For those of you who contribute either directly or
indirectly to the military Maintenance, Repair, and Overhaul (MRO) market,
fasten your seat belts, realignment is coming.
We often hear the civilian global MRO market quantified in
the $50 billion range; that’s indeed huge. If that impresses you, consider
this: as recently as 2011, the global military
MRO market was valued at $66 billion, and that excludes China and Russia. On
the other hand, that value fell to $62.5 and $60.7 billion respectively for
2012 and 20131, so what’s going on?
There are several factors influencing the attenuation of
this market:
First the obvious; sequestration mandated caps.
Do I need to dwell on this factor? Probably not.
There will be continuing, but a more sudden and
steep drop off in what is called Overseas Contingency Obligations (OCO).
Generally, this is spending to cover the over-and-above necessity of ‘surged’ MRO
for assets involved in contingency operations like Libya, Iraq, and
Afghanistan. Iraq and Libya are behind us, and Afghanistan is winding down. To
get a handle on the breadth of what will be going away, consider that in the
current fiscal year OCO spending is $85 billion3.
Cutbacks in military force structure: As the
size of the Federal Government contracts in order to mitigate deficit spending,
the same contraction will occur in the military. For MRO, look for the services
to draw down or eliminate MRO-intensive legacy weapons systems.
Globally, what the US calls ‘sequestration’ the
world calls ‘austerity’. This has tentacles into every nation’s defense
budgets, and the spending drawdown is evident.
The question is, are these trends triggering any other
activity or changes? The answer is, of
course they are. Here are some examples:
A Pentagon program called Better Buying Power.
Decades ago, ‘prime’ suppliers would accomplish most work in-house. Compare
this to today where the primes subcontract up to 60-70% of the work. In
realization of this, programs like Better Buying Power are ‘flowing down’ the
pressure to those subcontractors to create greater efficiencies and savings; to
the point of rewriting long standing deals in some cases2. Put any
other way, the subcontractors are feeling squeezed as margins are being scrutinized
for adjustments. In some cases the Pentagon is placing so-called integrated
cost analysis teams at contractor facilities to learn about their cost
structures. Activity like this is influenced by the perception that in the past
some contracts were awarded which, in light of today’s environment seemed too
generous.
As the cuts become deeper, pressure will be
applied to rattle and change long held doctrinal practices among the military
services. A recent example being bandied in the media is the fate of the MRO-
intensive USAF A-10. If this fleet is grounded, will that mean the USAF will
relinquish its Close Air Support (CAS) mission? It was not too long ago that
under similar economic pressure the USAF relinquished its Airborne Electronic
Warfare (EW) mission to the Navy by grounding its MRO intensive F-111 and F-4G fleets.
What about the Depots? The Depots are those
enormous MRO bases run by the various government military services. The Depots
mostly came into being after WW II, when the Pentagon was worried that the huge
post-war draw down would erode civilian industrial capacity and their desire to
support continuing MRO needs. Because of this, Congress mandated that a
percentage of MRO work be kept in-house (the Depots), and today that percentage
is referred to as the 50-50 rule: At least 50% on average, must be accomplished
by organic organizations – the Depots. Their share of the work is largely
monopolistic; not subject to classic competition as is the remaining 50% work
that is outsourced to contractors. In
today’s robust MRO environment, is there really a need for the 50-50 law?
Predictably detracting from a
collegial discussion to answer that question, are two powerful factors: The
Depot unions and politicians. The Depot unions are adept at mobilizing protests
and their local politicians at the faintest sounds of reforming military MRO,
and why not? They have a long history of successfully providing quality MRO
services which includes specialized needs peculiar only to the military. On the
other hand, there are those that argue that Depots are hampered by being
bloated and bureaucratic; that the lack of a profit incentive (compared to
industry contractors) does not drive continuous efficiency growth; and further,
that the absence of competitive bidding for
all MRO work means the tax payers may not be getting the best value for the
investment. They also contend that if the work is being accomplished on US soil
by US citizens, why shouldn’t 100% of the military MRO work be open to free
competition among all qualified parties, Depots and contractors alike? Watch the fur fly
It’s also interesting to note
another trend in some Depots: They’re
getting FAA Repair Station certificates. This is interesting for these
reasons:
This will make it easier for them to work on
emerging military aircraft and systems being certified and maintained under FAA
regulations.
They will compete for work previously
accomplished exclusively by contractors.
Look for them to eventually seek work not
traditionally associated with DoD work. For example, if they have extensive MRO
capability for engines, who’s to say that same expertise can’t be applied to
civilian engines?
Internationally, look for nations which are
allied to explore pooling military assets to a greater extent. Think of this as
fractional ownership for those expensive military systems. In Europe, AWACs
aircraft are being jointly operated by several NATO nations, and recently,
several countries stood-up a jointly operated C-17 Unit in Papa Hungary. Also
in Europe, after the Libya campaign, there was a heightened awareness of the
lack of air-to-air refueling aircraft. I expect some of these new aircraft to
be jointly operated under similar fractional ownership, if not operated
privately as suggested in the following.
Increased privatization of government services.
Please go back one click to a previous blog I wrote titled “ACCELERATION OF
PRIVATIZATION OF GOVERNMENTAL SERVICES”, or click http://www.aviationsuppliers.org/index.asp?bid=222&BlogEntryID=236&FormID=300
For the US alone, the defense maintenance sector counts
total inventory of more than $350 billion worth of aircraft, missiles, and
other vehicles being maintained by 650,000 military and civilian personnel3.
With numbers like that, the debates are likely to be characterized and
influenced by partisanship, local politics, interest groups, hidden agendas,
and parochial interests. We see the same playing out globally. Hopefully those
with bold, creative, and potentially effective solutions will not be drowned
out.
Roy Resto
www.AimSolutionsConsulting.com
1 Source: ICG Analysis
2 Supplying Pressure. Aviation Week & Space Technology. Page 26, April 28, 2014
3Churning Out. Aviation Week & Space Technology. Page 225, May 12, 2014
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