Opinion: MRO Opportunity Opens Way For Reconsidering Capacity, Investment

Life is full of choices: coffee or tea, sparkling or still, OEM or MRO. Despite the profitability and durability of the aftermarket, many aerospace and defense companies have tended to favor OEM business in decisions where the two intersect.

Aftermarket executives have managed around this preference, perhaps most creatively embodied by one of my former clients, who frequently secured parts for spares by sending the most physically imposing member of his staff to allocation meetings to glower at material planners. With respect to my client’s gumption, the aftermarket today finds itself in a very strong position relative to new production.

No matter the supply chain constraints, capacity crunches or delivery delays, airlines fly or die. Hyperboles aside, industry dynamics have put MRO in an even more strategic position to keep the current fleet flying.

In Accenture’s October 2024 survey of industry executives, 61% see MRO spending increasing over the next 12 months and 72% over the next 24 months. Merger and acquisition spending in MRO was up 8% year over year in the first half of 2024. While our research suggests that 64% of manufacturers are allocating most or all parts to new production, this is creating new opportunities and markets for used serviceable material and other sources, such as rotable pools.

While investor sentiment may well shift back, markets have reflected MRO’s relative position of strength. My own analysis of OEM-weighted companies versus after-market-weighted companies shows the latter outperforming over 12-24-month horizons. Indeed, the gap is greatest in the 12-month horizon, suggesting future value creation in the aftermarket will outpace that of new production.

This may feel a bit heady for stereotypically parsimonious aftermarket providers. While the relative size of aftermarket opportunities may vary by segment, now is the time for aftermarket providers and those suddenly inspired to increase their aftermarket exposure to consider what is required to succeed this year and beyond. Across the industry, announcements and dollars are being thrown at “capacity,” “digital” and “workforce.” All are necessary, and none will be sufficient to win the moment.

What will be sufficient? The aftermarket “moment” is built on two characteristics. First, aftermarket play-ers must support legacy fleet availability amid supply chain constraints. Second, they must construct models that can affordably support the large fleet transition delayed by these constraints. Sure, aftermarket providers have always had a foot in today while planning for tomorrow. But rarely have they had to do both at such scale across legacy and new fleets amid such uncertainty on supply chain and fleet transitions. Capturing this moment rests in getting a couple things very right.

Not everyone can be an integrated planning savant, but successful MROs must be. Making financial and fleet choices that balance part and fleet availability, affordability and profitability across new production and the aftermarket has never been more vital. Still, this capability remains immature within aerospace and defense compared with similar sectors, such as industrial equipment. Aftermarket providers will need to make hard choices in part allocation and customer commitments. Tomorrow, they will need to transition from legacy platform inventories to serve the coming fleet transition without harming their balance sheets.

We frequently talk of building, expanding and needing more capacity. Yet today’s realities of capital, workforce and scale require reconsidering capacity beyond buildings and lines. Capacity needs to be revisited in the context of integrated partner networks, where work can be more dynamically allocated based on the variability of demands and availability of supply.

Engine manufacturers have built basic network models to meet fleet availability commitments and manage contract risk. Reconsidering and reshaping networks based on data regarding shared assets, planning and material can build on this foundation to increase MRO throughput, create “capacity” and improve fleet availability while judiciously managing capital investment.