Will lower fuel prices lend a hand to the aircraft MRO providers?

The global economic crisis, followed by an unprecedented leap of fuel prices marked a new page in aviation industry, prompting the introduction of re-engined as well as entirely new generation of aircraft into the airspace. This, in turn, has had a massive effect on the MRO segment, generating a demand for a whole new generation of technicians, capable of maintaining these new technologies. However, as there are numerous reasons to believe that the fuel prices will drop, the MRO industry might finally get a chance to at least partially regain its breath.

The most fundamental change that the aviation industry has faced in the recent years was the immense rise in fuel prices, which has affected the overall environment a great deal. If a decade ago the world’s airlines were spending approximately $44B on jet fuel, today the fuel prices account for up to 38% of all operational expenses, constituting a collective tab of over $200 billion per year. However, despite the fact that most industry experts assume that oil prices will remain at around $100 per barrel for years to come, there is evidence that consistently high oil prices may not be a certainty after all.

The Economist magazine has recently cited the possibility that the demand for oil could peak in the not-too-distant future. Whether or not this prediction is an exaggeration, some statistical data does offer some food for thought. For example, the oil demand in over 30 developed countries has begun to decline (with new energy-efficiency standards and a continuous growth in the sector of renewable energy) and, at 44 million barrels per day, is 10% lower than it was ten years ago. Moreover, new oil-production technologies could add a few million barrels of supply a day in the U.S., and they are just now being introduced in other countries.

“Industry players continue to struggle in the environment of unprecedentedly high fuel prices as a driving force behind many innovations in aviation.  As a consequence, the industry experts have observed a record backlog for new, fuel-efficient aircraft. Nevertheless, it must be remembered that the price of oil is by definition unpredictable, which means that while the global economy may be one step away from another oil price spike, the industry leaders ought to prepare themselves for a lower oil-price scenario as well,” comments Kestutis Volungevicius, the Head of FL Technics Training.

A 15-20% decline in fuel costs could translate into up to $30 billion lower annual operating costs. This would have a major impact on airline profitability, as well as create a positive economic environment for lower airfare and ticket prices, which, in turn, would stimulate the already rapidly growing air travel demand in the emerging markets and stimulate the stagnant North America and Europe. Moreover, such changes could at last provide some good news for the MRO segment as well.

“Lower oil prices would definitely make new aircraft models, promising up to 20% savings on fuel consumption, financially not as attractive as they currently are. This could spell bad news for manufacturers which have managed to raise profitability on a cocktail of high fuel prices and new technology while successfully putting pressure on the MRO providers. In turn, the latter might at last have the opportunity to at least come close to meeting the demand regarding technical specialists,” shares his thoughts Kestutis Volungevicius. “Currently the personnel deficiency is aggravated by the need for re-training the current generation of maintenance professionals as a response to a larger share of new generation aircraft in the industry. If the change in fuel prices slows the current fleet retirement rates, this would allow making the inevitable transition smoother and more gradual, which is a luxury the industry just cannot afford at the time.”