Aircraft Maintenance Repair and Overhaul Market Study. - OBSA

07Aircraft MaintenanceRepair and OverhaulMarket Study.Glasgow International Airport.Glasgow Airport is represented byRenfrewshire CouncilScottish Enterprise RenfrewshireBAA Glasgow

NorwegianSeaSWEDENNORWAYGulfofBothniaSCOTLANDNorthSeaSPAINCANARY ISLANDSSweden / Stockholm Airport Region / Office of Regional Planning and Urban TransportationSweden / Gothenburg Airport Region / Municipality of HarrydaNorway / Oslo Airport Region / SNP GardermoregionenSpain / Barcelona Airport Region / Municipality of El Prat, Municipality of ViladecansSpain / Canary Islands Airport Region / Regional Development Agency PROEXCAScotland / Glasgow Airport Region / Renfrewshire CouncilBelgium / Ostende Airport Region / West Vlaamse Intercommunale

presentationMaria KomendantovaProject ManagerOslo TeknopolLead Partner STRAIRRichard Gibson, BusinessDevelopment Manager.Ken Goldie, Senior ProjectExecutive. James Cunningham,Head of Economic DevelopmentRenfrewshire CouncilSTRAIR Component 2 PartnerJohn BorkowskiMSP SolutionsAuthor of this reportThe STRAIR (Strategic development and cooperationamong airport regions) projectwas initiated in 2004 by seven members ofthe Economic Development Interest Group ofthe ARC (Airport Regions Conference), whichrepresents more than 30 European cities andregions with major international airports.They share the belief that airport regions havea significant role to play since aviation is a keyfactor behind economic growth.STRAIR is an INTERREG IIIC-supported projectwith eight partners from seven regions: theCanary Islands, the municipalities of El Pratand Viladecans (near Barcelona), Härryda(near Gothenburg), Oslo, Renfrewshire (nearGlasgow), Stockholm and West Flanders.partners: PROEXCA (regional developmentagency of the Government of the CanaryIslands and West-Vlaamse Intercommunale(WVI), the association of municipalities of theBelgian province of West Flanders.For Renfrewshire Council, the STRAIR projecthas been a valuable opportunity to learnlessons from the ways other European regionssupport the economic development of theirairports regions. We hope likewise that youwill find valuable lessons for your respectiveregions in this Report.www.strair.orginfo@strair.orgAll of us aim to improve development of theairports in our regions as well as manage theeconomic, environmental and social impactsof this development.This report 2B is the result of a study withinComponent 2 of the STRAIR project: Innovationand business development directlyrelated to airports. It was produced by MSPSolutions on behalf of Renfrewshire Council incooperation with the other two Component 2

indexExecutive Summary ................................................................................. 11 Air Transport Industry Forecast....................................................72 Characteristics of the MRO Market ............................................... 133 SURVEY OF MRO SUPPLIERS.................................................................... 194 MRO Opportunities at Glasgow........................................................ 25Glossary ................................................................................................... 31Appendices .............................................................................................. 35Warranty DisclaimerThis report has been prepared in good faith on the basis of informationprepared and provided by third parties over whom MSP Solutionsis not able to exercise any control or influence. MSP Solutions hastaken all reasonable care to ensure that this information representsa realistic view of the Civil Transport Aircraft Maintenance Repairand Overhaul Market in Europe. MSP Solutions gives no warranties(absolute or implied) as to the accuracy of the information in thisreport and accepts no liability for any adverse consequence thatmay arise from the use or application of information in this reportby the Sponsors or by any third parties.

executive summaryABIntroductionOutline of the StudyAir Transport Industry ForecastMRO Business IssuesMRO Opportunities at GlasgowCConclusionsQ&ASTRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 1

Executive SummaryA. IntroductionThe study was required to enable the Sponsors ofGlasgow Airport, Renfrewshire Council, Scottish EnterpriseRenfrew and BAA Glasgow, to gain a thoroughunderstanding of the current and prospectiveEuropean aircraft maintenance, repair and overhaul(MRO) market. This understanding will allow themto take a systematic approach to the possible developmentof a new major MRO facility at GlasgowAirport.The last section of this study focuses on specific aspectsof the UK market that have particular relevanceto Glasgow Airport, but in principle the general marketanalysis could be applied to the establishmentof a new MRO facility at any of the airports in theregions of the other STRAIR partners. In that case,one would need to undertake additional analysis ofthe relevant market as well as possible additionalfactors and considerations. The analysis of thesefactors and considerations is not within the scope ofthis report, but it is safe to say that the broad conclusionsmay well apply to locations with similar labourand other cost levels as the Glasgow region.B. Outline of the StudyThe study begins with an outline of the air transportindustry’s growth prospects. The next two sectionsexamine the main issues involved in managing theMRO business and survey the current market in Europe.The final section explores some specific issuesrelating to the development of a new MRO facilityspecifically at Glasgow Airport.Air Transport Industry ForecastMSP Solutions has prepared its own growth forecastof the aviation industry. This estimates the numberof aircraft by various categories until 2035. The forecastwas developed using three steps:• A macro-economic forecast is developed using USDepartment of Energy assumptions for GDP growthand oil prices.• Traffic forecasts were then derived, using incomeand price elasticity factors.• Demand for aircraft was then calculated from thetraffic forecast.The forecast covers the global fleet size. The numberof aircraft based in Europe is also forecast in somedetail by the various aircraft categories.The global fleet is expected roughly to triple to 44,000aircraft and the European fleet to nearly double. Inspite of the shift towards larger aircraft, more thanhalf of the aircraft in service in 2035 will be narrowbodies.This situation arises as availability of adequateflight frequencies is still judged to be critical,even in the maturing markets.A sensitivity analysis is also included in the study,using more cautious assumptions including the impactof steadily increasing oil prices. The resultinggrowth rates are roughly half of the mainstreamforecast. Nevertheless air traffic still manages todouble by 2035 and fleet size increases to nearly24,000, a still substantial growth rate of 60%.While the global fleet will continue to grow (even inthe alternative scenario) this does not mean thatthe MRO market will also grow. Over time the maintenancerequirements per aircraft are tending todecline because each generation of aircraft is engineeredto require less maintenance than the precedinggeneration.MRO Business IssuesMRO activity was initially the domain of the airlineswith very little work outsourced to independent providersor manufacturers. This situation has progressivelychanged over the years as increasing financialpressure on airlines has forced them to seek waysof reducing costs. Specialist MRO providers have developedwho can use the volume of their businessand specialisation to do the work at lower unit cost,often by choosing locations with lower labour andset-up costs.A number of national airline carriers have withdrawnfrom the business totally by subcontractingwork. Other airlines such as Air France have separatedthe MRO operation from their airline businessand transformed their engineering and maintenanceactivity into separate specialist companies. Finally,some airlines have continued doing work in-housein an integrated organisation.The traditional role of the MRO provider is alsochanging with much more of a total support functionrather than a one-off approach to the work.Increasingly, airlines are looking for a one-stopsolution based on a long-term commitment to theprovider. A good recent example of this was the 10-2STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

year agreement between SR Technics and easyJetfor total engineering and maintenance support ofthe easyJet fleet.The continual financial pressures in the air transportmarket, coupled with the introduction of lowcost carriers, has forced further change on the existingMRO providers, with a reduction in prices anda transfer of work to lower cost providers and countries.In geographical terms, there is a developing trendto move into China, the Far East and South Americain pursuit of lower labour costs. In the survey carriedout as part of the study, most MRO providerssaid that the concerns over service quality in theseemerging areas were gradually receding. Within Europethere has been a move to lower cost countriesin Central and Eastern Europe; e.g. Poland and Hungary.The development of new technology aircraft, coupledwith pressure on the manufacturers to reducemaintenance tasks, has resulted in a very significantreduction in both work scope and work frequency.This has resulted in a sharp fall in the MRO load as awhole, leading to some under utilisation of existingresources.In the UK there is a surplus of MRO resources atpresent, with some providers unsure and othersquite optimistic about the future prospects for theIndustry.Consolidation of MRO providers in Europe continueswith a few dominant providers buying into others ortaking them over entirely. These larger providers arealso expanding into both Eastern Europe and the FarEast, again to take advantage of economies of scaleand lower labour costs.MRO Opportunities at GlasgowThis section considers the challenges that will haveto be overcome to develop an MRO facility at GlasgowAirport. These include the barriers to entry and thekey success parameters, as well as characteristicsof the Glasgow region that would make it attractivefor a new MRO provider to enter the market. Incentivesare also briefly examined in this context, to theextent that they are available.MSP Solutions conducted interviews with seniormanagers from a selection of five airlines and MROproviders. These interviews highlighted the primaryconcerns of the MRO business as downtime, qualityand cost. There is considerable interest in findingnew solutions, especially by utilising MRO facilitiesin Asia where labour costs are lower and adequatequality can now be assured.There is, at first sight, only limited support for utilisingan MRO facility at Glasgow. This may be duein part to the potential participants having had littletime to consider such a move seriously.There would however be some interest in the prospectof moving into a purpose-built facility. So farMSP Solutions can find little evidence of any willingnessto invest major capital to develop a facilityin Glasgow – or in any other UK location, for thatmatter.However, three of the companies that were interviewedexpressed varying degrees of interest in aGlasgow MRO base, while only one of the five dismissedthe possibility out of hand.C. ConclusionsThe study boils down to answering four key questions:• How will the MRO market grow over the period to2035?• Is there an economic MRO development opportunity for Glasgow and what would this be?• Which acceptable organisations might beinterestedin developing a major MRO facility at Glasgow?• How can the Sponsors attract such organisationsto create the desired MRO facility at Glasgow?STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 3

