Pressure to cut costs is sending airframes outside airline shops and often far from home markets. Labor rates, which represent up to 70% of heavy-check costs, simply differ too much among regions to ignore. Cost-saving pressures intensified in 2009, but there are new twists on the cost side. Labor rates have converged among some regions. Long-term, some low-cost regions may become more expensive. New MRO facilities could open in countries or regions not now actively considered. Exchange rates could shift. And the U.S. government may impose new burdens on outsourcing abroad. Especially in planning multi-year airframe agreements, MRO execs have a lot more than this year's labor rates to consider.

Marcus Fromm, a Zurich-based maintenance consultant with Accenture, sees labor rates playing an increasingly significant role. Some European airlines already take advantage of low costs in Asia for spot-buying widebody checks, for example. MRO markets have shifted considerably under recent pressures. TeamSAI saw billable rates for airframe work in emerging markets jump considerably in January 2009, compared with 12 months before.

Overall, billable airframe labor rates were thus converging and rising slightly through the beginning of the year. Both trends may have dampened a bit recently. "We do not generally see convergence in labor rates," says ST Aerospace President Tay Kok Khiang. "But we do see to some degree a downtrend." These billable rates are averages within each region and do not reflect, for example, the difference between airline and independent shops. But the broad pattern is consistent. Western European shops are by far the most expensive, but highly active low-cost regions have grown pricier.

TeamSAI President Chris Doan says the major reason for converging rates is additional demand. That is why Latin American rates did not rise much in 2008. Their natural market, U.S. carriers, was shrinking fleets and could not send more jets south. And outside of EgyptAir and South African Airways, Africa simply has not developed a network for MRO outsourcing.

One striking fact is that, even as rates change, sending work far from home bases has been fairly stable. Doan estimates that roughly 20% of maintenance goes "out-of-region." He notes that about a quarter of major airline fleets are widebodies, the most natural candidates for low-cost labor abroad.

But there could be further movement ahead. "Airlines may be open more than in the past to where the maintenance is done," argues Oliver Wyman consultant Tim Hoyland. "They are willing to modify their strategies to send them to lower-cost regions."

Competitive Edge

There is plenty of room for out-of-region outsourcing to grow because billable rates do not reflect the full difference in labor costs among regions. MROs in some low-cost regions are making vastly healthier profit margins than others in rich countries. Billable rates in countries such as China and India have risen because the market will bear higher charges, not because costs have gone up. By contrast, the increase in Eastern European rates at least partially reflects higher costs, with labor free to move across the EU to seek higher wages. Table 2 shows the average compensation of labor across the entire economy in several countries active in MRO.

There are three basic reasons why billable airframe labor rates exceed average labor compensation. First, billable labor must include an overhead factor to cover facility costs. In mature economies for a fully utilized shop, this roughly doubles the compensation paid to techs.

Second is the difference between compensation paid to aviation MRO professionals and that paid to labor generally. Maintenance is a good but average job in many Western countries, sometimes done in locations with a low cost of living. But in emerging markets, mechanics earn a hefty premium relative to other labor.