The Middle East’s challenge: can MROs keep up with growth?
The demand for Middle Eastern MRO services is predicted to double within the next decade. Can Middle Eastern MROs keep up? James Careless reports on this ‘mixed blessing’ scenario.
The Middle East commercial aviation market is expanding with no end in sight. According to the Airbus Global Market Forecast 2015-2034: “Over the past 10 years, Middle Eastern airlines have spearheaded growth in the region … They have extended their presence to five continents, enabling air traffic to grow twice as fast as the economy.” In the last decade, travel to, from and within the Middle East has quadrupled, earning it the nickname of ‘Aviation’s Crossroads’. Looking ahead, the Airbus Forecast predicts that Middle East commercial aviation traffic will grow six per cent annually from 2015-2034; outstripping the projected world average of 4.6 per cent. “This will drive a need for nearly 2,460 new passenger and freighter aircraft valued at $590bn,” according to a November 2015 Airbus news release. “Of these nearly 1,890 will be for growth and 570 for replacements. By 2034, the fleet of passenger and freighter aircraft in the Middle East region will almost treble from nearly 1,100 in 2015, to over 2,950 by 2034.”
The aviation and aerospace consulting firm ICF International is similarly bullish about the Middle East. The region currently has about five per cent of the 27,100 aircraft global fleet; which works out to about 1,360 airframes. ICF predicts that the region’s fleet will grow to six per cent (about 2,300 aircraft; two-thirds more than in 2015) by 2025, while the global fleet grows to 37,900 aircraft.
Many trends driving growth
Given that the Middle East’s economy is currently being depressed by Saudi Arabia’s ongoing crude oil price war, one has to wonder why this region’s commercial air traffic future has been predicted to remain strong? The answer lies in the many factors driving the Middle East’s commercial aviation traffic growth.
In particular, “about 80 per cent of the world’s population lives within an eight-hour flight of the Gulf, allowing carriers in the Middle East to aggregate traffic at their hubs and offer one-stop service between many city pairs that would not otherwise enjoy such direct itineraries,” says the Boeing Current Market Outlook 2015-2034. The Middle East is also experiencing an increase in migrator workers and their families. The result of thismulti-faceted growth in commercial aviation traffic is that Middle Eastern carriers are buying more aircraft to keep up with demand.
Middle Eastern LCCs are also snapping up new aircraft, due to their success in attracting new customers. “The region’s low-cost carriers have ... been innovative, reducing shorthaul fares, setting up cross-border subsidiaries, and developing mobile booking portals to improve access to air services,” says the Boeing Outlook. “The business model is evolving as carriers broaden offerings to include business class seating and as they expand networks into previously under-served areas, such as the Commonwealth of Independent States.”
One big customer for new aircraft is Iran Air, the country’s flag carrier that has been saddled with ageing A300/A310s/A320s and 747-200s due to economic sanctions. Sanctions are being lifted thanks to the Iranian/US nuclear deal and ICF says Iran Air has recently ordered 118 Airbus jets (12 A380s, 16 A350-1000s, 18 A330-900neos, 27 A330ceos, 24 A320neos, and 21 A320ceos) and 40 ATR 72-600 turboprops.
The ATR turboprop sale marks the importance of short-haul aircraft in “the only region in the world where the twin aisle fleet is bigger than the single aisle,” says the Airbus Forecast. “ATR has been under the radar in the Middle East due to its carriers’ focus on widebody aircraft, but the Iran Air ATR 72-600 purchase shows that we are a real player here,” explains Milco Rappuoli, ATR’s sales director for Middle East and North Africa. “We now have Egypt and Saudi Arabia as active prospects for further turboprop sales.”
The bottom line: “Though not all airlines in the Middle East are profitable, the upwards trend since 2013 is set to continue into 2016,” according to the ICF presentation “MRO Forecast and Market Trends,” presented by ICF principal Richard Brown at the MRO Middle East conference in Dubai in February 2016. [Comments attributed to Brown in this article are from that presentation.]
And the impact of low oil prices? In the long-term, “the potential for sustained reduction in oil revenues will drive painful budget cuts in the Middle East region,” warns Brown. In the short term, it is motivating Middle Eastern airlines to keep older commercial airliners in service.
“Low jet fuel costs means that Middle Eastern carriers can afford to keep flying older generation aircraft that are not fuel-efficient” says Osama Fattaleh, CEO of JorAMCo; the independent MRO headquartered in Amman, Jordan. “So we are seeing a lot of these aircraft coming into our MRO facility. We are also seeing European carriers considering outsourcing maintenance activities to JorAMCo due to our aggressive pricing and flexibility driven by our skilled labour force, our lower cost base and our geographical location.”
MRO demand set to double
As a result of ongoing commercial traffic growth, “there has been a tremendous number of airliners purchased by Middle Eastern carriers over the past decade,” says David Stewart, head of ICF’s Aerospace and MRO team. “Many of these aircraft are due for their first major heavy checks, which means they will be keeping their MROs busy.” ICF’s projections indicate how busy.
