Brian Prentice
Hello, I’m Brian Prentice, a partner in the transportation group at Oliver Wyman, based in our Dallas office. And today I have the pleasure of sitting in Dallas, right after the 2022 MRO America show. I’m joined today by Sam Sergeant. Someone who I’ve worked with for quite a good deal of time, about the last 10 years or so. I’m sure it feels much longer to Sam than it does to me. But it’s been a real pleasure. Sam is a Principal in our Transportation group. He is one of the authors of our 2022 MRO survey and has been leading our market intelligence team for the last several months, who have developed and published our 2022 fleet and MRO forecast. So, Sam, I could talk about you all day, but maybe I’ll let you introduce yourself real quick. And maybe outline what we’re going to chat about today on this podcast.
Sam Sergent
Well, thanks for having me, Brian. And today I think we wanted to do two things. We wanted to talk a little bit about the MRO survey that we conducted. We've conducted this survey for the past several years. This year's iteration had over 150 responses to our online survey, as well as 30 hour-long interviews with senior level executives. And so, we wanted to talk about the survey, but also what we're hearing relative to that survey, and what we've heard relative to the survey over the past couple of days here at MRO.
Brian
So, Sam, you know, one of the things that I got a lot of questions about after the presentation this week was the labor shortage, right. We're definitely in the middle of a labor shortage, and people talked a lot about just the number of mechanics we're going to need, and that translating not only mechanics, but pilots and even management staff. Did you hear anything in any of the sessions this week that surprised you compared to what we learned in the survey, and what we heard from the market participants over the last couple of months?
Sam
Well, it's certainly been a big topic here this week, and definitely came across in our survey as the top disruptor for the industry, from this year's survey. It's really impacting everyone in the industry, no matter whether you're an operator, a third-party MRO, or an OEM. More than 75% of respondents to our survey said that securing labor is going to be challenging over the next few years. More acute for MROs than operators, but everyone's concerned about it, because MROs are often the feeding and training ground for operators. So it's really been the hottest topic, I think, on the floor this week. And definitely came across in our survey. And it particularly will be acute in North America, where securing labor is challenging, and will continue to be.
Brian
Yeah, I think one of the interesting things that came through in the survey was that the lack of labor is going to impact growth opportunities for everyone. And just looking around the rooms this week, and chatting with folks, it's a lack of labor up and down the supply chain. Right, so, had a conversation over the last couple days with someone who was worried about finding skilled machinists on the production side. And then, a couple of airlines about finding people who... Yes, I can get maybe newly minted technicians, but newly minted technicians getting proficient in working on sustainable generation aircraft is also going to be a challenge. So, I think that there's this influx of not only not enough people, but the skill sets are also changing as well. So when you think about what's going to happen to the North American fleet, right, and since you're also driving our fleet forecast as well, I mean, you need to remind me here, but there's a significant portion of the North American fleet that's going to be retired over the next couple of years, and replaced with new composite technology, and other sorts of things. Is there also a skill gap that's going to be created here?
Sam
You know, I think there is. You think about the North American fleet, retirements are going to be up 20% to 25% over the next 10 years, versus what we've seen over the last 10 years. The sustainable generation aircraft are going to come on extremely quickly. And by the end of the decade, be close to the majority of the North American fleet. And the amount of composite content in those airframes, and the new materials in the new generation of engines is going to require a different type of skill than what we've had to date. You're absolutely right. The labor challenge has been up and down the supply chain, but particularly in those skilled areas. People were having a difficult time finding folks skilled in certain types of aging inspections, non- destructive testing, those types of things were difficult even before this year, or the last couple of years, and will just get even more so.
Brian
Yeah, I mean and not to then even mention things like skilled production control managers, or even QC. And as you said, quality inspectors. But if I take a step back for a minute as well, we've definitely been talking about labor shortage for the last five, six, seven years. We knew it was coming. The pandemic hit, it felt like maybe we were going to get a little bit of a breather. But then, as the recovery started, we've got this perfect confluence of events. Of retirements, of a steep recovery, of continued growth for a while. A lot of re-fleeting, and new technologies. It really is, you know kind of feels like things are conspiring in the labor arena to make it difficult for us. And so, when we think about what people are doing to combat these challenges, I think one of the questions that we got was, what's the market clearing price, like how much money? And it's definitely not just money. What are the other things that people are doing? And that you heard about that folks are doing to try to attract, develop and retain talent as a part of their ongoing business strategies?