How will the MRO market grow over the period to2035?As noted above, it is anticipated that the aviationindustry will continue to grow over the foreseeablefuture. Even in the event of continuing escalation offuel prices and weak economic growth, the industrywill continue to grow.Growth in MRO activities will not follow the sametrends. Each new generation of aircraft is moresophisticated than its predecessor. This improvementhas included major reduction in maintenancerequirements. Thus the specific engineering maintenancerequirement per aircraft will continue thecurrent trend of decline. In broad terms, MRO growthin the mainstream scenario will be less than half ofthe traffic growth. In the high fuel price scenario,there could possibly be no growth at all in overallMRO activity.Given the scale of the market, MSP Solutionsbelieves that a Glasgow MRO facility would be betterplaced to look for business maintaining narrowbody aircraft of European airlines. There may alsobe some opportunity for smaller wide-body aircraftsuch as B767, B787 and A350. It is unlikely that Glasgowwill be able to compete for business servicingthe larger wide-bodies (A380, B747) as the marketsize will be smaller and the investment in resourcesmuch greater. There are already well-establishedlarge wide-body aircraft MRO facilities in the UK,including British Airways Engineering at Cardiff Airport.The A380 will also be maintained at least twomajor European locations which will be more thanenough to support the initial aircraft fleets.Which acceptable organisations might be interestedin developing a major MRO facility at Glasgow?(Please note the response to this question is specificto Glasgow Airport.)The interview process indicated that there are operatorsand suppliers who would consider usingan MRO facility at Glasgow. Primarily these are UKbased companies.Is there an economic MRO development opportunityfor Glasgow and what would this be? (Please notethe response to this question is specific to GlasgowAirport.)MSP Solutions believes that there is an economiccase for MRO development at Glasgow. In view ofthe growth prospects, this cannot be based purelyon providing additional capacity to meet demand. Insteadit is crucial that a new MRO facility will haveto be developed on the principles of providing highquality at reasonable cost.The term “reasonable cost” is chosen carefully. Itwill not be possible to match the lowest unit costsworldwide, especially in Asia. However, it should bepossible to offer competitive prices compared withEurope, and to make an advantage of geographicalproximity to the operators.At this stage, the interviewed companies wish tokeep the discussions confidential by not being publiclyidentified in the report. If the Sponsors wishto develop the proposals, MSP Solutions would bewilling to contact those organisations already interviewedas well as others who might be interested insuch a project.How can the Sponsors attract such organisationsto create the desired MRO facility at Glasgow?(Please note the response to this question is specificto Glasgow Airport.)It is essential that careful planning and implementationshould be aimed at developing a new MRO facilitythat meets the main concerns of the industry, i.e.downtime, quality and cost.The issue of state aid or other grants could also beextremely important. Currently Regional SelectiveAssistance (RSA) offers grants up to 20%, but thelevel will be determined by the rules prevailing at thetime of application. New European Union rules applyfrom the beginning of January 2007.However, raising finance to complete a major MROproject appears to be the biggest challenge. The interviewsreveal that in general, MRO organisations4STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

would be reluctant to invest a large amount of theirown capital in such a project. It is possible that theremight be some negotiating room here that couldonly be identified in serious detailed discussions ona more defined project, but MSP Solutions believesthat the sponsors would be advised to place a lowprobability of this outcome. While it should be possibleto partner with one of these organisations at allstages of the development process, it must be bornein mind that they will be seeking what amounts toa turn-key operation. This means that financing ofthe project will have to be found outside the existingMRO industry.It may be possible to attract potential MRO suppliersto Glasgow, provided clear thought has been put into defining the specific terms of a potential contract,together with a clearer set of time scales and costestimates for a defined project.The interview process shows that there are operatorsand suppliers who would consider using anMRO facility at Glasgow. There may also be otherEuropean or overseas MRO organisations that couldbe interested in a new facility at Glasgow. This wouldneed further investigation.In any event a new Glasgow MRO facility would haveto meet the main concerns of the industry, i.e. downtime,quality and cost. These issues would have to beaddressed at all stages of developing a plan and inthe implementation. In outline the next steps couldbe:• Discuss the project with banks and venture capitalorganisations to gauge their level of interest.For the project to advance it may be necessary forthe Sponsors to put up some equity capital. BAAparticipation would qualify for the EU grant aid, butthere might be problems if Scottish Enterprise andRenfrewshire Council as Government Agencies wereto take a majority stake. Involvement of British Airwayseither in the form of an equity investment oreven a long-term contract could also be very supportivefor the project.Additional equity could be sought from venture capitalorganisations or by creation of a special purposevehicle to allow investment funds and other financialinstitutions to participate in the investment. Therates of return and the stability of earnings would beimportant factors for these financial institutions.The perceived risks and the likely rate of return thatcould be earned on the investment will determinethe level of interest of external investors, especiallyfor equity participants. Once the equity funding hasbeen resolved, the question of debt coverage for theproject could be considered. It seems unlikely thatthe project could be funded solely on a debt basis.Investigation of the financing routes and serious negotiationswith potential MRO participants can onlyproceed once the outline project has been definedand its economics have to be evaluated.• Define the size and scope of the proposed MROfacility as an outline project. This would be a 4 bayfacility with room for further expansion at a laterdate.• Ascertain the position of the existing operators atGlasgow, what would happen to the sites they occupyat present.• Attempt to reach a consensus with other maintainersat other Scottish airports that they eitherrelocate or at the least do not attempt to competedirectly with Glasgow.• Identify a number of potential MRO tenants and/or investors.• Evaluate the economics of the potential projectbased on realistic estimates of the costs (capitalexpenditure and working capital), income streamsrepresenting a realistic earning potential of the definedoutline MRO facility.• Evaluate the project under a variety of financingoptions.STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 5

1. Air Transport Industry Forecast1.1 Forecast of World Fleet 2005-2035MSP Solutions has prepared its own economic andaircraft fleet forecasts. This estimates the numberof aircraft by category until 2035. The forecast wasdeveloped using three steps:• First a macro economic forecast was developedusing “mainstream” assumptions to assess GDPgrowth.• Traffic forecasts were then calculated from themacro economic forecasts using income and priceelasticity factors.• Finally an aircraft requirement was calculated,using assumptions on operati ng efficiencies andestimates of fleet composition by category.The forecast examines fleet numbers worldwide andfor European based aircraft. Passenger and cargotypes have been calculated separately.The fleet categories used are as follows:• 747 or larger – Aircraft over 400 seats. A380 willbe in this group.• Mid size wide body aircraft – Includes A300,A330, A340, A350, B767, B777, B787• Narrow bodies – Aircraft over 90 seats: B757 andA320, B737 families• Regional jets – Aircraft below 90 seatsThe cargo aircraft are also classified in the samecategories.The results of the forecast were compared with theforecasts published by Airbus and Boeing forecasts.Additionally a sensitivity analysis was prepared usingmore cautious economic assumptions than those ofthe mainstream scenario. The results are shown inAppendices 4 and 5.Macro Economic ForecastMSP Solutions used the forecast prepared by theUS Department of Energy (DOE). Their figures producedsimilar GDP results as other forecasts suchas those of the IMF, but importantly they includedan estimate of oil prices, which is crucial to an airtransport forecast.The DOE forecast only looked as far as 2025, sothe ensuing 10-year figures were extrapolated. Themainstream forecast shows the global GDP growthslowing during the period from 4.0% to 3.5%, com-pared with an average of 4.3% for the period 2001-2005. European growth slows from 2.5% to 2.2%.Of the manufacturers, only Boeing showed the GDPforecast. They used an average growth rate of 2.9%,which seems fairly cautious.The DOE oil price forecast expects a 6.6% annualreduction in real terms until 2010, followed by anannual increase of 0.8%. This in effect makes theassumption that the oil price rises experienced during2005 were a short-term phenomenon. This issueis considered further in the sensitivity analysis.Traffic GrowthTraffic growth is in large part driven by GDP growths,with elasticity varying in economies at differentstages of their development. Price is also an importantfactor.Passenger traffic has grown at an average of 4.6%per annum since 1985, while European growth hasincreased at 5.7% per annum. The higher figure forEurope reflects the stimulation effect of low prices,especially a consequence of the rapid expansion oflow cost carriers. It should also be noted that theworldwide growth rate has proved remarkably consistentover the long term, with short-term falls, asoccurred in 2002, being quickly recovered within afew years.Forecasts for passenger growth are as follows.Airbus Boeing MSP SolutionsWorld Europe2005-2015 6.0% 5.3% 5.8% 4.1%2015-2025 4.6% 4.3% 4.7% 3.2%2025-2035 4.5% 3.0%The three forecasts are all in a remarkably similarrange, though it should be noted that the first period2005-2015 is above the long-term trend. This is notentirely surprising given that the fuel price assumptionmeans significant reductions in real terms,which would translate into lower prices and greatertraffic stimulation. Additionally the advent of lowcosts carriers has had the impact of forcing generalcost reductions throughout the industry.It is also assumed that airlines can continue to makeother unit cost efficiencies, for example through8STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

