The worldwide airline maintenance, repair and overhaul business was projected to lose money in the fourth quarter of last year followed by a $1-billion downturn this year as the credit crunch and fear of a protracted recession take their toll on balance sheets.

“The MRO industry is dealing with significant, conflicting forces that include a massive economic slowdown and airline traffic and capacity reductions,” says Chris Doan, president and CEO of TeamSAI, a consulting company that specializes in aerospace market forecasting. Overall, the market forecast this year is down $1.3 billion (2.8%) from previous estimates.

A majority of the capacity problem is centered in North America, and MROs with contracts to maintain aging jets “will feel a significant reduction in business,” Doan says. In addition, the tight money situation will make it increasingly difficult for MRO operators to obtain the financing necessary to continue operations.

TeamSAI had forecast that, worldwide, the MRO business would be worth up to $45 billion last year and experience a growth rate of 4.6% into 2009, but the ongoing economic chaos has soured that view. As a result, the company initiated a mid-year reassessment of the industry and determined that fourth-quarter 2008 performance in the North American market would be damaged by about $1.3 billion—a reduction of 7%—and be worth $15.8 billion. Europe and Asia were feeling the pinch but were deemed to be “more insulated” against a major downturn.

Profit margins for MRO companies, which had been negative from 2001-06 following the 9/11 terrorist attacks, turned positive in 2007 and stayed in the black last year, “but are now sinking back into the red,” he says.

Doan chiefly attributes the backward slide to a weak economy that is suppressing business and personal travel, and forced airlines to cut capacity and park more than 500 less-fuel-efficient jets by the end of last year, such as older Boeing 737s, MD-80s and MD-90s, DC-9s and Bombardier CRJ100s and 200s. Orders for new, more fuel-efficient jets, however, remain strong with a backlog of more than 7,000 aircraft worldwide. The global airline fleet is projected to grow at 4.6% annually through 2018 to 29,437 from 18,816 in 2008, according to TeamSAI.

Doan says if the downturn persists, airlines may defer or cancel orders as they adjust acquisition plans. He expected fleet growth to be flat last year.

Considering the impact of current economic woes, the outlook for MRO for the next 10 years remains relatively healthy. MRO work is forecast to grow at 4.3% through 2018 to a value of $68.6 billion. Doan says during this period, the North American MRO’s share of the world market will decline to 29% in 2018 from 37% in 2008; Western Europe’s portion will shrink slightly to 25% from 27%; while MROs in Asia will capture about 16% of the market and South America will gain 1%.

Historically, the MRO business has grown steadily since the 1970s despite economic slowdowns that hit the airline industry in 1980 and 1991. Those conditions lasted about three years each, and were followed by strong spurts of growth, according to TeamSAI. As for the current situation, Doan says: “We have not seen the bottom of this economic cycle and until that occurs, it will be difficult to predict when an upturn in MRO will occur.” Despite gloomy prospects, “hard times have a way of helping rationalize the market” and weaker MROs may perish if bleak economic conditions persist beyond 2009, he adds.

To weather the downturn, MRO operators are providing more services and repair sites, implementing more total-care services and tightening competitive pricing. “The [airlines] search for value will continue to bring about change but there will be no easy deals,” Doan says. Price sensitivity will prevail; turnaround times will become increasingly crucial, driving the need for MROs to maximize business opportunities, according to TeamSAI.

The cost of jet fuel is another factor affecting how airlines execute their plans for MRO. Skyrocketing prices have created an offset to ferrying aircraft to other regions for work, and the dollar’s weakness against the euro and yen is a contributing factor.

In general, higher fuel prices have cooled plans to ferry jets to other regions for maintenance checks and repairs, but more attractive labor rates in North America may induce European carriers to ferry transports for work. The weak dollar is a further impediment to near-term growth, says TeamSAI. Doan says the “economics at work probably will not stimulate a great deal of offshore activity because those advantages have been reduced.”

Reductions in current and future MRO activity “will impact employment at both airline and independent MROs, and it is reasonable to assume that a manpower reduction at both enterprises will occur,” Doan says. Globalization and consolidation of the MRO business will continue, but “tight credit markets will be a deterrent until credit loosens up and makes money available.”

Another victim of the faltering economy is private equity investing in MRO. This had been on the rise in the past few years but has virtually ceased. Also, the loss of “human capital is going to be a constraint to growth globally, and there is a tightness for talent from the management level down to the shop floor that will continue to be problematic,” Doan says.

The financial outlook for MROs this year will be further exacerbated by tight credit markets that will “force operators to keep more money in-house and reduce working capital and purchases that require debt financing, such as new equipment,” says Tim Hoyland, a partner at the aerospace consulting group Oliver Wyman. For MRO businesses, he expects the first quarter of this year will see fewer transactions and a determination to minimize capital expenditures.

Airlines have cut costs and capacity but recently began paying less for fuel. Since carriers had built their current business cases based on fuel costs before the fourth-quarter 2008 decline in the price of oil, the industry has a built-in financial margin and is not projected to suffer acutely from the downturn, according to Hoyland. He notes that the overall business situation may improve for MRO companies in the third quarter of this year if the economy has picked up momentum.

One other concern centers on a lack of skilled workers. Hoyland agrees with Doan that the North American MRO market, in particular, is not training enough technicians to support future airline or MRO business activity.