The maintenance, repair and overhaul industry is undergoing fundamental change as original equipment manufacturers aim for more aftermarket share and third-party MRO providers come under increasing danger of being squeezed out of the business. With new-generation aircraft entering service, more MRO companies are seeking partnerships with the OEMs to secure access to a slice of the future market. Strategic co-operation has become an imperative for maintenance firms, be it with manufacturers, airlines, other MRO providers, suppliers, or ideally a combination of these players.
No other topic created more attention during the recent MRO Europe 2011 conference in Madrid than the growing aftermarket influence by the OEMs and what this means for the aviation industry.
While the debate might not be as existential for airline executives as it is for the heads of some maintenance companies, it ultimately boils down to how much choice the future MRO market will offer between OEM support programmes and alternative services from third-party maintenance companies - and this question leads straight to the airline executive's doorstep.
"We think that competition is really mandatory to keep control of our costs as an airline," says Franck Terner, president of Air France Industries. Emphasising the importance of the bidding process between competing MRO providers and OEMs for maintenance contracts, he questions what would give the airline purchasers a reference line in a potential future maintenance market if this was dominated by the manufacturers. Terner appeals to operators to take action through their purchasing power "to make sure that nobody will take control of the aftermarket, [be it] equipment manufacturers, aircraft manufacturers or MRO [companies]".
Co-operations between OEMs and third-party maintenance providers have a long history. For example, Air France Industries KLM Engineering & Maintenance is Boeing's joint venture for their mutual Component Services Program (CSP) for 777 and current production 737 aircraft. However, competition has become stiffer since manufacturers decided to include aftermarket support as a central revenue source in the business case of their products.
©Air France Indutries KLM Engineering
Their argument is clear too. The continuous demand for more efficient, lightweight, reliable and long-lasting equipment has led to gigantic development costs for the ever-more sophisticated technology. At the same time, sale prices have come under pressure, amid tougher discount negotiations with operators and leasing companies as the industry and, ultimately, consumers became used to cheaper air fares. So the costs need to be recuperated throughout the equipment's lifecycle.
Increasing the aftermarket business is a main objective in EADS' Vision 2020 roadmap until the end of the decade. Airbus offers its Flight Hour Services (FHS) programme, which focuses mostly on component support. However, this can be complemented with other MRO services, such as letter checks, fleet technical management and engineering services, under a Total Support Package contract. The airframer guarantees a certain reliability level at a fixed cost while it manages the repair work through a network of OEM and selected MRO companies.
Operators are increasingly demanding such support programmes, according to Pierre Reville, vice president of services solutions at Airbus. These are not just start-up carriers, who outsource their maintenance, but also legacy carriers with their own MRO operations, such as Singapore Airlines, which has subscribed its A330 fleet to FHS. Last year, the number of the manufacturer's sales tripled, reports Reville.
The objective is to establish long-term partnerships with OEMs, independent and airline-affiliated MRO companies, he says. This means that Airbus is in charge of where the repair work will be done and that airlines usually cannot direct their custom to individual maintenance companies of their choice. Such special arrangements would disturb the relationships and contracts within the FHS network, says Reville.
The amount of information in aircraft maintenance manuals has continually decreased over the years, making it more difficult for independent MRO companies to repair parts without advice from the manufacturers. Aviation regulators require the OEMs to include instructions for continued airworthiness in the equipment's documentation for the operator. However, in some cases these instructions are now limited to what OEM facility the airline, or its designated maintenance provider, has to send the respective part for inspection and possible repair.
Acceptable tolerance levels are essential information to repair, for example, damaged engine components and assemble powerplants. However, this kind of information is increasingly excluded from engine maintenance manuals, reports Stefan Weingartner, president commercial maintenance at MTU Aero Engines. "Aviation authorities will exercise as much pressure on the OEMs as is required from a regulatory point of view. The OEM is and will remain mandated to include enough information in the manual to be able to evaluate the serviceability of an engine. [But] how the engine needs to be repaired, when it is not serviceable anymore, will be less and less described in the manual."
With the introduction of new aircraft and engine generations, manufacturers have increasingly restricted access to their intellectual property (IP). At the same time, the equipment has become more sophisticated and complex, which has led to more demanding repair processes, advanced materials and state-of-the-art workshop kit. In many cases, MRO providers have to make significant investments to develop those capabilities, which consequently require large repair volumes to recuperate the initial lay-out.
Recent examples for the growing equipment complexity evident on the Airbus A380 and Boeing 787 are the move from hydraulic systems with 3,000psi to 5,000psi pressure, employment of fibre-optical cables, liquid-cooled electronics and software-controlled components. These, rather than working as discrete, individual systems, are interlinked as an aircraft-wide server network.
While the novel systems architecture offers enormous flexibility in terms of functionality, it will be difficult for MRO providers to understand the equipment to a similar depth as had been the case with previous system generations. "New aircraft will be like flying sets of software," says Jonas Butautis, chief executive of Vilnius-based maintenance company FL Technics. "They [manufacturers] control the software and core [processors]. So for me it is logical to become part of the OEM system for the aftermarket."
Another factor is the greater standardisation on new aircraft and reduction in the number of buyer-furnished equipment (BFE), which will likely lead to a concentration of maintenance activities among fewer parties. For example, Hamilton Sundstrand is providing approximately 42% of the components on the 787.