higher load factors, higher aircraft utilisation andimproved economies of scale through use of largeraircraft. As a result, airfares and cargo rates continueto reduce in real terms by 0.9% per annum overthe whole period.These forecasts all reflect an unconstrained situation,with the assumption that capacity limitationsat airports and other infrastructure will not limitgrowth. Also it assumed that there would be nodramatic change in the underlying economics, forexample fuel (as discussed) that other costs do notincrease in real terms and that no new aviation taxincreases are implemented.Equivalent forecasts for cargo growth are as follows.Airbus Boeing MSP SolutionsWorld Europe2005-2015 5.9% 6.2% 6.3% 4.1%2015-2025 5.9% 6.2% 5.5% 3.5%2025-2035 5.3% 3.4%Again the forecasts are fairly close together. It is alsoexpected that European growth will be lower than theworldwide trend. Generally the prospects for cargogrowth are higher than for passenger market.The following charts show the traffic growth, usingthe index 2005=100. It will be seen that for the periodto 2035, worldwide passenger traffic grows fourfold,worldwide cargo grows five fold while European passengertraffic is a little shy of tripling.Figure 1.1Passenger Growth WorldwideTotal Market (2005 = 100)Figure 1.2Cargo Growth WorldwideTotal Market (2005 = 100)50040030010020002005 2015 2025 2035Figure 1.3Passenger Growth EuropeTotal Market (2005 = 100)5004003001002000500400300100200AirbusBoeingMSPSAirbusBoeingMSPS2005 2015 2025 2035AirbusBoeingMSPS02005 2015 2025 2035Fleet SizeThe traffic growth can be used as a basis to estimatethe fleet size. This calculation is not straightforwardas it is necessary to make assumptions on the averageaircraft size. Not surprisingly, Airbus anticipatesa larger requirement for large aircraft in theA380 category; while Boeing believes there will bea greater requirement for mid sized aircraft suchas the B787 and B777. These conclusions are notentirely surprising given the contrasting strategiesof the two manufacturers with Airbus having made amassive stake on the Airbus A380 while Boeing haveinvested heavily in mid size types B777 and B787.STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 9

MSP Solutions believes that there will be a trend towardslarger aircraft. Partly this will be forced capacityconstraints at major airports such as Heathrow,Gatwick and Frankfurt. Also operating economicsfavour larger aircraft, especially if market growthcan sustain the additional capacity. Thus MSP Solutionsbelieves that Boeing have been unduly pessimisticin their forecast of the 747 or larger category,while Airbus have underestimated the mid size twinaisle aircraft.Figure 1.5Total Worldwide Fleet25,00020,00015,00010,000747 or largerTwin-aisleSingle-aisleRegional jetsThe recent announcements of the B747 Advancedand the A350 suggest that both the manufacturersmay have had second thoughts about their own forecasts!5,00002005 2015 2025 2035The manufacturers’ forecasts along with the MSPSolutions assessment are shown in the followingchart.Figure 1.6Total European FleetFigure 1.4Airbus, Boeing & MSP Solutions Fleet Forecasts35,00030,00025,00015,000747 or largerTwin-aisleNarrow Bodies4,5004,0003,5003,0002,5002,000747 or largerTwin-aisleSingle-aisleRegional jets20,0001,50010,0005,0001,0000Airbus2004Airbus2023Boeing2004Boeing2024MSPS2005MSPS202550002005 2015 2025 2035The base figures used by Airbus are lower thanthose used by Boeing – this appears to be becausethey have excluded stored aircraft – MSP Solutionshas followed the same approach as Airbus, thoughthe base line date is later.The figures shown above include passenger andcargo aircraft above 90 seat capacity but exclude CIS(principally Russian and Ukrainian) built aircraft.MSP Solutions has also included regional jets intheir total calculations, as has Boeing. It should benoted that Airbus excludes estimates of regional jetsin its published forecasts.The next two charts show the MSP Solutions fleetforecast through the period to 2035. The global fleetis expected to roughly triple from 15,000 to 44,000and the European fleet will nearly double from 3,600to 6,500. In spite of the shift towards larger aircraft,more than half of the aircraft in service in 2035 willbe narrow bodies.1.2 Sensitivity AnalysisMSP Solutions has looked at a forecast based onmore pessimistic macro economic assumptions.As a first step the DOE alternative forecast basedon higher oil prices was examined. Even this forecastseemed rather optimistic, as the oil price isassumed to decrease by 3.4% in each of the first 5years. This now seems much less likely – the DOEforecast was published in July – given the priceremaining at around $60 per barrel.It is the MSP Solutions view that there is a strongpossibility that the price will remain high, especiallyas the increase has been caused by buoyant demandrather than artificially applied supply restrictions, ashas occurred with previous price surges.10STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

For the purposes of a deliberately cautious forecast,MSP Solutions has recalculated the forecast basedon an oil price increasing each year at 2.5% in realterms. This has the effect of reducing GDP and alsohas a significant impact on airline costs, which wouldhave to be reflected in airfares and cargo rates.Although the oil price assumption is very pessimisticcompared with the mainstream forecast, the effectis not as devastating as might be expected. TheGDP growth rate does indeed decline - to an averageof 2.2% for the period 2005 to 2035 (compared with3.7% in the mainstream forecast). It also means thatfares increase in real terms but only by an average0.04% per annum. (In passing, it is worth noting thatboth the world economy and the airline industry havebeen remarkably resilient in absorbing the recent oilprice rise of over 40% year on year.)As a result of these more cautious assumptions, thegrowth rates are roughly a half of the mainstreamforecast. Nevertheless air traffic still manages todouble by 2035 and fleet size increases to nearly24,000, a growth of 60%. Full results are shown inAppendix 5.1.3 MRO ProspectsThe forecasts demonstrate that the total fleet willcontinue to grow over the period, even in the alternativescenario used in the sensitivity analysis. Howeverthis does not necessarily translate into a growthin MRO requirements and facilities. With continualimprovements in design and production techniques,each succeeding generation of aircraft requires lessmaintenance than the predecessor. This is demonstratedby the table in Appendix 1, which shows thatthe B737 New Generation aircraft require roughlyhalf the scheduled man-hours as the predecessorclassic B737 types.Higher fuel prices will in fact accentuate this trend.Whereas the current average life of an aircraft is 25years, the older types will in future be retired earlieras modern replacements offer better fuel efficiency.There are already signs that retirement ages are reducingand it is possible that the average lifespancould reduce to 20 or even 15 years. Though this isencouraging news for the manufacturers, it is not sofor the MRO suppliers!STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 11

2 : characteristics of the mro market2.1 Key segments of MRO2.2 Contracts in Use2.3 Work Loads2.4 CapacitySTRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 13

2. Characteristics of the MRO Market2.1 Key Segments of MROThe key segments of maintenance, repair and overhaul(MRO) activity are as follows:• Line Maintenance• Airframe Heavy Maintenance• Engine Overhaul• Components Overhaul• ModificationsLine Maintenance:This is the activity associated with routine turninground and servicing aircraft up to and including AChecks. It is an activity very largely done in-houseby the legacy airlines (flag carriers and full-serviceairlines) either for themselves or for their partners.They frequently club together their needs especiallyfor common aircraft types and one airline providesthe engineering service for all the participating airlines.Many new entrant airlines, especially wherethey have low frequencies to particular cities, subcontractout this work. This situation is particularlycommon at outstations.Most of the cost of routine line maintenance is labourcosts. Typically it now accounts for about 85%of the total costs. However, over recent years therehas been a significant reduction in the labour contentand hence cost savings in selected areas bypossibly up to 30%. Examples include the routineground turnaround of aircraft without an engineerand contracting the supervision of aircraft fuellingoperations out to the oil companies supplying theairline at the individual airports where it operates.Airframe Heavy Maintenance:• In airframe heavy maintenance, approximately85% of the total cost is for labour with only a smallelement for materials.The introduction of the latest generation of aircraftis having a very significant affect on overall workloads.Service intervals and types of maintenancechange as new aircraft types are introduced intoservice. Generally the newer aircraft types have increasinglonger time and/or cycles before overhaulis required. The manufacturers are also extendingthe service intervals as they build up experience ofthe reliability profiles of the different aircraft types.Appendix 1 shows an example of the maintenancerequirements of the B737 new generation and of thepredecessor “classic” type.Engine Overhaul:This is essentially a material intensive process withlabour only accounting for 15-20% of total cost. TheOEMs control about 45% of the work with the airlinesdoing around 35% in-house. This then leavesthe remainder (20%) split fairly evenly between airlinethird party contracts and independent sources.The engine manufacturers have increasing soughtto raise their share of the engine overhaul marketas it is a valuable source of substantial additionalrevenue and profit.Engine overhaul work is of a highly technical natureand large elements of it call for highly specialisedequipment and tooling. Since materials make upsuch a large element of the total cost, and becausethere is considerable effort put into the restorationof items through sophisticated technical processessuch as plasma spray, it gives a natural advantagefor the engine manufacturers to carry out the work.While some airlines’ MRO divisions, for exampleLufthansa Technik, carry out a substantial amountof engine overhaul, it is doubtful whether this is asprofitable for them as it would be for the enginemanufacturers to carry out the work.The engine repair OEMs are also able to offer thesmaller airlines the benefit of purchasing engineson a pay-as-you-go basis per flying hour. This iscalled Power by the Hour. Some low-cost airlinesoperate on this basis but at discounted rates fromthe OEMs.Performance retention is a key part of jet engineengineering. Over the past 15 years there has beena massive improvement jet engine performanceretention that has had an effect of reducing the averagelevel of engine maintenance per operating hour.At the same time the number of engines has grownsignificantly as the aircraft fleet has increased.Components:The largest share of this activity is carried out bythe original equipment manufacturer (OEM). Theyhave an advantage with technical knowledge of newproducts. Techniques and tools developed for themanufacturing process can readily be adapted for14STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

