Narrator
Welcome back to the Velocity Podcast. We are joined again by Jérôme Bouchard and Ken Aso as they continue their conversation around the recovery of the aerospace industry post COVID-19. We invite you to listen to the previous episode if you haven't already done so. Thank you and enjoy the show.
Jérôme Bouchard
Hello and welcome back to the Velocity Podcast. You are joined here again by myself, Jérôme Bouchard, and my colleague Ken Aso. We are both Partners at the management consulting firm Oliver Wyman. Great to be speaking with you again today, Ken.
Ken Aso
Hi Jérôme. Yes, very happy to be continuing this conversation. We've got some great, interesting topics to cover today. If you haven’t already, have a listen to the previous episode. We discussed the aerospace industry’s recovery from COVID-19, the current state of the industry, and how it may potentially take up to five years to recover. Today, we will be discussing new business models and the implications on the MRO aftermarket. Jérôme, what is your view on the kinds of decisions that OEMs and suppliers will need to make around production and models?
Jérôme
I think some drastic evolutions are required. First of all, in terms of production rates and operational models for production, what we mean by that is maybe some simplifications are expected. Today, aerospace in Europe is quite complex from a logistics standpoint, with a lot of exchanges between several countries. So maybe COVID-19 helps rationalize the industrial system overall. Another impact will, of course, be on assets and the aerospace footprint. There will be some difficult trade-offs that need to be made, and unfortunately, some factories may shut down. At the same time, I believe we’ll see a relocation of some aerospace activity, specifically in systems, back to Europe or high-cost countries in general. The last consequence will be on the organizational side. It’s sad to say, but we’ve already seen some layoff plans in the aerospace industry. Hopefully, with the support of the government, big OEMs, and private funds, we can limit the social damage. Still, for the next two to three years, downsizing in the aerospace industry will be expected.
Ken
Yeah, there are going to be some painful steps. I think about specific models as well, like the A380, where there’s been significant discussion about retiring those planes. There are also decisions around new airplane production, like the A380's viability as an aircraft. Boeing’s 777X is also going through its development and certification process, which has been delayed a couple of times. Some air carriers are questioning whether they’re ready to take delivery of expensive new airplanes. Regarding the 737 Max 10, there are very low orders for that model derivative, while the smaller and mid-sized 737 Max models have strong orders. We’re also seeing the 747 being phased out of passenger service, although it still plays a useful role in cargo. Boeing may have to sacrifice 747 production as they make cost-cutting decisions. Similar model decisions will likely face other manufacturers as well.
Jérôme
Yes, there will definitely be difficult decisions regarding Airbus’s project portfolio. You mentioned the A380, which was already planned to stop production, but the acceleration of its exit from airline fleets is now a reality. Unfortunately, it’s a sad fate for an aircraft I love. Airbus also faces questions about other programs, like the A330. Its future may be under question, especially when compared to the A350, which has better range and performance. The A321XLR is another competitor that could squeeze the A330 out. So, its future is uncertain, though it may still hold a small market share.
Ken
Yeah, there may be a need to retrench certain models, especially to support lower production rates and orders. Jérôme, we’ve talked a lot about Airbus and Boeing. What about other aerospace firms? Do you have any thoughts on Comac, Embraer, and others?
Jérôme
Yes, I can talk about ATR, the European manufacturer. We feel relatively proud because their regional aircraft, particularly turboprops, have proven resilient despite the decrease in airline demand. They’re smaller and consume less fuel, and they have lower maintenance costs compared to the 737 or A320. However, the airlines operating these planes are more agile but also fragile, with many operators flying only 3 to 6 aircraft, often in remote regions like the Philippines or Africa. Their order book has dried up in recent months, and production capacity has dropped drastically, from around 80 aircraft last year to possibly 20 or 30 this year.
Ken
It’s also been interesting to watch the failed Boeing-Embraer JV. It made a lot of sense for Boeing to fill a gap in their portfolio by partnering with Embraer, following Airbus’s success with Bombardier’s C Series. However, the JV didn’t move forward due to COVID-19, raising questions about Embraer’s future. Will they seek a new partner or remain private? The Brazilian government may need to step in to support Embraer, given their importance to both commercial and defense sectors.
Jérôme
For me, the big question is about Comac. Will they benefit from the relatively weak positioning of Airbus and Boeing during the crisis, or will they also be affected? The strength of Comac lies in China’s domestic market, where we are already seeing signs of recovery. However, Comac’s heavy reliance on internal markets and potential supply chain issues, especially with engine suppliers, might lead to difficulties.
Ken
That’s a great point, Jérôme. Designing and launching an aircraft is one thing, but producing it at scale, hitting cost points, and integrating the supply chain are entirely different challenges. These are real questions Comac will face as they mature. Speaking of supply chains, let’s shift to the MRO aftermarket. For those unfamiliar, the aftermarket is about supporting aircraft after delivery, including spare parts, maintenance, and modifications. Before COVID-19, Oliver Wyman predicted global MRO services would reach over $90 billion, but now we forecast it will be about $43 billion, threatening the survival of many aftermarket suppliers.
Jérôme
That’s a massive evaporation of business. I believe this drastic drop is directly correlated to the large number of parked aircraft and the temporary reduction in service fleets. But Ken, there’s also opportunity related to early retirements, correct?
Ken
Absolutely. We’re seeing opportunities for private equity to support the MRO industry, and there’s significant potential for the rise of used serviceable materials (USM) as older airplanes are retired. Airlines prefer USM because it’s OEM material that’s been restored, offering a cost-effective solution, which is particularly attractive given the current cost pressures.
Jérôme
But are OEMs interested in the rise of USM?
Ken
Yes, airlines want cheaper solutions, and USM can provide that. Given the need for OEM parts in leased airplanes and certain carriers’ premium on OEM material, USM could see substantial growth in the coming years.
Jérôme
I believe we might also see new business models, such as separating the ownership of aircraft from their usage, almost like an "uberization" of aircraft. Airlines could focus on flying, while maintenance, operations, and acquisition could be managed by third parties. Do you see innovation like this in the MRO market?
Ken
I think digital solutions will continue to drive innovation and efficiency, though capital constraints might limit new investments. Digital analytics and optimization tools will remain a priority, helping streamline operations in a cost-effective way. Your idea of "uberization" is interesting, especially as airlines look to reduce their fixed costs.
Jérôme
As we wrap up, looking towards 2030, are you still optimistic about the aerospace sector, Ken?
Ken
Yes, despite the current challenges, the aerospace industry is resilient. By mid-decade, we expect to see strong growth, with fleets approaching 35,000 aircraft by the end of the decade. There will be significant opportunities for growth across regions and business models.
Jérôme
Thank you, Ken, for this interesting discussion. If our listeners would like to dive deeper into any of these topics, please write to us or visit our website for more information.
The Velocity Podcast is brought to you by Oliver Wyman. Please email or tweet us if you’d like Ken and Jérôme to explore any other topics. Don’t forget to subscribe to be notified when the next episode goes live.
This transcript has been edited for clarity.
