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CAVU Café: Royboy’s Prose & Cons

*Note: The views expressed in CAVU Café: Royboy’s Prose & Cons blog are those solely of the writer and are not necessarily shared by the Aviation Suppliers Association or the Association’s staff, members, or Board of Directors.

 

   About Roy Resto

 

MILITARY MRO, WHERE IS IT GOING?

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

Posted By Roy Resto | 5/27/2014 3:15:56 PM
 

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