maintenance tasks. In addition, it is becoming increasinglybeneficial for an airline operator to leaveall the work to the OEM, who has the advantage ofmuch larger scale of activity. Contracting-out thiswork to OEMs also saves the costs associated withprocuring spare parts and tooling for a smallernumber of items by the airline.Additionally, for reasons of simplicity there is tendencyto transfer the ownership of inventory to theOEM or other repair agency and base charges on aper flight hour basis.Modifications:Modification work is so varied that no single factoraccounts for a predominant amount. Some modificationssuch as conversion work of passenger aircraftto cargo involves complexity and is expensive.The aircraft manufacturers have approved conversionprocesses, parts and procedures and tend tolimit the number of MROs that they will licence tocarry out this work. This tight control also maintainsprofitability of this process for the OEMs. Carryingout of passenger product modifications (interiorsand in-flight entertainment systems IFE) is alsoexpensive and quite labour intensive.Additionally, there is an element associated withmandatory changes to service bulletins. Increasingly,some of the more established MROs areexpanding to take on large amounts of this work inpurpose-built facilities.• One-off contracts for the defined work packageNormally this would be done on a fixed price for thescheduled work with additional work being at anagreed man-hour rate per item. Difficulties invariablyarise when the final bill comes in with frequentmajor disputes over the level of booked hours! In addition,the customer usually has to provide a numberof engineers to be on site in order to agree what thescope of the additional work is to be and to act as atechnical monitor of the work as it progresses.• Long-term contracts to cover a whole fleet over afixed time periodOften this will be for a number of years. As a resultof the certainty of an income stream for the supplier,the overall price will fall and a better relationshipwill develop.• Power by the HourThis is a concept whereby the supplier is effectivelyselling a total service to the customer. Often used inthe engine market, it guarantees the availability ofserviceable engines in exchange for a fixed price peractual flying hour achieved. Airline finance directorsparticularly support this type of arrangement, as itgives fixed and predictable costs over the life of thecontract. Additionally, it encourages the improvementof quality, since the longer the engine stays inservice the lower the cost to the supplier. This type ofcontract is now being used increasingly for the componentindustry.A variation of this type of support is where the suppliertakes ownership of the entire inventory of thecustomer and manages it on his behalf. A typicalinventory might be 7 -10 % of the initial aircraft purchaseprice so the savings for the customer can bevery great.• Total MaintenanceThis is an increasingly popular contract for theemerging airlines. The MRO supplier contacts tosupport the total operation from the departure phaseall the way through to major maintenance includingparts. Contracts of this type are necessarily long sogiving both the customer and the supplier some stabilityin revenues and costs.2.2 Contracts in UseThere are a number of differing types of contractualarrangement that operators make with MRO suppliers.These are described below:2.3 Work LoadsAll maintenance tasks are generated as a result ofthe aircraft operation. The manufacturer, in conjunctionwith the regulator (CAA in the UK and theFAA in the USA), produces a Maintenance PlanningSTRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 15

Document (MPD) for the particular aircraft type. Thisspells out the required task and the frequency – orinterval – at which individual maintenance checkshave to be undertaken. This is normally a function offlying hours; landings; cycles and calendar time. Insome cases several of these parameters may simultaneouslyapply and the first hurdle in any categorytriggers the requirement for a maintenance checkor overhaul requirement.The operator may vary these intervals, in conjunctionwith the regulator and manufacturer, to suit his particulartype of operation. For example an operatorwith a predominantly summer operation may wish toconfine his maintenance to the winter months.Engine maintenance is defined by the number ofhours of operation and by the operating cycles – thisbeing necessary since the number of take-offs affectsthe stress and thus the wear on the engine. Thescope of work actually needed at engine removal isnot fixed and will depend to a large degree on theengine condition at removal and the requirements ofthe operator in terms of its next planned removal.Component maintenance is increasingly dictated byfailure rather than by a fixed life, except where anyfailure could adversely affect safety.It is clear from the above that the projected growthin fleets and traffic will generate additional work forthe maintainers. However, there are already significanttechnology improvements in place and moreundoubtedly planned. Evidence shows that the trafficgrowth will not produce a similarly sized growthin work load. Indeed, due to technological changeour forecast shows a possible reduction overall.Technology changes have been accompanied withimprovements in productivity. The traditional wayin which work was divided up between trades haschanged in a major way. It is now quite common for asingle trade group to carry out all the functions andindeed for most individuals to certify their own work.Previously, certification was carried out by specialiststaff or by a limited number of skilled tradesmen.Finally, in this area, the role of the Trades Unionshas also changed. Traditionally they were opposedto any transfer of work out of the operators’ ownfacilities. Now transfers and sub contracting arecommonplace with changes being negotiated.In all the above the key is costs. Not only is thedirect cost of the work important, but also the overallcost of the maintenance task as a percentage oftotal cost for the operator is a determinant. Since themajor success factor for any airline is the amount offlying they can get out of an aircraft, it follows thatthe maintenance needs to be done in such a way thatdowntime is minimised. It is perfectly legitimate foractual maintenance costs to rise if there is a tradeoffin terms of reduced downtime.The chart in Appendix 1 shows the typical intervalsand man-hours planned for B737 by one of the Europeanmaintainers. Variations between new and oldergeneration aircraft are clearly evident.2.4 CapacityThis is normally measured – for airframe maintenance– in terms of available man-hours. Thecalculations needed are relatively simple but have aprofound affect on both costs and productivity. Whilecosts are driven directly by paid man-hours theefficiency of a unit is driven by available man-hoursand by the rate of utilisation of those hours. So, whileall the employees contracted hours are paid, he –orshe – is only useful when actually at work and actuallyworking!These issues have significantly affected the planningand execution of tasks with heavy emphasis placedon production planning and computer aided taskallocation.The challenge for maintainers is to have just enoughcapacity for the contracted tasks but not too muchwhich stands around unused.Our clear impression of the UK market at present isone of some excess capacity although this appearsto be localised and may be a feature of only someMRO facilities. There are definitely excess physicalfacilities but these are in the main on valuable land.The Eastern European market appears, by contrast,to be capacity constrained. There may be an opportunityhere to develop contracts into the future.16STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

3 : survey of the mro suppliers3.1 Size of the MRO market3.2 Types of MRO Supplier3.3 Existing MRO Facilities3.4 Cost StructureSTRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 19

3. Survey of MRO Suppliers3.1 Size of the MRO marketThe following chart demonstrates that nearly $100billion is spent annually on aircraft MRO. This ismore than the value of new aircraft production thatis estimated at about $75 billion.Figure 3.12004 Global Aircraft MRO SpendingThe next chart shows the worldwide split of the airtransport MRO market by segment. Engine overhaulis the largest segment, with the remainder splitroughly equally between line maintenance, componentoverhaul and the combination of airframe heavymaintenance and modifications.Figure 3.2MRO Segments %Middle East4%Africa2%Latin America5%Asia Pacific21%North America40%Europe28%The total includes military spending is the largestproportion of MRO activity. However, the largestshare of the military spend will be American and thismay not be available for international tender. Also itshould be noted that it is not practical to mix militaryand civil aircraft maintenance and repair activitiesas the methods, constraints and priorities are verydifferent. MRO suppliers that are involved in bothsectors tend to keep military and civilian activity inseparate lines or even as separate business units.Figure 3.3Global SharesModification14%Modification8%Line Mtce23%Component14%Engine34%The final chart in this section shows the distributionof air transport MRO activity by region.The air transport portion of the MRO business is estimatedto be worth over $36 billion worldwide, ofwhich 50% is outsourced to third party suppliers.North America is the largest market followed by theEuropean market, which represents 28% of the totalglobal spend and is worth $10 billion per annum.20STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

