At last year's MRO Europe conference in Madrid, General Electric emphasised its aftermarket strategy being based on an "open MRO network" – comprising its own and third-party repair shops – and suggested that this offered operators a greater choice between manufacturer-led and self-managed maintenance options than its competitors did.

Pratt & Whitney has adopted the term "open MRO network" and insists that competition between in-house and external maintenance facilities is central for a functioning aftermarket. Still, that manufacturer has signed up 80% of the customers for its PW1000G geared turbofan to long-term aftermarket service agreements.

Meanwhile, Rolls-Royce – which has been selling maintenance contracts as part of the vast majority of its engine deals – has after years of negotiation concluded an agreement that allows Air France-KLM to service the Trent XWB engines that will power the airline group's on-order Airbus A350s and those of third-party customers too.

There seems to be movement in the largely manufacturer-controlled engine maintenance market. But operators and lessors are demanding further change amid discontent about the level of choice and competition in the MRO arena.

At IATA's general meeting in Miami in June, IAG chief executive Willie Walsh expressed strong views about "restrictive practices" in the maintenance field and called on other airlines to collectively oppose cost rises as a result of insufficient competition: "We need to start pushing back on our costs where they are driven by a limited number of suppliers."

Walsh said IATA's board of governors was "unanimous" in its views on this issue, adding that the association was taking legal advice to scrutinise existing support contracts. "As an industry, we need to start taking action or our maintenance costs will definitely rise," he said. "If we don't challenge the restrictive practices that exist, we will be held captive and costs will rise and rise."

In certain cases, MRO costs have risen dramatically for airlines forced into restrictive maintenance contracts, said Walsh. He added: "The escalation in costs bears no relation to the service you are getting – it's just not right."

A week later at Paris air show, GE chief executive David Joyce conceded that Walsh "had a point" with his questions about "value within total care [service agreements]". But Joyce sees such debates as nothing unusual within the industry and, indeed, believes they contribute to a "good tension" between customers and suppliers which is conducive to keeping cost under control.

GE's aftermarket services chief Kevin McAllister has likened long-term, point-of-sale maintenance agreements to "marriage" with customers. He suggests these partnerships are stable because, in his view, the manufacturer is continuously devising ways of reducing costs for operators.

Pratt & Whitney aftermarket president Matthew Bromberg has told Flightglobal the manufacturer would be "perfectly happy" to sell engines without service agreements. But, he argues, airlines opt for such contracts – which have an average duration of 10 years – especially for new-generation engines where the technology has not yet been proven in operation.

Around 80% of Pratt & Whitney's PW1000G geared turbofan sales include long-term service agreements, while around 45% of its legacy models and 60% of International Aero Engines V2500s are covered by such contracts.

"That's the marketplace speaking," says Bromberg. He argues that hour-based deals allow carriers to shift risks associated with the engines' performance to a manufacturer "laser-focused" on reducing costs.

Rob Morris, head of consultancy with Flightglobal's advisory service Ascend, is in agreement with that view of airlines electing to use service agreements to gain product assurances from manufacturers for new technology. But he questions whether the aftermarket will open up once the equipment becomes more established and operational experience grows. In 10 years' time, Morris says, manufacturers might consider it "time for a reward" for initially absorbing the risk, and could on that basis seek to maintain control of the aftermarket.

Bromberg says about 10 MRO facilities will be available to support PW1000G engines when the first scheduled overhaul of a geared turbofan is required, typically five to seven years after service entry. These sites will be associated with Pratt & Whitney or its partners. But over time, he asserts, an "open network" of shops will emerge, providing airlines with a similar choice to that of V2500 and CFM International CFM56 operators today. "We believe in competition," he says.

"Open" is a flexible term, however. While some manufacturers might be more tolerant than others about the location or ownership of facilities that can dis- and reassemble engines, there seems to be much less flexibility when it comes to operators' choice of spare-part sources and component repairs. With material accounting for up to 80% of engine overhaul costs, manufacturers have a clear interest in regulating access to spares and the development of repair part capabilities, suggests Bob James, managing director of UK aircraft end-of-life specialist AerFin. "The person who controls the... material costs will ultimately control the engine shop," he says.

