COVID-19 … impact on MRO business
The COVID -19 global pandemic is hurting industries from retail, industrial, airlines and many others. Recently, People-Assetz has provided consulting services to a client to evaluate the impact of COVID-19 on MRO (Maintenance, Repair and Overhaul) business. For many segments ex. Industrial, aviation this is a key business that generates high margins and cash. Typically, service jobs are short term in nature that generate revenue and cash in a relatively short period of time. Any impact to this business hurts the company’s bottom line. The impact of COVID-19 on MRO business can be categorized in the following areas:
Contractual Agreements/Long Term Service Agreements (LTSA) – some customers sign up for long term contracts i.e. request the OEM to service its machines for a length of time and guarantee a certain operational parameter ex. availability, reliability etc. For these contractual agreements, the OEM’s may see a decline in short term revenues/cash as some of the customers will delay use of services due to lack of operation of machines. However, since the machines are under contract the longer-term impact should be minimal. Recently, power plant operators saw a reduction in demand for electricity caused by the COVID-19 outbreak that forced them to halt or defer maintenance that otherwise would be prioritized. This will impact companies such as GE and Siemens that provide maintenance services to the utility industry.
Transactional Agreements – some customers maintenance philosophy is to repair machines only when they fail. These customers will continue to offer service opportunities but will be more price sensitive and seek out 3rd party service providers v/s using OEM’s to repair its fleet.
Parts Business – MRO businesses provide three key services – parts, repairs, maintenance services. Selling parts is a lucrative business, as each OEM has IP on its parts and constantly upgrades parts to stay ahead of the competition. In such times, it will be critical for OEM’s to constantly innovate to prevent 3rd party service providers from gaining market share of the OEM parts business.
Digitization – this is an opportune time for customers and providers to improve productivity. Several customers that have traditionally been transactional may evaluate LTSA for its machines and leverage the digital technology offered by OEM’s.
Areas of Growth – ex. maintenance of infrastructure. A large US infrastructure bill has been in discussion for a long time. The current COVID-19 pandemic may accelerate its approval that will create a lot of jobs. Typically, federal government spends approximately quarter of all public spending on roads and highways and the rest is borne by states or local governments. The infrastructure stimulus package is getting a lot of attention and will be great for construction companies focused on maintenance of bridges, roads etc.
Sachin Nijhawan is a Partner at People-Assetz consulting firm. He was an executive for the GE Power Services business. Recently, People-Assetz provided consulting services to clients to develop COVID-19 scenarios for the MRO businesses.