3.2 Types of MRO SupplierThere are three types of supplier• Third party contractors, either specialist MROproviders or airlines supplying on a third party basis• Original Equipment Manufacturer (OEM)• In house by the airline operator itselfThe split between these categories varies accordingto the element of MRO activity, as is shown in thefollowing chart.Figure 3.4Global MRO Segments by Supplier Type$ Billion14121086420Engine Component Line Mtce Airframe ModificationsLarge proportions of engine and components overhaulare carried out by the manufacturers (43% and35% respectively). Independent third party suppliershave the largest share of airframe heavy maintenanceand modifications. Indeed modification activityis largely in the hands of the third party suppliers.In Europe there has been a tradition that the mainnational airlines kept as much possible of theirmaintenance in-house. However recent years haveseen an increasing trend towards outsourcing. Insome cases this has meant placing a high proportionof MRO activity with completely independentsuppliers. Other major airlines have set up theirMRO operations as profit centre businesses withintheir group: Lufthansa Technik and Air FranceIndustries (AFI) are examples of major MRO supplierwhich began life as an in-house engineering departmentbut which has grown into a major third partysupplier. SR Technics is another interesting case:it become a separate company within the Swissairgroup and eventually outlived its parent to becometotally a third party supplier.Over recent years a number of airlines have contractedout engine overhaul or sold their engine overhaulworkshops to the engine manufacturers. For exampleBritish Airways sold its Treforest works in SouthWales to General Electric of the USA (GE) and has letlarge contracts to both GE and Rolls-Royce (RR) forengine overhaul and the supply of spare engines.Given that aircraft can move easily from one region toanother, suppliers are competing on an international,if not global basis. For example European airlinesalready despatch aircraft to engineering facilities inAsia for some tasks, especially modifications and Dchecks. This is worthwhile because manpower costsare lower and quality is good. However, the scopefor such solutions is constrained because the timetaken to ferry aircraft to and from Asia is a majorfactor as it means a loss of revenue earning days.MRO are suppliers in Eastern Europe are makingan attempt to expand their markets, using theadvantage of lower labour costs. There have beenconcerns about the quality and reliability (in termsof scheduled downtime) of some of the suppliers.Additionally there are signs that these facilities arealready becoming capacity constrained.Suppliers in Israel however have also managed tomake an impact. Labour costs are also low, butquality and reliability are good.3.3 Existing MRO FacilitiesThe total MRO market is vast and situated in all fivecontinents with over 300 suppliers in total.This section of the study will focus primarily of thefacilities in Western Europe, as this is the arenawithin which a Glasgow MRO would have to operate.The study will also examine MRO facilities in Israel,where there are a number of competitive supplierswithin reasonable geographical range of the Europeanmarket.MRO Facilities in the UKThe following is a summary MRO activity in the UK.A number of significant airlines are not mentioned,including easyJet, Virgin Atlantic and Thomson Fly(formerly Britannia), as they rely mainly on third partyproviders for their maintenance support.STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 21

• British AirwaysAs the major operator in the UK and with one of thelargest engineering facilities in Europe, they obviouslyneed to be considered. They have traditionallydone all their own work in-house and they now performno third party work.In the late 1980s they sold off their Engine Division toGE and reached a 10-year contract with them for alltheir existing engine work. Latterly this relationshiphas been strengthened by a new 10-year renewalof the contract for all the RR RB211 and GE enginetypes (GE90 and CFM 56). It is believed that Rolls-Royce maintains the RR Trents on the RR poweredB777 fleet.They have also split off their workshop and componentoverhaul units to subsidiary companies and relocatedthem away from Heathrow. In some casesthey have sub contracted specific tasks – such aswheel, brake and undercarriage overhaul – to outsidecompanies.They have greatly reduced both their work loads andworkforce by progressively implementing productivityagreements and working with the manufacturersto improve maintenance practices.• BMIThe main bases are at Heathrow and East Midlands.Besides maintaining its own fleet, BMI perform heavymaintenance up to C check for Virgin Atlantic.• Rolls-Royce plc Aero Repair & OverhaulPart of the aero engine business, Rolls-Royce hasfour UK facilities. Rolls-Royce Aero specialisesin engine refurbishment and overhaul for a largecustomer base including civil, military and marineapplications. It also has a comprehensive parts refurbishmentcapability. Rolls-Royce has associatedcompanies worldwide, including facilities in the USAand Canada.• Marshall AerospaceMarshall is based at Cambridge and specialises indesign, development, maintenance and conversionof military, civil, business and general aviation aircraft.Boeing and Airbus aircraft are services up toD check level. Marshall Aerospace is also a majormaintenance supplier for military aircraft. Additionally,they perform a significant amount of manufacturingwork for aircraft manufacturers. They havefacilities for total airframe maintenance for all sizesof aircraft up to and including the B747.• Bournemouth Aviation Services (BASCO)BASCO is now owned by Singapore TechnologiesAerospace. They specialise in aircraft maintenanceand modifications especially on widebody aircraft.• ATC Lasham LtdATC Lasham was originally part of the charter airlineDan Air. They are now significant suppliers tooperators and individual owners of executive jets.Originally based at Lasham, they have recently acquiredthe premises of the former Heavylift Companyat Southend where they plan to open an A320/321maintenance facility. In addition they have taken overhangar facilities at Cardiff previously used by DARAand plan to open a B757/767 Maintenance Line• MonarchThe main base is at Luton, maintaining its own aircraftand providing third party services.MRO Facilities in Continental EuropeThe main MRO suppliers in Europe have developedfrom airline in-house operations. The most significantexception is EADS. The following is a summaryof some key players.• Lufthansa TechnikPart of the Lufthansa group, Lufthansa Technik isthe largest MRO provider in Europe with total staff of16,000. It provides MRO services for all major commercialaircraft and provides maintenance supportat over 60 international airports.Lufthansa Technik was formed from the EngineeringDivision of Lufthansa at a time when the main nationalcarriers were reviewing their cost bases andorganisations. The intent was to allow more freedomfor the carrier to choose its supplier but, moreimportantly, to ensure that the Engineering divisionwas aware of its true costs and thus to more likely torun its activities on more business like terms.Lufthansa Technik has become highly successfuland has rapidly expanded both in and outsideEurope. Significantly it has set up a joint venture withMalev in Budapest (in which it holds 85%) and anotherpartnership with Air Malta. It has also acquiredShannon Aerospace in Ireland. In a recent move,they have formed a further partnership with Garudain Indonesia. These companies are clearly intendedto provide capacity and services at lower cost thanthe main bases at Hamburg and Frankfurt.• Air France Industries (AFI)AFI is the next largest MRO supplier in Europe, with11,000 employees. Originally the Engineering Divisionof Air France, AFI now operate as an autonomousunit within the parent organisation. They have22STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

een very active in the Component Support areaoffering total Inventory Management. They also undertakethe full range of Airframe maintenance. Itis believed that about 80% of their work is now forthird parties.• EADSThe majority owner of Airbus, EADS has developed alarge presence in the MRO market through varioussubsidiaries. Not surprisingly the company specialisesin supporting Airbus aircraft.The main subsidiary company is Sogerma. Its headquartersis in Bordeaux and has a number of basesin France and also in Tunisia and Morocco. Theyundertake a total range of engine, airframe andcomponent services. Currently EADS has over 500customers and a staff in excess of 4,000. Other divisionsinclude ASLLC at Lake Charles in Louisiana,Barfield at Miami, EFW at Dresden in Germany andEADS Revima in France.3.4 Cost StructureThe following chart shows a breakdown of the costsfor each MRO segment. For Line maintenance andfor airframe heavy engineering, labour is by far thelargest proportion of the cost.Financial PerformanceThe financial performance of some of the UK MROshas been giving concern for some time. Prior to itsabsorption by SR Technics, the Stansted based MROFLS was reported to be heavily loss-making. BASCOis now part of Singapore Technologies Aerospacealso was reported as loss-making in 2004.Figure 3.5MRO Expenditure by Catagory %100%• SR TechnicsSR Technics, once the Engineering Division of Swissairit has, unusually, survived the demise of its parent.It is very successful and has recently bought upFLS with bases at Stansted, Manchester and Dublin.SR Technics offer a full range of services andhave recently concluded a £10m per year deal witheasyJet for total support of their fleets.MRO Facilities in IsraelMention should be made of Israeli suppliers. Themain MRO suppliers in Israel are able to offer lowerman-hour rates, have established a good reputationfor quality, and are not so far distant from Europe asto significantly penalise the time aircraft are out ofservice. Consequently they are a highly competitiveforce in the MRO market.• El AL TechThe technical organisation of the international airline,EL Al Tech specialises in Boeing aircraft up to Dchecks and provides logistical support, engineeringsupport and modifications. It is prepared to developtailor made solutions for its clients.90%80%70%60%50%40%30%20%10%0%Engine Component Line Mtce AirframeLabour Parts RepairMaterials Other• IAI BedekAn independent third party MRO supplier, IAI Bedekcan provide airframe, engine, component maintenanceand modifications for Boeing and Airbus aircraft.They also perform cargo conversions for Boeing747, 757 and MD11 aircraft.STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 23