Sam
Clearly there's no silver bullet, right. If there was a single silver bullet, we would've all figured it out by now. And it's not just about wage rates. It really isn't. That's probably fourth or fifth on our list of tactics that the industry is using, and the effectiveness. What we find is there's the attracting and then retaining piece. On the attracting piece, good old fashioned apprenticeship programs, and partnering with local schools to bring people in and create the labor pool. But on the retention piece, which has probably gotten less attention than attracting and creating the labor pool, it's things like making the workspace, making this industry a more attractive, long- term proposition for people than maybe it has been in the past. And I think that requires the industry embracing things like inclusion, and belonging. Ideas that came up in some of the interviews that we conducted along with the survey this year, which frankly was a little surprising to hear folks in the industry talk about some of those ideas. Because I don't think they've been on the radar in the past, but will increasingly be, as we try to figure out how to keep people long- term in this industry.
Brian
I think you bring up a good point right. As I sat around the room, and even walked the halls of the trade show this year, it struck me that it looks very different than when I first started coming to MRO 15, 20 years ago. But we still have a long way to go, right. And I think your point about making this industry attractive to people who are thinking about entering the industry is a big deal. Because the options that folks have now, if I'm coming out of high school, or I'm coming out of a technical college, I have a lot of options that I didn't have before. And you know, unfortunately, in North America we don't have as developed an apprenticeship program or trade program as maybe some other parts of the world do. When a young person who is entering the workforce has the option of getting their A& P license, or even coming to work for an airline, and working nights, and working weekends. And as someone I heard the other day describe it, having to drive their car to a parking lot, and get a site badge, and take a bus ride over to the airport, and all that. Versus, I could just go to work in a warehouse, or I could drive a truck, or I could enter the gig economy. And while I might make more money in the short- term, in the long term, the aviation path that's a path that's going to grow into a career versus just a transactional job. And I wonder if we, as an industry, could do a better job of outlining not only the career path, but then thinking about those entry points, and thinking about how we make those entry points more attractive, compared to the alternatives that people have.
Sam
I think that's absolutely right. I think there's a lack of understanding about what the long- term career prospects could be. And I think one of the big concerns of a lot of people looking at potentially entering the aviation field, is the stability of the industry. And the last two years have not helped that at all. But over the long- term, it's a vital part of the economy, and isn't going anywhere so.
Brian
And it's hard to think, or at least for me, it's hard to think of a well-paid, skilled job that is transferable, and provides the opportunities, and provides the transferability as aviation, right. And that movement is one of the things that is a little challenging. I'll bring it up here. You know, it was something that was a little controversial this year but moving between states. At least in the United States with so many states now having legalized marijuana, and those pools shrinking. Because people who live and have those options, understanding that they can't pass the drug tests that are required to be a part of our industry. I think that is also going to require us to look for pools of applicants and people that we haven't had before. Is there anything there that you think we should be thinking about as an industry overall? I mean, I'm just certainly not in any way, shape, or form advocating that we change any of the requirements. Because they're there for a good safety reason, but is there something that we'd want to get out into the industry that would help people understand why it is such a good career, and why it is such a good career even in places maybe where you know, you have to forego some other options?
Sam
I think the industry has to be more proactive in reaching out on those fronts. It's types of conversations that I'm not sure the industry is used to having. You know, one of the topics in addition to some of the things that you mentioned, is we talked about the perception of stability of the industry. But also, the perception of the industry as a sustainable industry, versus not. The expectations of young people today are that their companies are, should be doing things to promote sustainability. The aviation industry actually has made a lot of strides, but those aren't always the headlines that you see. Changing that message, changing that narrative on a number of fronts is what's going to be needed to grow the pool of potential applicants.
Brian
Yeah, I'm glad you brought that up because it is, you know, I've got a 12-year-old son now, right. And he's in junior high, not quite thinking about what his career looks like now. But I'll tell you, sustainability is even on the top of his mind. He's asking me, “What does your company do?” Of course, then it reminds me when I don't properly recycle every now and then. But even in our company, as we're recruiting people today, they are very interested in the sustainability efforts of what we do. And I don't think, at least the numbers that we shared this year right, in terms of the amount of investment that the industry has made in new sustainable aircraft, and in digital technologies, and repair technologies, and recycling in order to reduce our overall carbon footprint. You know, one of the stats I heard is since 1980, we've reduced carbon footprint by like 70% per seat mile, right. And that's pretty amazing. And even over the next decade, just given the investments that we're going to make in sustainable generation aircraft, we're going to reduce our total emission carbon footprint to a 1% year- over- year growth. While we're growing the fleet size at over two- and- a- half percent, and we're growing the flight hours. It's just, it really is impressive. And so, I think we need to kind of give ourselves a little bit of a pat on the back, or acknowledge that, right. And let people know that we are doing a lot of stuff. Let's not let perfect get in the way of the good. There's still a lot more we can do. And there's a lot more we should do. When you sat down with a lot of the leaders for your interviews, what were some of the things that they were doing, and that they were interested in from a sustainable perspective that is you know, kind of driving activities, and some of the capital investment that we'll see over the next couple of years?