"The position of a truly independent MRO is going to be a very difficult one to sustain," says James Stewart, SR Technics' chief executive. "All of the independent MROs have challenging times even today, and those times are going to become more challenging There will be more limitation on the number of shops to support the engines and there will be strict restrictions on the number of partners who will have access to the IP to deal with components."
In July, SR Technics' parent, Mubadala Aerospace, inked a partnership agreement with Hamilton Sundstrand to give the Zurich-based maintenance provider, its sister MRO company Abu Dhabi Aircraft Technologies as well as the consortium's engine and component financing firm Sanad Aero Solutions access to the future business. Last year, the sovereign wealth fund signed a similar contract with Honeywell for avionics and mechanical components on the 787. In Germany, Lufthansa Technik (LHT) signed a co-operation agreement with Hamilton Sundstrand for 787 component maintenance in September.
Different and competing partnership models are possible - and arguably necessary - to uphold some independence as a MRO player in the marketplace.
"Our industry is maybe quite unusual versus other industries as it is in a situation where we are, at the same time, competitors, customers, suppliers and partners," reflects AFI's Terner. "Ahead of us, partnerships and alliances will probably not be so much different as compared to today, but there may be broader partnerships."
Standalone maintenance firms are under the greatest pressure because they are increasingly squeezed between the manufacturers and airline-affiliated MRO companies. In the engine-maintenance sector, the OEMs control approximately half of the market, with the other half roughly split between independent and airline overhaul shops. But operators increasingly outsource engine maintenance, especially for new powerplant generations, and use full MRO-support programmes.
The respective market will likely be taken over largely by the OEMs, suggests Weingartner. While he foresees enough growth potential for MTU through the overall expansion and expected consolidation of the MRO market, he does not anticipate the approximately 25% share by independent maintenance companies to change significantly in future.
SR Technics' Stewart echoes this view, saying that the engine MRO market is "pretty much sewn up" by the manufacturers. "If you want to invest in a new engine facility, you've got to make sure that your deal is with the OEM, because they are potentially going to be your biggest customer. They supply pretty much all the parts, and they supply the IP or otherwise you are not going to be able to do the repairs. So that's absolutely a mature market. The component manufacturers are working towards it, and the [airframe] OEMs certainly come in and play [with their programmes]."
Over the past few years, Mubadala has entered a number of Abu-Dhabi based partnership projects with manufacturers, including an overhaul shop for GE90, GEnx and Engine Alliance GP7200 powerplants, landing gear facility with Goodrich and a maintenance base for military aircraft, together with Sikorsky and Lockheed Martin.
The emirate's investment fund wants to establish its MRO business as a strategic partner for both airlines and manufacturers. Rather than standing opposite the OEMs, executive director Homaid Al Shemmari wants to co-operate with them and provide value for both sides. "We can produce better costs than the OEMs because they are geared to manufacturing, not MRO work," he says. With Mubadala planning to establish new locations in Asia and North America, maintenance services could be provided at different locations around the globe and reduce the OEMs' risk exposure if they were to establish the respective facilities themselves.
Partnerships with different manufacturers will cater for complete equipment ranges rather than selected systems. This is particularly relevant as airlines, which are outsourcing their maintenance, will likely want to deal with few partners, who can service as many as possible parts, rather than having to manage a broad range of specialist suppliers.
However, Mubadala's aftermarket services are to go beyond mere technical maintenance. Sanad is to purchase engines and components to lease them to the operators as running equipment and spare inventory. This option could prove to be a particularly attractive incentive in today's financially uncertain times, both for the operators and manufacturers. With the combination of financing, leasing and maintaining the equipment, Al Shemmari thinks that "at the end of the day the airline is saving, the OEM is selling, and I am benefitting".
Al Shemmari says he has no doubt about staying in the 'driving seat' in regard to the OEM partnership. He expects that the engineering departments in Abu Dhabi and Zurich will develop repairs on behalf of the manufacturers in future, and that the cooperating airlines within the three-way partnership will provide enough counterweight to the manufacturers to reduce the equipment's MRO costs.
The operational experience in maintaining in-service aircraft over long time periods is a central asset, which MRO providers bring to the table. "I think we have a wider and deeper understanding of the aircraft than the individual component OEMs who are focussed on their systems but in the end do not have much of the service experience," says Burkhard Andrich, senior vice president of aircraft component services at LHT. "We look at the components from an airline perspective. That means finding out where the cost drivers are and what can be done to reduce those costs. The OEMs also do this in certain areas, but sometimes this is actually against their interests. That is the nature of the business."
He says that the partnership with Hamilton Sundstrand will be on equal terms and gives both sides freedom to pursue their individual MRO activities separately whilst benefitting from each other's expertise. LHT's contribution is to help achieve the targeted reliability rates of the 787 - and Hamilton Sundstrand's equipment onboard - now that the aircraft enters service. Another objective is to ensure there is sufficient MRO capacity in the market given the type's large order backlog.
Andrich sees nothing fundamentally new in the co-operation with the US manufacturer, because the German MRO provider has a long tradition of OEM partnerships. What he thinks is important is that operators not only enjoy the present competition between OEMs and third-party MRO providers but keep this market alive in future.
"Airlines have to ensure that access to technology remains open and that we don't become dependent on the OEMs," Andrich says, adding: "With aircraft life cycles of up to 20 years, where it is usually not possible to change from one equipment OEM to another, the carriers need to become aware of their market power, and use this strategically to achieve a balance in the market forces. That's pertinent at the moment."