engine cowling) can cost millions of dollars and years to accumulate. Airplane maintenance technicians also require specific training for specific types of airplanes (not every mechanic can work on an Airbus jet engine). To mitigate some of these upfront costs, many MROs choose to specialize in a specific aircraft manufacturer and airplane type.
At first, specialization seems to limit the addressable market for a given MRO, but the very nature of airplanes increases the total number of aircraft available to be serviced. Airplanes can usually fly somewhere to complete annual maintenance. If an emergency procedure grounds the aircraft, aircraft management groups (or the manufacturer) often send maintainers to the airplane (instead of relying on someone at the airport, these “on call” services can also be an MRO product). Specialization is generally a good thing for MROs - superior performance in a niche could bring customers from across the country.
The Talent Challenge
However, location does have a heavy influence on recruiting. One of the biggest challenges MRO owners face today is staffing qualified Airframe and Powerplant (A&P) mechanics. Like many trades, these highly skilled workers are in very short supply. Maintainers have diverse backgrounds (many have experience in the military), but few enjoy living in undesirable places. MRO owners may find it difficult to replace older, experienced personnel regardless, but an airport in a growing region certainly helps (and can help with access to new talent via tech schools, etc.). Ultimately the MRO needs to be somewhere techs will want to live.
Hangar Capacity: The Backbone of the Business
Maintainer utilization and capacity can govern growth, but hangar size and availability is the tail that wags the dog in the MRO space. Most MROs do not own the land on which their hangar is built (the airport gives them a long-term lease). Obtaining new land for a new hangar is a long process full of bureaucratic red tape and politics. Many airports don’t have space for new hangars, and if they do and airport management approves the permits, it still takes time to erect the new building. Unpredictable maintenance and hangar requirements complicate the hangar utilization challenge too. Annual maintenance inspections for a large airplane with a budget for two days in the hangar can stretch for weeks or even months depending on additional issues discovered during inspection, part availability, and a host of other factors. This restricts the company’s ability to bring in other customers in need of comprehensive inspection or repair. MROs with additional capacity in their hangars (bigger is usually better!) are best positioned for growth without excess capital expenditures.
The Impact of OEMs
Finally, although the aviation maintenance industry has many favorable qualities (regulated repeat inspections, increasing demand, good margins), aircraft manufacturers understand the dynamics and are de facto competitors. Most manufacturers offer in-house maintenance packages for new owners, and they’re increasingly encouraging airplane managers to send aircraft “back home” for maintenance. They realize, like many existing MROs, that the repeatable, high margin inspection and routine maintenance revenue is great for the bottom line and after all, the manufacturer is the ultimate expert in their airframe.
Manufacturing troubles have created headaches for airlines and aircraft management companies, but they present an opportunity in the aircraft maintenance industry. Taking advantage of MRO tailwinds can produce great returns, if the buyer pays close attention to personnel, location, hangar size, and specialization.
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