4 : mro opportunities at glasgow4.1 Introduction4.2 Barriers to MRO Entry4.3 Success Parameters4.4 Incentives4.5 Interview Process4.6 Conclusions and Next Steps(Please note this section is specific to Glasgow Airport and would notapply to the other Strair Partners’ airports.)STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 25

4. MRO Opportunities at Glasgow4.1 IntroductionThis section of the report considers the specificchallenges which the sponsors face in developing anMRO facility at Glasgow Airport.First of all the barriers to entry are described alongwith the key parameters which will determine success.As a key part of the exercise a number of interviewswere held with senior managers from a selection ofairlines and MRO suppliers. These interviews wereextremely helpful in establishing the viewpoints ofthe type of the organisations that will be vital to thedevelopment of MRO activities.On the basis of the analysis, MSP Solutions has concludedthe report with some recommendations thatneed to be addressed if the Sponsors are to be successfulin attracting MRO activity to Glasgow.4.2 Barriers to MRO EntryPremisesAll types of MRO activities requires premises fortheir work. These naturally vary depending on therange of tasks and the aircraft types being handled.Most suppliers, particularly the more establishedones, tend to own their facilities outright althoughthe land may be on long-term lease.Tooling & Support Equipment.The investment levels for aircraft maintenance arefairly low being generally confined to support rigsand specific tooling. For engine work the provision ofspecialist machinery and metal treatment systemsadd considerably to cost, as does the provision forengine testing. A recent engine cell for a high bypassengine was installed to in excess of $5M.Capital InvestmentAll the above obviously require capital investmentin the first instance. When the current state of theIndustry is taken into account, it is easy to see whythere is some reluctance to invest in new facilities.A number of providers have been reporting significantlosses over the last several years, as have theircustomers. There is a major squeeze on costs by theairline operators with traditional costs of 13-15% oftotal costs falling to some 9-10%.Track RecordIt is extremely difficult to get a customer base fromscratch. The industry tends to trust existing playersrather then brand new entrants. Increasingly we areseeing new companies being floated off from existingones.LabourThe aircraft side of the business is the most demandingin terms of labour and of qualified staff who cancertify their work and that of others. Since the completionof work in a timely fashion is critical to thesuccess of the business, this naturally means a significantlevel of labour as well. It is fairly common tosee up to 1,000 man-hours per day made availablespread over a 7-day double day shift pattern. Usingthe normal figures for the Industry of some 1,500hours per man per year this would equate to some250 employees PER LINE. Big numbers!In the engine business, where labour cost is lessthan material costs, the labour issue is not so great.Additionally, much of the work is process drivenand requires more specific skills but over a limitedrange. Component work involves a lot of automatictesting as well as more detailed assembly. Numberstend to be lower here.26STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

4.3 Success ParametersAny knowledgeable customer will seek to have:• Guaranteed and minimised downtime. An aircrafthas to fly to earn and if it is in a hangar it is not earning.So, downtime has become a critical factor – evenabove cost – in deciding whom to use as a supplier.• Quality in the shape of reliability is the next priority.It has become virtually an assumed issue sincea long-term failure to deliver this will result in nocontracts.• Price. This only becomes an issue after the twocriteria above are met. Most operators will pay morefor delivery and quality being achieved.• Availability. Particularly an issue in the componentand engine fields since any aircraft on ground(AOG) occurrence will directly affect revenues.• Financial success. A positive return on capital aswell as an operating profit and a return to shareholdersare the more obvious ones. In the current marketit is increasingly seen to be gaining an increasedmarket share in the expectation of an improvementin finances for the Industry.proceed as envisaged. RSA can be used to influencethe location of a project to Scotland, make projectsbigger, better or happen sooner.• Other funding – the majority of project fundingmust come from the private sector.Eligible project costs can include investment in:• Land and buildings• Plant and machinery• Software and intellectual property (IP)4.4 IncentivesThe issue of state aid, EU subsidies, direct and otherdirect or indirect incentives available from governmentscan be an extremely important issue in thelocation of major investment projects. At present theGlasgow Airport area qualifies for Regional SelectiveAssistance (RSA). This enables grants to be claimedfor new project investment.Regional Selective Assistance, or RSA, is a nationalgrant scheme, aimed at encouraging investmentand job creation in the areas of Scotland designatedfor regional state aid under European Union law (theAssisted Areas).To be considered for assistance, a project must meetthe following criteria:• Location – it must take place in an Assisted Area.• Jobs – the project must directly create or safeguardjobs. Assistance will not be given where itleads to job losses elsewhere in the Assisted Areas.• Investment – it must involve an element of capitalinvestment.• Viability – the project must make commercialsense, and contribute to the national economy.• Need – the project must need RSA to enable it toLevels of grant are negotiated individually, and willdepend on the scale of the project and the need forassistance. Most grants represent about 15% ofproject capital expenditure. These grants generallywork out between £5,000 and £10,000 per eligiblejob, with more for higher quality jobs.For projects involving relatively low levels of capitalinvestment, assistance can be calculated againstthe first 2 years’ salary costs of new project jobs.RSA is not limited to a single grant, and can beawarded for subsequent expansion project(s).The European Union have applied new rules fromthe beginning of 2007. The new assistance regimeis designed to direct as much assistance to the newmember states, mainly from Eastern Europe to hastentheir process of economic convergence. Consequentlythe opportunities for assistance in Scotlandmay become more restrictive.STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 27

In considering future investment or expansionplans, businesses are able to apply for RSA underthe current regime. As RSA applications can coverplanned investment and related jobs over a numberof years and, irrespective of the changes effectivefrom 1 January 2007, RSA offers issued before then,including those involving capital investment and jobsbeyond that date, will be dealt with on the basis ofcurrent rules.The consequence of these changes means that thereis a great deal of urgency in preparing for any newproject, with it being necessary to have the planningprocess advanced to a decision point well before theend of the current year.4.5 Interview ProcessThis section is not available for publication. The confidentialityof the companies who agreed to take partwas guaranteed and therefore it is not proposed topublish their comments.The main concerns in the industry are downtime,quality and cost. There is a lot of interest in findingnew solutions, especially by utilising MRO facilitiesin Asia. Three of the interviewees expressed varyingdegrees of interest in a Glasgow MRO base whileonly one of the five dismissed the possibility out ofhand.4.6 Conclusions and Next StepsGiven the scale of the market, MSP Solutions believesthat a Glasgow MRO facility would be bestplaced to look for business maintaining narrowbody aircraft of European airlines. There may alsobe some opportunity for smaller wide body aircraftsuch as B767, B787 and A350. It is unlikely that Glasgowwill be able to compete for business servicingthe larger wide bodies (A380, B747) as the marketsize will be smaller and the investment in resourcesmuch greater.The interview process shows that there are companiesthat would consider using an MRO facilityat Glasgow. At this stage, the companies involvedwish the discussions to remain confidential, but ifthe Sponsors wish to develop proposals, a numberof target organisations can already be identified.A new MRO facility must meet the main concerns ofthe industry, i.e. downtime, quality and cost. It is essentialthat these concerns are recognised and addressedat all stages of developing a plan and in theimplementation.The suggested steps are:• Decide on and define clearly the physical area tobe released for the MRO facility. In reaching this decisionit will be vital that there is adequate room fora 4 bay facility with room for further expansion at alater date (defined outline MRO facility).• Clarify, and if possible agree with the existing operatorsat Glasgow, what is to happen to them andthe sites they occupy at present. Of particular concernhere must be the continuity of current work.• Attempt to reach a consensus with other maintainersat other Scottish airports that they eitherrelocate or at the least do not attempt to competedirectly with Glasgow.• Assuming that we are correct in our conclusionsthat no one else is likely to commit to a capital investmentfor a new facility it is considered advisableto identify a number of potential tenants first.• Evaluate the costs (capital expenditure on buildings,equipment and infrastructure, working capitalto recruit and train the personnel, other pre-operatingexpenses), income streams representing a realisticearning potential of the defined outline MROfacility.• Evaluate the economics of outline project takinginto account the income streams, costs under a varietyof financing options.28STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

