Aerospace – where is the potential for growth in 2018?
By Dan Lewis, Market Sector VP of Aerospace and Defence at Plexus
There has been a noticeable increase in the interest being shown in the outsourcing of the global maintenance, repair and overhaul (MRO) of commercial fleets by major carriers in the aviation industry. Over the next six months, providers of these services will be looking to companies such as Boeing and Airbus for clarity and insight into future strategies, and how that will affect the overall industry. Where Boeing and Airbus lead, it is very likely that others will follow.
Today’s MRO varies based on a company’s position within the supply chain; from component repair to full engine overhaul, all the way to in-theater or in-service asset management. It is the need for agile aerospace-minded teams to keep fleets running safely that is key to the continued accessibility for the frequent traveller and to the safety of global militaries.
Current analysis shows that original equipment manufacturers (OEMs) are increasingly supportive of a more competitive MRO strategy and are directly targeting the MRO space. This is often through greater insourcing of the design and production of commercial aircraft systems, which in turn is generating a substantial demand in the aftermarket sector. In the past this was not a priority for OEMs, but it is now proving a margin rich domain.
The result of this is a significant increase in third party “continuous improvement” companies that claim to provide inventory management and spare parts forecasting expertise, while offering little to no true manufacturing or business resumption offerings. This is in direct contrast to an electronic manufacturing service (EMS) that can not only perform flexible warranty management and maintenance services to reduce down time, but can also provide manufacturing services for spare demands and/or drop in demands due to end market shifts. It will also deliver engineering optimisation to offset risks such as the inherent part obsolescence in the global aging of commercial and military fleets.
Where is MRO today?
Historically, Tier 1 suppliers/integrators to the military and commercial aerospace industry have been the prime suppliers of MRO services, along with third party depots to allow for strategic, targeted MRO solutions to meet a close geographic proximity demand.
Today there is a new dynamic in this sector with wings, nacelles, and flight control actuation notable areas where both Boeing and Airbus have taken work in-house. This is not only to lower production cost, but also to retain design IP and gain greater control in the aftermarket. Boeing’s recent formation of a dedicated aftermarket business unit, Boeing Global Services (BGS), is a clear example of this new strategic direction. This poses a significant threat to Tier 1 designers and system integrators as BGS seeks to achieve $50B in commercial, military, and space services revenue by 2026 – a lofty target considering Boeing generated approximately $14B in services activity in 2016.
In the light of this continuing ‘in sourcing’ shift by major OEMs, the impact to an EMS will first come through its customers. The growing pressures on Tier 1 industry leaders, specifically on aftermarket revenue and margins, will increase the flow-down cost pressures. Creative solutions will therefore be required to meet these pressures, deliverable through out of box thinking and true partnership.
What does the future hold?
That said, it is probable that the scope of the OEM ‘insourcing’ of MRO will increase even further than these projections. If so, it will be vital for Tier 2 suppliers, such as an EMS, to make a move into offering spare part programs and quick turn-around-time (TAT) offerings for flight-critical hardware. This will mean that additional investment will be needed in certifications like FAA Part 21, with focused Production and Airworthiness approval solutions, to ensure the aftermarket activities surrounding electronics keep pace with any larger MRO activities that the OEMs may field.
In the world of military aviation and global defence, there is a significant push for interoperability and sustainability at the forefront of allied nation electronic systems, particularly in the communication and weapon systems market. With a focus on government entities promoting modular open systems, and OEMs willing to surrender IP to the former, there is a shift afoot that should enable a larger group of companies and service providers to engage in MRO activities on behalf of the user nation. This will open up the in-place global defence MRO market capabilities to current commercial aircraft MRO providers, who have a wealth of experience that could be utilised for more cost effective and efficient MRO services.
In looking to outsource such services, the ability for an OEM to retain its IP is vital and this is where Tier 2 suppliers can have a significant advantage. If an EMS can approach MRO in a competitive and lean fashion, while leaving the IP solely with the OEM, it is then a win for both sides; it is favourable for the OEM from a cost-effective standpoint, and for the EMS from a service offering standpoint.
This potentially means an EMS can deliver an attractive ‘one stop shop’ proposition for the customer, as it can range from pre-production through system integration to aftermarket services. It will eliminate the tiers of suppliers that could become involved in a product’s lifecycle, providing a single integrated cost-effective solution, with a predictable warranty and service management cost model. There are further benefits to working with a global design and manufacturing company as MRO hubs can be strategically located to match the carrier’s requirements.
More importantly though, this model leaves industry leaders free to focus on the next generation of innovation.