Supply Chain Woes Force the MRO Industry Into a Perfect Storm

And some believe that the storm may get even more severe before it subsides.

“The supply chain is something that is really going to get a lot worse. I don’t see it getting any better,” Ryan Waguespack, senior vice president of the National Air Transportation Association (NATA), told FLYING.

Waguespack sees issues his members are facing now—and in the future—across the entire ecosystem, but specifically:

“I don't think these problems are going to go away quickly by any stretch,” he says.

The problems Waguespack refers to include:

Since the pandemic began to affect markets significantly in March 2020, the industry has been trying to recover from a bullwhip effect—a supply chain phenomenon describing how small fluctuations in demand at the retail level can cause progressively larger fluctuations in demand at the wholesale, distributor, manufacturer, and raw-material supplier levels.

Gogo Business Aviation (NASDAQ:GOGO) president Sergio Aguirre gave insight into some of the issues exacerbating the MRO supply chain on a recent “AEA Amplified” podcast. Aguirre noted a list of events including:

To be fair, some of the issues facing the industry predate the pandemic and were only made worse by it. For example, an Airbus subsidiary, Satair, expressed concerns about the MRO industry in 2019 that included the now-realized workforce challenges, rising costs, and rising oil prices.  

Now, a perfect storm has developed as all the things pre- and post-pandemic have become reality.

To understand the backlog in MRO facilities, FLYING reached out to representatives from Duncan Aviation, the largest privately owned business-jet service provider in the world, and George Baker Aviation, a burgeoning, but smaller facility in New Smyrna Beach, Florida. Options for maintenance work are vast and range from avionics, airframe, powerplant, and other auxiliary services, such as inspections for sales and scheduled maintenance.

In its third quarter 2021 report, the General Aviation Manufacturers Association (GAMA) reported that in the first nine months of 2021, turboprop deliveries grew by 40.6 percent and jet deliveries grew by 15.9 percent when compared to the same period in 2020.

Added to that, if a 2003 FAA prediction—which said the average age of the U.S.-based single-engine general aviation fleet (about 150,000 airplanes) would reach 50 years in 2020—came to pass, the bulk of airplanes that were bought and sold would be roughly that old.

Given that new owners normally complete a pre-purchase or pre-buy inspection in the process of purchasing an aircraft—usually done through an MRO provider—it’s unclear how shops of all sizes would be able to meet the demand.

Like getting an appraisal on a new house, a pre-purchase inspection helps buyers and sellers agree on a fair deal based on the state of the airplane. MROs or independent aircraft maintenance technicians help by inspecting the aircraft and providing an unbiased review of the airworthiness of the aircraft. Depending on the airplane, most pre-purchase inspections can be completed within a couple of weeks of scheduling them, with an average total turnaround time of about three days. It comes at a cost, though, especially when a unique model requires personnel with enough knowledge about that model to perform the inspection well.

However, there have been some indications, at least on popular forums, that suggest some buyers have been skipping these inspections, or rather, doing it themselves, shaking on a deal with sellers, and deferring any undiscovered maintenance to an annual, when a thorough inspection is required. Buyers point to the desire not to miss out on a deal as the reasoning for this.

Steve Gade, a vice president at Duncan Aviation and director of aircraft sales and acquisitions, explains that on a broad scale, the issue relates to buyers attempting to book slots for their inspection. Duncan has been unable to answer some of these requests because of other scheduled maintenance on the books from long-standing customers. 

In fact, Gade explains that the greatest demand for MRO services through his company has been a robust number of regularly scheduled maintenance appointments with established customers, which limits their capacity to do pre-purchase inspections with newer customers.  

“The issue is that overall, maintenance is [being] scheduled further out than we've seen in many, many years,” Gade says. “Specifically, with pre-buys, your typical pre-buys don't have the luxury of having a 60- or 90-day advance planning for scheduling purposes. So, by the time that they're ready to commit and put down a deposit and sign an agreement for a pre-buy, the slots have already been filled with the MRO customer base.”

So, are new owners just risking it all together? Gade says not quite. 

“Both buyers and sellers are making concessions with either the degree of the pre-buy inspection or sometimes just a visual walk around in logbook research,” he says. His reason is that buyers and sellers don’t want to “kill the deal.”

When asked about the risks involved, or if this practice is advisable, Gade explains that there are provisions that can be met, suggesting that buyers might consider a “limited pre-buy” especially if the airplane’s general make and model is known.

This is consistent with a recent report by NBAA’s Insider Operation, which examined the differences between buying domestic versus international equipment. 

“There can be some cleanup involved with domestic transactions, like verifying all the names are correct and spelled identically on every document, but surprises really aren’t that common when you work with a good broker, title, or escrow company.…International sales can be a lot more challenging, especially in the current frenzy,” notes Josh Mesinger, vice president for Mesinger Jet Sales, in that report. 

Gade says buyers and sellers would have to consider the purchase price and the risk-reward ratio, and that when his company advises clients, they go over worst-case scenarios, based on their maintenance database.