According to the firm’s data, Middle Eastern MRO demand in 2015 was $5.1bn; eight per cent of the global $64.3bn total. It is expected to grow annually at a rate of 7.4 per cent to 2025, when ICF’s Brown expects it to reach around $10.2bn – “effectively doubling” in the next decade. “The region’s significant widebodies will be the leading driver of MRO spend over the next 10 years,” he adds. “Strong historic fleet growth from Emirates, Qatar, Etihad and Saudia will mean they account for about 70 per cent of the region’s MRO demand.”
Unfortunately for independent firms such as JorAMCo, much of this work will be done by the major carriers’ own corporate MROs. “Major carriers such as Saudia, Emirates, and Etihad all have their own dedicated MRO shops,” confirms ICF’s Stewart. “Emirates and Qatar Airways are building up the scope of their MRO capabilities; leaving less work for third-party MROs.” The result is that it is very difficult for new MROs to start up in the region without a core customer base. This has limited the growth of new MROs in the Middle East.
The silver lining to this cloud is that “there is more demand for independent MROs such as JorAMCo to serve smaller local carriers in this region,” said Fattaleh. “We are seeing growth in workload, from new customers coming in from Europe, India and Turkey.”
Engine support is currently limited
One area where the Middle East is thin on MRO facilities is in the engine repair and overhaul sector. There are only five Middle Eastern engine MROs in all; one of which is Turbine Services & Solutions Aerospace (TS&S). It was spun off as an engine MRO from Abu Dhabi Aircraft Technologies (ADAT) in 2014, when the UAE’s Mubadala Development sold ADAT to Etihad Airways. Currently, TS&S is working to attract global A330 customers using the Rolls-Royce Trent 700 engine; leveraging TS&S’ status as the world’s only independent Trent 700 MRO shop.
“Because there is not a lot of support for engine repair and overhaul locally, much of this work goes to Asian and European engine MROs,” Stewart notes. But that could change in the years ahead, according to Ian Taylor, TS&S senior manager of sales and commercial. He told delegates at the 2015 Airline Engineering & Maintenance Middle East conference in Abu Dhabi that “I estimate there will be two new major [engine MRO] entrants into the Middle East market,” [as reported by www.arabianaerospace.aero]. “I suspect these will be in Saudi and Qatar.”
Taylor notes that the regional market is ripe for this expansion, due to the steady growth of Middle Eastern airline fleets. “This will have a massive impact on the Middle East’s engine MRO business and the regional jet market is largely untouched,” he says.
Another country where MRO opportunities exist is Iran. In tandem with the country’s push into modern commercial airliners, Iran also wants to expand its in-country MRO capabilities. According to ICF’s Brown, Turkish Technic and Mubadala are talking to Iranian ‘entities’. Lufthansa Technik has also expressed interest in an Iranian joint venture.
Two of these possible ventures have been mentioned by PressTV.ir, the official Iranian news site operated by Islamic Broadcasting of Iran. “The Abu Dhabi-based investment firm Mubadala is reportedly in talks with a major Iranian aircraft maintenance centre over a potential acquisition,” reported PressTV in May 2015. In November 2015 the news site reported that Turkish Technic plans to enter into a joint venture with an Iranian entity, with a likely focus on transferring knowledge to the Iranian workforce and training, according to Ozcan Bastekin, the company’s sales and marketing director.
“With the sanctions just coming off Iran, it is early days for such joint ventures,” declares ICF’s Stewart. “But the interest in setting up such facilities is still there; both on the part of the Iranian government and possible international MRO partners.”
Need for qualified technicians
Against the backdrop of 7.4 per cent annual growth, Middle East MROs are faced with an ongoing need for more qualified technicians. Unfortunately, “it can be very difficult to source such skilled people locally,” says Stewart. “This is why JorAMCo has established its own training facility in 2007. We have partnered with AST [Air Service Training, based in Scotland] to create a specialised academy to EASA Part 147 standardthat graduates mechanics who are accredited by the UK’s Civil Aviation Authority. Our academy provides 40-50 licensed mechanics to our MRO facilities each year,” explains Fattaleh.
To make matters worse, the declining Middle East economy is forcing MROs to reduce the salaries and benefits that they can offer to new applicants and current employees; motivating the most marketable prospects to seek betterpaying work and living conditions elsewhere.
Taken as a whole, the Middle Eastern MRO market offers both opportunities and challenges for the companies who support commercial carriers in this region. So what will the next five years be like for the Middle East’s MROs? JorAMCo’s Fattaleh sees Middle Eastern MROs “attracting more work from Europe and Russia”. ICF’s Stewart is upbeat about the future of Middle Eastern MROs. “Overall, the economic, traffic and airline growth in the Middle East over the 10 years is expected to be well above the global average,” he reiterates. “This will result in a more than doubling of spend on MRO.”
“The challenge, and importantly the opportunity, is for those involved in the MRO supply chain, whether within airlines or third-parties, to support that growth,” Stewart concludes. “Whilst a lot of the required supply will be satisfied in-house by certain airlines, there will be a lot of change as the growth is very much driven by the introduction of newer technology aircraft. This combination of growth and change will generate people, technology and processrelated opportunities for the third-party market to target.”