He views co-operation between manufacturers and maintenance providers – be it repair licence agreements for existing third-party shops or establishment of overhaul joint-ventures – as a means of catering to customer demand for more choice in the MRO arena. "These partnerships are sought as a compromise of opening up the market," says James. "But at the end of the day, the extent to which they [external partners] are actually able to go out into the market to win business and compete actively with a… total-care product is extremely difficult, if the manufacturer – be it Rolls-Royce, GE or whoever – has total control over material price."

Air France-KLM needed more than three years to agree with Rolls-Royce the maintenance of Trent XWB engines. The SkyTeam carrier announced in September 2011 an A350 order, and Rolls-Royce is the sole engine supplier for that type. But an accord on servicing of the powerplants at the airline group's in-house facilities was not concluded until this year.

Air France Industries KLM Engineering & Maintenance will become part of Rolls-Royce's MRO network and be able to support third-party customers for the Trent XWB, the airline group division's vice-president Franck Terner has told Flightglobal. But he indicates that the maintenance provider will not be able to offer hour-based service agreements in competition with the manufacturer.

Rolls-Royce is seeking to expand its MRO network to external partners such as Air France-KLM in order to ensure sufficient Trent XWB overhaul capacity in view of the large order backlog for the A350. "They [Rolls-Royce] have advised they are committed to increase overhaul capacity, working with selected partners," says James, "but the challenge for them, as with other OEMs, is how to achieve this whilst at the same time maintaining control over the material supply and repair costs, which are so important to the cash flows over the coming years?"

Rolls-Royce declined to comment.

Beyond airlines, manufacturers face pressure from lessors and the aircraft financing community demanding more choice in the maintenance arena, too. As a majority of large turbofan engines have been sold in conjunction with long-term service agreements, there is limited supply of spare parts on the open market – and that has had a detrimental effect on aircraft residual values. This is especially the case for widebodies with a single engine source – such as current-generation 777s, powered by GE90s – and types with a dominant powerplant supplier, like Rolls-Royce on the A330.

When lease agreements for such aircraft come to an end, owners can struggle to find a new operator because of limited engine maintenance options beyond the manufacturers' support programmes. James says "it is becoming increasingly difficult to find routes to market on large widebody aircraft that have been subject to point-of-sale [maintenance] agreements since new, because that entire [engine maintenance] market... is tied up with the manufacturer".

He adds: "[As] there is no parts market, there is no lease market."

If follow-up operators cannot be found, owners may be forced to prematurely disassemble aircraft. But the equipment's scrap value will likely be lower than the market value for second-hand aircraft. Thus, a lack of spare parts has had an adverse effect on the investment strategies of aircraft financiers, says James: "It is bringing into question the whole depreciation rate and residual value [practices] of some of the larger widebodies."

He adds: "While investors will be looking at the initial 10 years [of an aircraft's service life] quite happily, any wise investors will be looking to move that asset out of their portfolio after, say, seven years and let someone else worry about the final residual value, because the residual values are going to be challenged – and I think the aircraft manufacturers know that as well as the engine manufacturers."

Morris says engine makers are developing alternative maintenance contracts that give lessors more financial flexibility and control. But he adds that it is not clear how much such agreements have penetrated the market to date.

The proliferation of long-term service deals is testament to airlines demanding contracts providing maintenance cost certainty and equipment reliability guarantees. But it is also a result of manufacturers aiming to recoup investment through aftermarket revenues as engine sales have become more competitive.

James thinks the "primary focus" in the manufacturers' development of point-of-sale service agreements "has perhaps been on the operator". But he adds: "The industry is maturing, there are more stakeholders coming into play that have vested interests in that asset, and those other stakeholders are not the operator."

Source: Cirium Dashboard