China's declining competitiveness opens new opportunities for younger market players

In order to compete with powerful OEMs many engine and component MROs must concentrate on developing innovative solutions and seek new ways to increase efficiency. Most airframe providers, however, seem to be faced with no such challenges. According to the recent projections, the value of the global airframe MRO market is to reach $17.5 billion in 2014. This indicates a stable and sustainable growth within the segment. However, the situation varies from region to region. With the latest slow-down in the Chinese economy which is now growing at a pace of 7-8% a year (down from 10-11%), the demand for air travel and, in turn, MRO support in the country has significantly dropped. As a result, in the view of some experts the situation in the market has become favourable for some new, more competitive, entrants.

Although last year the passenger traffic in China was growing at a fairly fast pace, there were no significant peeks in demand for air travel in the region. Local carriers’ inability to fill their aircraft was echoed in the maintenance shops that support their operations. Although the industry-wide figures are not available, some of the airframe maintenance providers reported that in 2013 their business (measured in man-hours) grew by 7-8% instead of the previously forecasted 10-12%. However, according to the industry experts, the weakened performance of local carriers is not the most important factor to influence the changing workload.

“The international competitiveness of the Chinese airframe maintenance industry ultimately rests upon the modest pay rates and high labour efficiency. However, the local salaries have been rising by about 10% a year for quite some time now, and the situation in the market is changing respectively. Such dynamics will definitely become a major factor as concerns the developments within the MRO market in 2014 and the years to come,” shares his thoughts Kestutis Volungevicius, the Head of FL Technics Training.

Some signs of the aforementioned demand shifts are already noticeable. For instance, while the MRO needs of the North American fleet are expected to remain flat, forecasters emphasize that the rising labour costs in such markets as China are changing the contract maintenance equation, tilting the results more favourably towards keeping the airframe MRO work closer to home. What used to be enjoyable 30% savings per check have dried up. As a result, in a recent survey conducted by Oliver Wyman consultancy agency, 60% of airline representatives said that they were willing to absorb up to a 5% cost deficit relative to overseas alternatives to select a domestic provider, while 20% indicated willingness to accept up to a 15% deficit.

The changes in labour rates are expected to influence the competitiveness of MRO providers in China not only with regard to Northern American clients, but also in the context of the entire Asia-Pacific. There are reasons to believe that new MRO capabilities of such countries as Indonesia, the Philippines, Malaysia and others will allow these new players to attract new clients and gain larger market shares due to lower salaries.

“The unavoidable implication of the current situation is that one day the Chinese industry will simply become uncompetitive. Lion Air in Indonesia, where the average income is much lower, is already setting up a large maintenance base in Batam, an island near Singapore. Vietnam is yet another well positioned country which has the potential to rank among the largest players in Southeast Asia. No doubt both of these countries, as well as other newcomers, will have a lot to learn. For instance, achieving adequate labour efficiency and service quality will be a major challenge, putting additional pressure on the training providers. Same as it was in China relatively not such a long time ago,” concludes the Head of FL Technics Training.