Sam
You know, it might surprise people outside of the industry to know that 90% of the respondents to our survey said that sustainability was a priority for their company. And if it wasn't already a top priority, the vast majority said it was going to become a top priority over the next few years. So, this is on the agenda at the top of the house throughout the industry. Like you said, there is a lot of focus on it. Unfortunately, I don't think a lot of the, there's as much credit given to the industry about what it's doing on this front, but there is a lot of focus on it. And it's true across segments. You know, it certainly started with the operators, and the OEMs, but it's working its way into the MRO space as well. In terms of some of the specific levers, what you're seeing now is, you know, particularly in the MRO space, there's a lot of focus on recycling. Reduce, reuse, recycle. A lot of people are doing that. I think there's been less attention paid, and less focus on some of the more sophisticated emissions reducing measures. So, things like measuring greenhouse gas emissions, offsetting those emissions, changing processes to actually reduce the carbon footprint of bigger operation. There are some people doing that. It hasn't made its way fully into the MRO space quite yet. But I expect it to. Many of MRO's customers are publicly traded companies, with the new SEC guidance that will likely require publicly traded companies to disclose the emissions footprint of their supply chains. This is going to make its way down the supply chain, whether the supply chain is prepared for it or not. And I think people are figuring out, you know, how much of a leadership position do we take on this front? When do we start doing some of those things? It's clearly a priority. But I think the degree to which people move on this front, particularly in the supply chain, is not clear yet.
Brian
I would agree with that. It's definitely made it from the boardroom to the exhibit hall floor, because it was one of those things that everyone was talking about. And it is the little things that are going to matter for us. Because in this industry that is so capital intensive, right, and we have capital cycles of 15 to 20 years. And technology development cycles that are going to take another decade for true step function changes in the things that drive big emissions for us like, that are the jet engines. That means that we as an industry, everywhere else along the supply chain have to continue to find ways to be at the forefront of sustainability, right. Everything from lead-certified campuses and buildings to recycling. Bringing used serviceable materials back to the forefront, looking at ways to drive new technologies and digital technologies to reduce just overall operations. And reduce, you know, waste and consumption of resources as we build and repair aircraft.
Sam
I think that's right. And I think one of the big things that people are realizing is when you have a such a huge global fleet, such a large emissions footprint that aviation transportation has, every little percentage matters. And everybody in the supply chain has an ability to move the needle. Maybe not a ton, and certainly not a ton very quickly, but can incrementally contribute to reductions in emissions. And those little percentages, half percent here, a full percent there, they start to make a real big difference.
Brian
Absolutely. And just given the size of the industry, a half a percent in our industry, even outside of jet emissions, is a big number. I know from the survey that two thirds of the survey thought that it was going to be table stakes. And only, I don't know, 10% or so thought that there was a differentiator for it. I understand where that's coming from, but I'm going to disagree a little bit. And I want to hear what you want to say to this. But I do think that people who get this right, folks who are investing in this, folks who are really taking it seriously, will have a competitive advantage. There will be a differentiator in the market, because it is so important to the future of our industry. From our customers, our families, our employees. And at some point, you know, if we don't get it right, it will probably get the attention of the regulators. So, do you think that investing in this is a differentiator for participants in the industry right now?
Sam
What's interesting is that I think the most popular response to the question in the survey of whether or not sustainability would become a differentiator or not was, we don't know. I think there is a recognition that it could become a differentiator. Whether that will lead to an ability to price differently, I think there's more skepticism on that. But I would tend to agree with you, Brian. I think as operators and publicly traded companies put plans in place because their shareholders expect them to, the natural shift will be to start focusing on the supply chain. And the companies that are proactive on sustainability, who are supply chain partners, are going to be the ones that win more work. And maybe that's because they get through the supplier selection phase and are looked upon more favorably at the sort of upfront decision point. Or it's because they've been truly innovative in bringing new products to market, new processes that actually help operators reduce their emissions footprint. So, I tend to agree that eventually it will be table stakes. But I think there will be a period of time where leaders in this space have a competitive advantage.
