By 2025, Large Portion of European MRO Activitiy Will Move to Low Cost Destinations. How Can Turkey Win This Opportunity?
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By 2025, Large Portion of European MRO Activitiy Will Move to Low Cost Destinations. How Can Turkey Win This Opportunity?

Issue 1 - 2019
By 2025, Large Portion of European MRO Activitiy Will Move to Low Cost Destinations. How Can Turkey Win This Opportunity?
An exclusive Aviation Turkey report from Amartya De Associate Director, Aviation Practice, Frost & Sullivan and Philipp J. Reuter, Head of Mediterranean Region, DBD A&D Europe

Strategic position of Turkey

Located strategically at the convergence of three major continents Europe, Asia and Africa – Turkey is in an apt position both geographically and economically to take advantage of the growing aviation sector in the region, developing the country in to a regional MRO hub. Turkey has been a hot topic of discussion for aviation investors with the opening of the world’s largest airport in Istanbul expected to have a handling capacity of 90 Mn passengers initially. As of Dec 2018, all Turkish airports hosted nearly 210 Mn passengers serving 5 percent of passengers travelling through various airports on both domestic and international flights. With greater connectivity, at Turkish airports, opens a large market for line maintenance serving international airlines as well as presenting an option of a regional heavy maintenance hub, as many global cities are within a five-hour flight radius that can be flown by both narrow body and wide body aircraft. The continuing growth of low-cost airline operations in Europe, Middle East and North Africa provides a lucrative market for burgeoning MRO market.

European MRO dynamics

European MRO expenses are expected to move beyond than those of North America by 2025. By end of 2018, European MRO demand was estimated to be close to $US 22.7 billion which is expected to increase by a further $US 5.3 billion and reach the $US 28.0 billion mark by 2025 growing at a CAGR of 3.05%. The total MRO market demand of Western Europe is estimated to grow at 3% annually and add a further $US 4.7 billion to its current demand of $US 18.5 billion by 2025. Eastern Europe, though continuing to suffer from economic sanctions placed on Russia, the MRO market demand is forecasted to increase 2% annually. UK, Germany, Turkey and France continue to be the four major markets with higher MRO spending in Western Europe whereas in Eastern Europe, the prominent markets include Hungary, Poland and Kazakhstan. Noticeably Russia accounts for more than 50% of the Eastern European MRO expenses while Western Europe’s MRO market is more fragmented with UK, Germany, Turkey and France together accounting for 40% of the spending in 2018. Locally, the total MRO spending of Turkey stands at $US 1.88 billion in 2018 that is expected to grow at a CAGR of 5.21% and reach an estimated value of $US 2.68 billion by 2025.

MRO Migration from West to East

Over the past few years, airlines have outsourced maintenance activities to Asia and other regions to achieve cost savings due to comparative lower wages and lower infrastructural or operational costs of repair facilities. Both Eastern and Western European regions have felt the wage pressures, as the labors rate are on the verge of further increase. While Eastern European MRO labor rates hover around $US 50 per hour that is closer to North America’s average rate of $US 55 per hour while the Western Europe billing rate is $US 70 per hour, one of the highest MRO labor rates in the world.

While outsourcing MRO work to Asia and other regions has been a major trend, it could slow down in the near future with the introduction of composite aircraft which are expected to reduce regular, labor intensive maintenance work. As a result, European carriers such as Air France KLM, Lufthansa and Virgin Atlantic which have outsourced heavy maintenance for long haul aircraft to MRO providers in the past, may soon see low-man hour rates being less relevant in overall economics of heavy checks. Heavy checks are expected to be more spaced out and composite repair works would require more specialized services in addition to man-hours only. In addition, rising fuel costs have led to higher ferry costs thus reducing the potential labor savings. Thus, considering above factors such as higher ferry costs, rising wages emerging economies of Asia and reduction in man-hour dependency for heavy maintenance work will lead to substantial drop in migration work from Europe to elsewhere.

Western European MROs will continue to invest into Asian markets, since simply outsourcing of tasks did not benefit many large airline customers unless their MRO subsidiaries were able to leverage cost benefits of both labor and infrastructure in Asia with added new customers. Now with growing number of Asian customers, these global MRO centers are able to stay closer to their Asian customers and reap the benefits of a high growth market.

Low cost labor rates in Turkey

The most significant MRO challenge is the tight labor market, evidenced by the shortage of skilled aircraft engineers, particularly in northern Europe. In addition to close proximity to major cities, Turkey extensively benefits from its labor rates, lowest compared to major countries in Europe while closely competing with those of the ASIA’s major MRO destinations such as China, Singapore, Malaysia and Thailand.