• Initiate discussions with a number of banks andventure capital organisations to seek out the mostattractive terms likely to be available for a partnerbased operation.However, it is the area of financial arrangementsthat is arguably the biggest challenge. The interviewprocess revealed that the organisations approachedby MSP Solutions might be reluctant to invest theirown capital in such a project. While it should be possibleto partner with one of these organisations at allstages of the development process, it must be bornein mind that they may be seeking what amounts toa turn-key operation. This means that financing ofthe project may have to be found outside the existingMRO industry.If the Sponsors wish to ensure that the MRO projectmoves ahead, it may ultimately be necessary forthem to put up some equity capital. The involvementof BAA as a private company would qualify for theEU grant aid, but there might be problems if ScottishEnterprise and Renfrewshire Council as GovernmentAgencies were to take a majority stake (assumingthat they were willing and permitted to do so).would require a firm long-term contract from areputable MRO organisation. Investors will wantto ensure that the utilisation of the facility will behigh and that there is a high chance that they will bepaid the agreed rental streams until the capital isrepaid. If the participating MRO organisation wouldbe prepared to put some equity into the project thenthis might ease the way for other investors to put upcapital, whether this would be equity or debt.Before the questions relating to financing are investigated,the outline project needs to be defined andthe economics be evaluated. These two steps will becritical to taking the project forward before any furtherserious discussions are held either with seriouspotential MRO participants, investors and debtproviders.Direct participation of British Airways, even if it is inthe form of a long term contract with the new proposedMRO facility to overhaul all their narrow bodyfleet Airbus A320 family (A319/A320/A321), theirB737 family (B737-300/400) and possibly their B757-200/B767-300ER fleets (and their eventual replacementseither B787 or A350), would also mitigate theperceived risk for other potential investors.If additional equity were to be required it might bepossible to secure this through venture capital organisationssuch as 3i or similar types of institutions.Another approach might be to create a specialpurpose vehicle to allow investment funds and otherfinancial institutions such as pension funds to participatein the investment. The rates of return andthe stability of earnings would be important factorsfor the various financial institutions such as pensionfunds.The perceived risks and the likely rate of return thatcould be earned on the investment will determinethe level of interest of external investors, especiallyfor equity participants. Once the equity funding hasbeen resolved, the question of debt coverage for theproject could be considered. It seems unlikely thatthe project could be funded solely on a debt basis.To secure external financing both equity and debtSTRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 29

glossarySTRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 31

GlossaryAOGCAACADCAMChecksDOEETOPSFAAGAGDPIFEMPDMROOEMRSAAircraft on groundCivil Aviation AuthorityComputer aided designComputer aided manufactureProgressive maintenance checks ranging in durationfrom over night to six weeks.US Department of EnergyETOPS stands for Extended (range) Twin (engine) Operationsand covers special rules for operating twin engine aircraftover water or land where there are no readily usable airportsfor emergency landings.Federal Aeronautical Agency (USA)General AviationGross Domestic ProductIn flight entertainmentMaintenance Planning Document. This spells out requiredmaintenance tasks and the frequency at which they have tobe undertaken.Maintenance, Repair and OverhaulOriginal Equipment ManufacturerRegional Selective Assistance32STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

appendices1. Example of Maintenance Planning Document.Shows frequency and man hour requirements.2 Global Fleet – Airbus and Boeing Aircraft.3. Stored Aircraft.4. Results Summary - Mainstream Scenario.5. Results Summary - Alternative Scenario.STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 35

Appendix 1Example of Maintenance Planning Document.B737-300/400/500Item Frequency Man hour requirementsMechanical Avionic Others Total CommentsPreflight 3 3Daily 7 1 8Weekly 8 81A Check 300hours/300cycles/50days 42 422A Check 575hours/575cycles/3months 82 4 864A Check 1150hours/1150cycles/6months 138 8 7 1538A Check 2300hours/2300cycles/12months 188 10 11 2091C Check 4600hours/4600cycles/24months 1385 200 370 19552C Check 9200hours/9200cycles/48months 1550 370 555 2475 And 1C Items3C Check 12800hours/12800cycles/72months 1385 230 390 2005 And 1 & 2 C ItemsCustomer Maint ProgrammeDaily 2.5 1 2.5 6Weekly 4.75 2.25 2.5 9.5A Check 24 8.5 8.5 412A Check 575 hours / 3 months 30 18 10 583A Check 13 1 9 234A Check 30 2 11 431C Check 514 90 255 859 And all preceding2C Check 655 90 520 1265 And all precedingB737 - New generationItem Frequency Man hour requirementsMechanical Avionic Others Total CommentsPreFlight 1 1Daily 2 27 days 150hrs/50cycles 1 240 days 300/400/500hrs.300cycles 14 1460 Days 600/700/800hrs.400cycles 11 11100 days 100/1250hours.1000cycles 25 258 months 1600/2000/2500/3000hours 35 3512 Months 12/15/16mths.3500/4000hours.1250/1600 cycles 65 6518 Months 5000.6000hours.2000cycles 380 15 39524 Months 6500/8000/10000hours.3000cycles 223 5 228Shows frequency and man hour requirements.36STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

Appendix 2Global Fleet – Airbus and Boeing AircraftAirbusBoeingTypeTotalOrdersTotaldeliveredInServiceTypeTotalOrdersTotaldeliveredInServiceA318 89 27 27 B717 148 137A319 1,138 765 764 B737 462 4,930 4,114A320 2,082 1,440 1,429 B757 1,049 993A321 457 339 338Narrow Bodies 3,766 2,571 2,558 Narrow Bodies 462 6,127 5,244A300 598 546 416 B767 14 932 869A310 260 255 232 B777 109 532 494A330 553 374 371 B787 185 - -A340 385 310 307A350 25 - -Mid size 1,821 1,485 1,326 Mid size 308 1,464 1,363A380 149 B747 43 1,364 990Large aircraft 149 - - Large aircraft 43 1,364 990Airbus Total 5,736 4,056 3,884 Boeing Total 813 8,955 7,597This data is accurate as at the end of September 2005.It does not cover the entire world fleet of jet aircraftthat is nearer to 17,000 in all, including Russiantypes, regional jets and discontinued models.Most significant types still in service are the DC9/MD80/MD90 family of which there are approximately1,000 still in service. The main wide body not includedabove is the MD11 of which there are over 100 stillin service, many as freighters.The two most significant regional jet manufacturersare Bombardier of Canada and Embraer of Brazil.BAE Systems has withdrawn from manufacturingcivil aircraft but over 300 jet aircraft in the 60-90 seatrange are still in service.STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 37

Appendix 3Stored AircraftThe standing down of aircraft has been a feature ofthe industry since the first Gulf War and subsequentfinancial recessions. Essentially, as airlines becamemore and more financially unstable and as trafficfell due to a reluctance of people to fly, there werejust too many aircraft in the system.As a consequence a large – up to 2000 at one stage– number of aircraft were “dumped”, largely in theMojave and Arizona deserts in the USA. They werekept useable and as the travel Industry gradually improvedmany were brought out of retirement. Subsequentmajor losses in the industry as a whole haveresulted in a further tranche of aircraft being takenout of service and again parked in the desert.It is not possible to determine with absolute accuracythe stood down aircraft numbers by type, butthe following charts give the best available data, asat end of July 2005.Extrapolating the numbers involved, by taking thepercentages involved and applying them to the totalsproduced, gives a rounded up figure of 2,000 aircraftstored, equivalent to 12% of the world fleet. Many ofthese are older types: so long as the fuel price stayswell above the initial figure of $10 a barrel usedwhen justifying their purchase, they are very unlikelyto ever fly again. However, some of the more recentlarge jets may well be converted to freight use andthis of itself will result in conversion work for theMRO industry.Figure 3.1Aggregate Aircraft Types2722Turboprops% of Fleet Parked1712NarrowbodiesAll Commercial JetsWidebodies7Regional Jets2JUN 05MAY 05APR 05MAR 05FEB 05JAN 05DEC 04NOV 04OCT 04SEP 04AUG 04JUL 04JUN 04MAY 04APR 04MAR 04FEB 04JAN 04DEC 03NOV 03OCT 03SEP 03AUG 03JUL 03JUN 03MAY 03APR 03MAR 03FEB 03JAN 03DEC 02NOV 02OCT 02SEP 02AUG 02JUL 02JUN 02MAY 02APR 02MAR 02FEB 02JAN 02DEC 01NOV 01OCT 01SEP 0138STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

Figure 3.2Airbus Widebody (twin aisle) aircraft. (Airbus Models: A300, A310, A330 & A340)3025% of Fleet Parked201510A300A3105A330A3400JUN 05MAY 05APR 05MAR 05FEB 05JAN 05DEC 04NOV 04OCT 04SEP 04AUG 04JUL 04JUN 04MAY 04APR 04MAR 04FEB 04JAN 04DEC 03NOV 03OCT 03SEP 03AUG 03JUL 03JUN 03MAY 03APR 03MAR 03FEB 03JAN 03DEC 02NOV 02OCT 02SEP 02AUG 02JUL 02JUN 02MAY 02APR 02MAR 02FEB 02JAN 02DEC 01NOV 01OCT 01SEP 01Figure 3.3Airbus Narrow body (single aisle) aircraft. (Airbus Models: A319. A320-200, A321-200)1210% of Fleet Parked864A321-200A320-2002A3190JUN 05MAY 05APR 05MAR 05FEB 05JAN 05DEC 04NOV 04OCT 04SEP 04AUG 04JUL 04JUN 04MAY 04APR 04MAR 04FEB 04JAN 04DEC 03NOV 03OCT 03SEP 03AUG 03JUL 03JUN 03MAY 03APR 03MAR 03FEB 03JAN 03DEC 02NOV 02OCT 02SEP 02AUG 02JUL 02JUN 02MAY 02APR 02MAR 02FEB 02JAN 02DEC 01NOV 01OCT 01SEP 01Figure 3.4Boeing Narrow body (707,717,727) and Widebody (747, 767, 777)50454035% of Fleet Parked302520151050717787777707727JUN 05MAY 05APR 05MAR 05FEB 05JAN 05DEC 04NOV 04OCT 04SEP 04AUG 04JUL 04JUN 04MAY 04APR 04MAR 04FEB 04JAN 04DEC 03NOV 03OCT 03SEP 03AUG 03JUL 03JUN 03MAY 03APR 03MAR 03FEB 03JAN 03DEC 02NOV 02OCT 02SEP 02AUG 02JUL 02JUN 02MAY 02APR 02MAR 02FEB 02JAN 02DEC 01NOV 01OCT 01SEP 01STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 39