As for where other hold-ups might be, Curtis Boulware, owner of George Baker Aviation, paints another picture. 

Boulware’s shop probably sits at the center of the crisis, as most of his customer base is made up of piston-airplane owners, which constitute a significant percentage of the aircraft currently being bought and sold, based on the GAMA report.

“It's common things like spark plugs, grease, and oil,” Boulware says, and that the lead time on rubber products such as main landing gear tires from suppliers like Goodyear (NASDAQ:GT) was “six to eight weeks.”

In fact, this is consistent with the picture Waguespack painted around petroleum products amid reports from his members.

“I had an operator call me who went in for an engine overhaul, and got it torn down, and the shop said, ‘We can't find the rubber seal to go round, and the closest we could find is three months out,’” Waguespack says.

For owners and operators, the inconvenience is more than superficial. 

“Now you’ve got to plan events that now went from 60 days to 90 days,” Waguespack says. “Not only does that tie up valuable real estate in that repair station—hence why they can't move products out quicker—now you've got an aircraft with two motors that are removed. 

“Are you going to tell the owner that you’re going to just park it on the ramp? So, it's very challenging on the repair stations,” he says.

A report from the U.S. Bureau of Labor Statistics tracked data to measure the impact of the pandemic on petroleum products. The bureau concluded that in March 2020, “as economic activity slowed sharply across the globe, demand for petroleum and petroleum products plummeted. The drop in demand, coupled with an unexpected increase in supply, led to a collapse in crude oil prices and subsequent impacts on prices for refined petroleum products and other downstream items.

“As economies reopened, the initial price downturn gave way to reduced oil production and some renewed demand.”

This lends to the idea of a bullwhip effect, where the rebounding demand began to outpace the supply, and consequently drove oil prices up. As of January 3, crude oil prices per barrel, as tracked by the US Benchmark West Texas Intermediate, sat at $76, about $10 short of the highest cost since October 2014. Compared to the same time in January 2019—a normal year—and 2020, those prices were $49 and $53 respectively. Prices remain elevated now as demand recovers while OPEC is still limiting supply to address the drop-off from that March 2020 cliff.

All this to say, of the 42 gallons of oil in a barrel, as much as 16 percent, or six gallons, are used to create the petroleum-based rubber products used to make tires and other consumables like the one Boulware mentions. Invariably, when the oil supply chain sees any fluctuation, maintenance services are affected.

Zooming out, manufacturers who use rubber also use natural rubber, most of which—93 percent of the world’s natural supply—comes from southeast Asia. It would’ve been possible to shift supply sourcing, but in this case, a combination of fungus, pre-pandemic rubber tariffs, worker shortages, and climate change has conspired against natural rubber exports globally.

Just as consumer demand for electronic products created a semiconductor shortage, the surrounding rubber elements of said products began to overstress the market. It just so happened that the increase in aircraft sales and retrofits coincided with this trend.

But what else is holding up the line? “It’s becoming a bigger problem in the avionics department,” Boulware says. His shop is a full-service avionics one, but says Garmin (NYSE: GRMN), one of his avionics providers, has communicated to him that they are having a lot of backorders, as they are “having supply chain issues with microchips and processors and everything coming out of Asia. 

“We can't book any more jobs, because nothing's available,” Boulware says.

Boulware’s avionics services are just an add-on to the bigger shop. Still, he fears that smaller shops might have trouble staying afloat.

“It’s really going to put the hurt on a lot of smaller avionic shops who can't finish or even can’t start the jobs they promised or quoted and the jobs that are keeping their doors open.”

This is consistent with the results of a recent survey by the Aircraft Electronics Association published in their December 15 “AEA Wired” newsletter, which tells a part of the story. When asked how its members were dealing with the industry’s supply chain constraints, nearly 38 percent of participants said they were simply rescheduling appointments. The next leading response was that nearly 18 percent elected to install similar or alternative products.

“If you're a small shop, and you're not diversified, you're going to have a real problem,” Boulware says.

One other price increase Boulware admits customers might run into is the rising cost of spark plugs, on the back of surging demand.

“A standard spark plug has gone from $18 to $23 to $27. Now a Champion spark plug costs $43. We need 12 of those things. For one airplane, that goes from a $300 bill for a set of spark plugs to over $600 for a set of spark plugs,” he says.

For customers, he says the only choice shops face is to pass that cost along to them.

The effects on pilots and operators are ugly. Waguespack shared one story of a Gulfstream operator whose scheduled maintenance event—because the shop lacked a critical part—went from two months to six, and despite being quoted and budgeted for $800,000 to $900,000, saw the fee jump another million dollars to nearly $2 million. 

An aircraft on ground (AOG) maintenance event is a problem severe enough to prevent an aircraft from flying. Technicians have to rush to purchase parts to put the aircraft back into service and avoid flight delays or cancellations. For airlines, Boeing (NYSE:BA) estimates that a one- to two-hour AOG will cost $10,000 to $20,000, or as high as $150,000. These costs may be slightly lower for general and business aviation, depending on the size of the aircraft involved.