Brian
Yeah, I like that perspective. Because I think the innovation is really important. And I think the innovation is really important both on the sustainability side, but also on the cost side. Because one of the big challenges of the two things we've talked about already, labor, right? Labor scarcity is definitely going to drive up wage rates. Sustainability doesn't come free, right. There will be investments and there will be costs. And we're also facing down, after a couple of years of you know zero or very little inflation, or you know, cost increases by manufacturers, or OEMs, or in raw materials. We're facing a period of what I would call, not hyperinflation, but definitely cost increases. Material and labor cost increases that we haven't seen in quite some time, right, 5% or more, right. So, as we start moving into this era of rising costs with an uncertain future, from a revenue perspective, prioritizing where the investments go, and prioritizing what MROs and airlines are going to be focused on is going to be pretty challenging, right. And so, bringing this to the top of the investment and priority list is going to be really important for all of us.
Sam
You're absolutely right about the inflation expectations. I mean, to put some numbers behind it, 60% of respondents to our survey expect materials, costs to increase 5% or more over the next two years. Labor, a little bit more muted, but a very similar story. 40% of respondents expect 5% or more increases over the next couple of years. So, inflation's here. We knew that, but it really is here. It's probably going to stick around for the next couple of years. And it's going to be difficult to invest in things like sustainability initiatives, which might tend to get maybe a push down a little bit relative to other investments. But the industry's going to have to address this and respond to it. And I think it's going to be about increasing productivity. And particularly on the labor side where there are labor shortages, and what labor you can find is going to be more expensive. It's going to be about how do we make every bit of labor as productive as possible. So, I think on the MRO side, you're going to see increased investment in IT systems. Those who don't have you know latest IT systems. The ability to e-sign, for example, during the repair process in airframe. Things like that, that make your labor more productive, are going to be where you see the investments over the next couple of years.
Brian
Yeah. And I think the levers that we've been pulling for the last few years to conserve cash, and to keep cost down as we were uncertain, you know, about what COVID was going to do, are similar levers that we're going to continue to pull over the next couple of years as the recovery comes back, but as we face these increased cross pressures. You know, one thing that wasn't in the survey, right, and it's definitely something I want to add into the survey for next year, is the supply chain issues. We've heard a lot about, and you've heard about in other industries, of chip shortages. And we've heard a lot about, you know, maybe some raw material challenges. Especially given Russia's invasion of Ukraine, and the availability of nickel and cadmium, and some other rare earth metals. At what point, do you think, the industry will/could hit some supply chain challenges in the next couple of years? And is used serviceable material, is the tear down of all these aircraft that are going to be retired, is that one of the ways that we can mitigate these challenges? And really then drive the recycle and reuse portion of our sustainability platform to address some of these supply chain issues that we're going to face?
Sam
Yeah, I definitely think that's a lever that needs to be pulled. And it is a very strong lever for the reasons that you mention. You get the cost benefit of using lower price materials in the case of tear- downs and used serviceable materials. But you also get the sustainability benefit as well. What you saw on used serviceable materials and tear- downs during the pandemic was the market sort of seized up. I think everyone expected a tsunami of parts, or a bow wave of parts to occur. But the market was a little bit illiquid for a period of time. Where people weren't tearing down aircraft, because they weren't sure about their future fleet needs. And so we didn't see that tsunami or bow wave. I think it's going to work its way through the supply chain. It's starting to happen, and it's going to be a lever that I think you'll see the industry take advantage of. Particularly as the current generation gets retired, there's going to be a continued supply of used serviceable materials beyond just the glut of retirements that we saw during the pandemic.
Brian
I would agree with that, it's a, I've been describing it more as a ripple, and that is going to kind of keep coming through. We'll get a little bit here and there. And a little bit you know, continued, USM continued to be put into the market. Because one of the challenges also is just finding someone who can tear down an aircraft, and then putting the parts back through, you know, certification. Either to have them, you know, certified, or have them overhaul to get them back into shape. But it's going to happen, and it's going to have to continue to happen. And the one thing I can say, after being in this industry for the last 20 years or so, is that it is incredibly resilient. You said it well earlier. Aviation transportation, it is a core part of our world. We work to bring people together. We work to connect the globe, and we are going to continue to do that. We'll have to find more innovative ways to continue to grow, but it's here. It's exciting. I'm so happy to be a part of this industry. And Sam, I'm so grateful for you, and all the work you did in kind of pulling together the survey. And in helping with our fleet forecast, and really looking forward to the next year. So, thank you so much for this conversation today, and for all that you've done.
Sam
Thanks for having me, Brian.
Narrator
You've been listening to the Velocity Podcast by Oliver Wyman. You can find more podcasts in this series at oliverwyman.com. Thank you for listening.
This transcript has been edited for clarity.