Figure 3.5Boeing 737 and 757 single aisle aircraft. (Boeing Models: 737-300, 737-400, 737-500, 767-200)10987737-300757-200% of Fleet Parked6543737-40021737-6000JUN 05MAY 05APR 05MAR 05FEB 05JAN 05DEC 04NOV 04OCT 04SEP 04AUG 04JUL 04JUN 04MAY 04APR 04MAR 04FEB 04JAN 04DEC 03NOV 03OCT 03SEP 03AUG 03JUL 03JUN 03MAY 03APR 03MAR 03FEB 03JAN 03DEC 02NOV 02OCT 02SEP 02AUG 02JUL 02JUN 02MAY 02APR 02MAR 02FEB 02JAN 02DEC 01NOV 01OCT 01SEP 01Figure 3.6McDonnell-Douglas aircraft types now supported by Boeing. (DC10/MD11/MD80)5040DC10-10% of Fleet Parked3020DC10-40DC10-30MD1110MD300JUN 05MAY 05APR 05MAR 05FEB 05JAN 05DEC 04NOV 04OCT 04SEP 04AUG 04JUL 04JUN 04MAY 04APR 04MAR 04FEB 04JAN 04DEC 03NOV 03OCT 03SEP 03AUG 03JUL 03JUN 03MAY 03APR 03MAR 03FEB 03JAN 03DEC 02NOV 02OCT 02SEP 02AUG 02JUL 02JUN 02MAY 02APR 02MAR 02FEB 02JAN 02DEC 01NOV 01OCT 01SEP 01Figure 3.7Lockheed Tristars (L1011) widebody aircraft and Regional Jets. (CRJ/120RT/L1011)80% of Fleet Parked706050403020L101EMB 12ORT10CRJ-200CRJ-1000JUN 05MAY 05APR 05MAR 05FEB 05JAN 05DEC 04NOV 04OCT 04SEP 04AUG 04JUL 04JUN 04MAY 04APR 04MAR 04FEB 04JAN 04DEC 03NOV 03OCT 03SEP 03AUG 03JUL 03JUN 03MAY 03APR 03MAR 03FEB 03JAN 03DEC 02NOV 02OCT 02SEP 02AUG 02JUL 02JUN 02MAY 02APR 02MAR 02FEB 02JAN 02DEC 01NOV 01OCT 01SEP 0140STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

Appendix 4Results Summary - Mainstream ScenarioProjectionsAv growth2005 2010 2015 2020 2025 2030 2035 2005-2035GDPWorld (2005=100) 100 121.9 147.1 176.2 210.0 249.1 296.4Annual % variation 4.3% 4.0% 3.8% 3.7% 3.6% 3.5% 3.5% 3.7%Europe (2005=100) 100 113.0 126.9 142.1 158.7 176.5 196.5annual % variation 2.4% 2.5% 2.3% 2.3% 2.2% 2.2% 2.2% 2.3%WORLD OIL PRICES (4)Price per barrel $51.87 $36.85 $38.44 $40.03 $41.61 $43.39 $45.18Index (2005 = 100) 100 71.1 74.1 77.2 80.2 83.7 87.1Annual % variation 41.1% -6.6% 0.8% 0.8% 0.8% 0.8% 0.8% -0.5%AIR FARESIndex (2005 = 100) 100 90.3 87.2 84.2 81.5 79.0 76.6Annual % variation -2.0% -0.7% -0.7% -0.7% -0.6% -0.6% -0.9%Passenger traffic forecastWorld (2005 = 100) 100 137.7 175.3 221.3 277.6 345.7 431.4Annual average % growth 6.6% 4.9% 4.8% 4.6% 4.5% 4.5% 5.0%Europe (2005=100) 100 126.6 149.0 174.7 204.0 236.6 274.5Annual average % growth 4.8% 3.3% 3.2% 3.1% 3.0% 3.0% 3.4%Cargo traffic forecastWorld (2005 = 100) 100 138.9 183.8 240.7 313.1 403.9 523.1Annual average % growth 6.8% 5.8% 5.5% 5.4% 5.2% 5.3% 5.7%Europe (2005=100) 100 124.8 149.4 178.2 211.5 249.3 294.2Annual average % growth 4.5% 3.7% 3.6% 3.5% 3.3% 3.4% 3.7%Fleet Forecast (World)747 or larger 960 2,053 3,046 4,276Twin-aisle 2,800 5,045 8,474 14,268Single-aisle 9,060 12,840 17,273 23,492Regional jets 2,400 2,400 2,400 2,400Total 15,220 22,339 31,192 44,436 3.6%Fleet Forecast (Europe)747 or larger 261 480 649 860Twin-aisle 571 788 1,041 1,381Single-aisle 2,271 2,778 3,273 3,889Regional jets 540 486 437 393Total 3,643 4,532 5,400 6,524 2.0%(1) GDP measured in terms of 'international dollars' using 'purchasing power parity exchange rates(2) All cost and price assumptions are at constant prices (excluding the effect of inflation).(3) Oil price per barrel 2005 is average annual price in US$ quoted by US DOE. Forecast at constant pricesSTRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport. 41

Appendix 5Results Summary - Alternative Scenario.ProjectionsAv growth2005 2010 2015 2020 2025 2030 2035 2005-2035GDPWorld (2005=100) 100 111.0 126.6 142.6 158.7 176.4 194.7Annual % variation 4.3% 2.1% 2.7% 2.4% 2.2% 2.1% 2.0% 2.2%Europe (2005=100) 100 106.1 114.8 123.3 131.6 140.4 149.6annual % variation 2.4% 1.2% 1.6% 1.4% 1.3% 1.3% 1.3% 1.4%WORLD OIL PRICES (4)Price per barrel $51.87 $58.69 $66.40 $75.12 $85.00 $96.16 $108.80Index (2005 = 100) 100 113.1 128.0 144.8 163.9 185.4 209.8Annual % variation 41.1% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%AIR FARESIndex (2005 = 100) 100 98.7 98.0 97.8 98.2 99.3 101.1Annual % variation -0.3% -0.2% 0.0% 0.1% 0.2% 0.4% 0.0%Passenger traffic forecastWorld (2005 = 100) 100 113.6 132.4 151.1 169.2 188.1 205.9Annual average % growth 2.6% 3.1% 2.7% 2.3% 2.1% 1.8% 2.4%Europe (2005=100) 100 108.2 118.8 128.8 137.8 146.3 154.0Annual average % growth 1.6% 1.9% 1.6% 1.4% 1.2% 1.0% 1.4%Cargo traffic forecastWorld (2005 = 100) 100 116.4 140.6 166.2 192.6 222.2 252.8Annual average % growth 3.1% 3.9% 3.4% 3.0% 2.9% 2.6% 3.1%Europe (2005=100) 100 109.4 122.6 135.6 148.3 161.4 174.7Annual average % growth 1.8% 2.3% 2.0% 1.8% 1.7% 1.6% 1.9%Fleet Forecast (World)747 or larger 960 1,329 1,784 2,246Twin-aisle 2,800 3,545 4,504 5,752Single-aisle 9,060 10,608 12,249 13,203Regional jets 2,400 2,400 2,420 2,457Total 15,220 17,881 20,958 23,658 1.5%Fleet Forecast (Europe)747 or larger 261 315 385 465Twin-aisle 571 714 894 1,119Single-aisle 2,271 2,235 2,177 1,921Regional jets 540 491 450 415Total 3,643 3,754 3,905 3,921 0.2%(1) GDP measured in terms of 'international dollars' using 'purchasing power parity exchange rates(2) All cost and price assumptions are at constant prices (excluding the effect of inflation).(3) Oil price per barrel 2005 is average annual price in US$ quoted by US DOE. Forecast at constant prices42STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.

07For further information contact:James Cunningham, Head of EconomicDevelopment, Renfrewshire Council.E-mail: james.cunningham@renfrewshire.gov.ukTel: 00 44 141 842 5877STRAIR Aircraft Maintenance Repair and Overhaul Market Study. Glasgow International Airport.