Like most maintenance providers, Air France Industries has had to seek new ways to win the work it needs to fill its hangars. Efforts with its alliance partners and, uniquely, technology transfer, are both part of the answer

There are potential penalties as well as advantages to be had from being the captive maintenance arm of a major airline. Mindful of the costs, Air France Industries (AFI) has worked creatively to maximise the benefits of its affiliation, notably leveraging its SkyTeam alliance membership. It also has employed some innovative methods to gain more and higher value work from third parties.

The basic issues facing AFI in the downturn are similar to those that confront any other maintenance operation, explains president Alain Bassil. To begin, he says, the fall in capacity caused by the downturn equates to fewer aircraft cycles, which, in turn, retards the normal maintenance schedules. Also, in an era that has seen masses of aircraft removed from active service, the first to make the trip to the desert and the last to leave are the older, and therefore more maintenance-intensive, models.

Furthermore, with manufacturers anxious to keep their production lines engaged in the face of virtual market collapse, the cost of purchasing new aircraft has never been lower. The price tag for new models has fallen to the point that carriers accustomed to filling their shopping carts with second-hand goods, are for the first time acquiring new aircraft.

This change in buying habits has meant that maintenance outfits - which depend on a certain degree of throughput to keep their resources profitably engaged - have seen the heavy maintenance schedules of their customers pushed significantly back, sometimes by years. These factors combined last year to lower global market revenues by about 10%, and Bassil believes their continuing effect will make this year's 4-5% lower still.

In addition to these industry-wide problems, a captive unit such as AFI faces unique difficulties, such as having its decision-making autonomy limited by the dictates of the passenger carrier. For instance, the areas of technical capacity AFI institutes will be driven by the fleet decisions of Air France, which last year accounted for almost $1.3 billion of its $1.8 billion in revenues. It also makes less likely the prospect of garnering contracts from airlines that substantially compete with the parent carrier.

Benefits of affiliation

Naturally, however, the association also includes major advantages, not least of which is a sizeable amount of guaranteed revenue. And in the case of Air France, this revenue is growing: although the parent airline purchased 70% of AFI sales for the second straight year, this occurred against a backdrop of increased third-party revenue. It was only significant flight-hour gains posted by the sister carrier that kept the in-house proportion static.

Something else that has become an advantage is the wholesale fleet replacement exercise carried out by Air France in the late 1990s, which installed maintenance facilities to match. With the Boeing 777 and Airbus A330/A340 having become the most popular widebody aircraft, AFI has enjoyed a critical time advantage in terms of the ability to service them.

With C and D checks of those types now gaining critical mass, the move to install the capacity seems especially fortunate. It is a major reason why, Bassil says, that in a period that saw the sector as a whole post revenue declines of about 10%, AFI sales only declined by a little over 2%.

There is no denying the value to AFI of the business coming from Air France, which is billed at rates based on prevailing market prices and features carefully benchmarked performance guarantees. However, providing maintenance to its associated carrier is only part of AFI's mandate. As one of the Air France Group's three core businesses - alongside the passenger and cargo operations - it is also expected to increase external revenues and post a solid return on its considerable capital investment.

Margins decline

Although the group currently supports 250 Airbus A320s, more than 100 A330 and A340s, and 30 777s - which it expects to grow to 50 in the next few years - AFI is still not maximising its capacity. The unit is also facing a decline in the margins it achieves for airframe-related work, as the dual effects of increased global capacity and a fall in demand have led to lower prices. This is contrasted by the high value that the more technically sophisticated work on avionics, components and engines generates.

This leaves Bassil and his team with the twin objectives of locating new sources of work in a rapidly consolidating industry, and finding ways to win more engine and component work. The chief executive says: "We will work toward this in our own way, using three methods - investments, partnerships and heavy co-operation programmes."

AFI appears to pursue the investment part of its strategy cautiously, although last May the company did acquire a majority stake in the Chinese components repair firm Hangxin Avionics. That transaction will serve to make AFI a bona fide player in the world's fastest-growing aviation market and give it more of the geographic reach necessary to be a global player, while also helping it increase its component overhaul work.