This can be a shock to the business for operators that need equipment to support operations and keep personnel efficient and safe. AOG events caused by delayed maintenance have multiple second-order effects.

Waguespack says he’s advising flight operations departments to start planning earlier with their respective repair stations. 

“If you have certain issues coming due, go on and start talking to your repair station of the entities that you want to use today. You've got to do it four or five months to be prepared.” 

He admits it might be more expensive than they are used to because stations might negotiate a deposit upfront of 50 to 75 percent—money that customers would probably hold on to longer. But the alternative? Having an aircraft grounded for months.

Boulware says his shop is staying as flexible as possible for customers if it keeps the customers flying.

“The customers knew that for them to keep optimal, they weren’t going to have to do some type of stop-gap measure, knowing that when their equipment came in, they would have to come back in to get that installed,” he says.

In its 2021 report, Aviation Technician Education Council (ATEC) said, “In 2020, the FAA issued 30 percent fewer airframe and powerplant (A&P) mechanic certificates than it did the previous year.” 

Yet, demand for maintenance services has shot up, which means the workforce shortage that predates the pandemic has grown worse. 

Both Waguespack and Boulware say some customers might be relying on what both called “through the fence,” or unofficial workers who might not have the proper formal certifications.

There are other reasons why recruitment is hard. There have been reports of problems including vaccine hesitancy in the workforce—even with mandates in place—and enduring cost of entry, retirements outpacing recruitment, and just a dispersion of talent.

“We’ve heard about the ‘Great Resignation,’ but we also don't talk about the ‘Great Retirement.’ We were sensing a little bit of ‘I’m going to retire from this gig where I've worked at this repair station for a number of years, and I'm going to go and become an independent contractor,’” Waguespack says.

According to him, the sentiment he’s seeing in the workforce is different. 

“Culture means more now than anything. People are saying, ‘You know what? It's not a money thing anymore.’ They’re no longer chasing the dollar; they’re chasing a larger purpose.” 

“There’s a different culture in business aviation now that’s ‘maybe I don’t want this to completely own me anymore.’”

Boulware says his shop is competing with airlines for talent because of their more attractive benefits.

“It is very easy to lose employees to different opportunities. One of my younger guys went to work for Allegiant Airlines (NASDAQ:ALGT) because Allegiant was paying so much money [for someone] with [a basic A&P certificate]. 

“Hiring new kids right out of school is really difficult because airlines are just sucking them all up,” he adds.

How does that affect service? Well, local shops, like Boulware’s, must pick their workforce from what he calls a “below average” pool. He says he tries to convince new hires to come work for him by offering as competitive as pay and benefits as possible, but also a more rewarding learning curve.

“Working on smaller planes is more rewarding than working on a line,” Boulware says. “You're going to do more stuff. You’re going to learn more stuff. You're going to do different things every day, but some guys, the airline mentality appeals to them, simply because they're going to be doing the same thing every day.”

Waguespack seems to agree that the general and business aviation community will have an uphill battle recruiting and will have to come up with new ways to attract talent—especially on the business aviation side of recruitment—because “whether they are truly stable or not, the airlines are perceived as more stable.” He thinks the business aviation industry can work together to offer more stabilized paths for students through things like internships, but especially for programs that support those who lack basic items like tools, or might need upskilling. This support would make for a more compelling case to come work in the industry.

ATEC said in its report that the “mechanic population is expected to increase 13 percent over the next 20 years, but ultimately fall 12,000 mechanics short of meeting commercial aviation needs in 2041. This optimistic scenario assumes pre-pandemic certification rates return.”

To help their customers, each entity has its own communication priority. Waguespack says NATA is gathering information to understand what the pressing events are and exploring how they can assist with compliance.

“We’re starting to explore exemptions with MELs [minimum equipment lists] and whether we can get a longer-term exemption on a non-safety-related item, so that we can keep our fleets mobilized rather than parked,” Waguespack says.

He says the FAA was able to accommodate new suggestions around training. For instance, during the height of the pandemic lockdowns, training needed to be delivered differently. In some ways that has been good for the industry: “Now we do Part 135 Section 299 check rides for some business via a GoPro camera,” he says.

On the shop front, for big players, there’s less of an issue, as they have the capital to expend on inventory—even at a premium—and then pay a restocking fee, so that a customer’s airplane doesn’t sit on the ground. Gade of Duncan says, “There are certain situations where there might be a supply chain issue, but we try and plan for that as much as possible. Sometimes if there's something that we think may require preordering, it may be worth pre-ordering it and paying a restocking fee if it was unnecessary, versus having the airplane sit another month and wait.”

“People are going to find lift one way or the other,” Waguespack offers optimistically. He suggests that customers with the wherewithal during AOG events are alternatively tapping into the charter market, though that has second-order effects on the global fleet.

Waguespack maintains that the uptick in jet sales and usage means more engine cycles and shorter trip times. When combined with all the other contributing factors, he says that proves that the industry has a long way to go to grapple with what lies ahead.