As per our analysis, the gross average monthly wages in Turkey accounts for $US 1046 which is 4 to 5 times inexpensive compared to the UK, Germany and France, the major aviation hubs in Europe. Not only Turkey beats Western Europe prices but is also rated better when compared with the average monthly salaries of aircraft technicians working in ASIAN countries such as Singapore, Thailand, Malaysia and China.

MRO demand and existing capabilities in Turkey

The growing MRO demand has resulted in a surge of MRO activities in the country, with new MRO centers being established in Istanbul. Turkish HABOM, based in Istanbul at Sabiha Gökçen Airport, is a large MRO facility consisting of THY Technic joint ventures for wide and narrow body aircraft repair and maintenance activities. The facility at Sabiha Gökçen also has an engine repair shop and various other MRO facilities of varying size and scale.

Turkish MRO companies like Turkish Technic, MyTechnic, Pegasus Technic and others are also competing to increase their share of the MRO market and expand their customer portfolios. According to aviation industry experts, 12% of the airline industry costs pertain to aircraft maintenance, which provides significant opportunities to MRO companies in Turkey.

Besides the industry initiatives, the government has also prioritized the aviation sector and brought some incentives to make it more attractive for both customers and airlines. Low-cost airlines have become more popular, regulations pertaining to fares have been revised, and discounts in airport service, landing and passenger fees, and tax reductions for ticket fares and jet fuel have been implemented. In addition the Turkish government has privatized Turkish Airlines, signed bilateral service agreements with likes of EASA, increased the active role of the Civil Aviation Authority in the international arena and started constructing new airports with the opening of New Istanbul Airport being the most significant and largest in the World. The recent developments are in line with Turkey’s Vision for 2023 to construct new airports with 400 million passenger capacity, and build at least two major aviation maintenance and training centers.

Turkey is emerging as an aerospace hub for markets in Europe, Middle East and Africa with the increase in number of domestic and international flights which lead to a surge in passenger and cargo traffic. It is forecasted that by 2025, MRO spending of Turkey will reach $US 2.68 billion from current spending of $US 1.88 billion in 2018. Turkey’s MRO demand is growing at a rate of 5.21% which is much higher than the growth of entire Europe’s MRO spending put together at 3.05% year on year till 2025. Turkey’s local MRO market demand by 2025 is estimated to be close to 10% of Europe’s entire demand for MRO services that puts Turkey is an advantageous position with a large local addressable market.

The MRO forecast major aircraft families for the period 2018 – 25 clearly highlights that the MRO demand in Europe will be driven by A320 and B737 in narrow body category whereas A330 and B777 in wide body category. Besides these, A350, A380 and B787 are expected to exhibit high grow rates of 40%, 14% and 40%

respectively during the

period 2018-25.

In line with Turkey’s MRO demand resulting from narrow body aircraft, the major MRO suppliers like Turkish Technic which has been a preferred MRO service provider for Airbus models has developed capabilities focusing primarily for narrow body aircraft models such as A320 family, A330 and B737 along with few old generation wide-body aircraft models such as A330 and A340. In addition to the existing MRO facilities, Turkey aims to further strengthen its capabilities in MRO with development of new facilities. As Istanbul’s new airport has been fully operational, major airlines including Turkish Airlines have already shifted their base to the new airport. With these changes in place, the older Atatürk International Airport could be used for aviation maintenance activities and positioned as a major MRO and training hub.

Vision for Turkey - capture 5% MRO demand of Europe by 2025

By 2025, Europe is estimated to generate a total demand of $US 28.0 billion resulting from various MRO services such as airframe, engine, component, modifications and line maintenance activities. Turkey can take advantage of the growing European MRO demand through its existing MRO capabilities mainly in narrow body category both in airframe and engine segments and position itself as a major MRO service provider in the category.

Owing to Turkey’s excellent geographic position and competitive labor rates supported by government’s initiatives and vision towards being established as one of the major aviation and maintenance hub, setting a vision to capture 5% of the total European MRO demand amounting to $US 1.4 billion is a challenging yet attainable goal. This would be composed mainly of airframe heavy maintenance and engine services, supported by component repair shops of major aircraft components such as APU, landing gear, wheels and brakes etc. and may come largely from Western Europe MRO outsourcing activities.

Turkey being a suitable transit point for the global passenger also has the potential to be the MRO transit hub for the aircraft in future

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