Much of the drive for the partnership-based part of the growth strategy comes via the SkyTeam global alliance of which Air France is a founding member. AFI vice-president for marketing and sales Pierre-Yves Reville explains that, as it does not make sense to invest in heavy maintenance facilities for fleets of under 25-30 aircraft, there is potential for carriers within the alliance to send their smaller fleets to other members for maintenance.

Accordingly, Delta Air Lines says it will contract with AFI to have its fleet of 777s, which currently stands at eight, overhauled at its alliance member's Paris Orly base. Similarly, new SkyTeam member Alitalia will send its six 777s to AFI, with Air France engaging the Italian flag carrier's auxiliary power unit repair and overhaul abilities.

Bassil says that the alliance - which has a committee dedicated to maintenance issues - brings significant scope for further collaboration. New repair deals are frequently agreed between members, and there have been efforts made toward collaborating to win third-party work, especially between two largest carriers Delta and Air France. The fact that they have mostly different fleet compositions, Bassil adds, will facilitate their ability to offer overhaul services on a wide range of aircraft. The two have already partnered to secure from Royal Air Maroc, with which Air France has long-standing ties, Boeing 737 overhaul work for Delta, which extensively operates the type.

AFI is also undertaking partnerships with manufacturers, such as the recent programme it launched with Boeing to provide component support for the 777 to other carriers. Air Austral was the first to sign up to the programme, which will see client airlines pay a per-flight hour charge and turn over all responsibility for the repair and inventory of their line-replaceable avionics and other flight-critical components to Boeing and AFI, with the guarantee that any requested part will be sent within 24 hours. Other overhaul service providers have used investment and partnership options to secure new and more lucrative work, but AFI has taken a unique approach with the third strand of its strategy - co-operation.

Whereas other maintenance outfits have tended to work with external groups only under the umbrella of joint venture or equity link agreements, the French unit routinely engages in less binding arrangements. These deals often feature an element of technology transfer, which helps the client become self-sufficient in a particular technical area.

For instance, four years ago, AFI initiated a deal with Aeroflot to help install maintenance capabilities for Boeing 767s, which the Russian carrier had just purchased and Air France was phasing out. Bassil explains that the deal has been a success for both sides. Aeroflot, which plans to double its fleet of four 767s, will be qualified to conduct A, B and C checks entirely on its own by the end of this year and has already received high marks on its work from Boeing.

For AFI's part, the deal would not have been a net positive if it were strictly a training-based, technology transfer contract. What makes it a winner for the French unit is that it includes a seven-year exclusive agreement for Aeroflot's 767 powerplant and component overhaul work. Bassil admits that "without engine and component support, these deals wouldn't make sense".

This was not the first time the group has used this technique of leveraging its airframe skills to secure more lucrative work. For example, in July, it sent 25 technicians to Port Louis to help Air Mauritius enhance the reliability of its five A340s, a contract that included a two-year exclusive agreement for engine and component work.

Unique partnership

A new twist was seen in the recent work the group has done with Vietnam Airlines. AFI sent technicians to Ho Chi Minh City to help the carrier institute capability on A320 family aircraft and its just-delivered 777s. Uniquely, the Vietnamese carrier did not agree to precede the work with a contract for component and engine work.

Reville explains that the two carriers are still constructing the framework of their co-operation, and that AFI agreed to the deal recognising that cultural perspectives rendered a more intensive up-front commitment unlikely. "In Asia, it's a step-by-step process - you have to work and invest together first," he says. Bassil, however, is confident that the unsecured investment they have made in co-operating with the Vietnamese flag carrier will pay dividends, and the seven CFM-56 engines currently being overhauled at Orly would seem to bear him out.

Such deals illustrate the flexibility AFI uses in leveraging its technical expertise to increase productivity and gain new work in the high-value component and engine arenas. "We don't necessarily impose initial conditions on our co-operation contracts," Bassil says, "but they must be win-win at the end of the day."

Source: Airline Business