Lufthansa, Air France and Swissair have built their repair and overhaul facilities into some of the most competitive in the world, but profit margins remain slim.
Europe cannot claim to be a world leader in many sectors, but when it comes to commercial aircraft and engine maintenance, it is home to three of the world's largest players. They are linked to the continent's largest airlines, Lufthansa, Air France and Swissair, although two of them - Lufthansa Technik (LHT) and SR Technics - operate autonomously. All three are targeting rapid growth as they jockey for position in an increasingly competitive market.
LHT is second only to original equipment manufacturer (OEM) General Electric Services in revenue terms and has experienced consistent double digit growth every year since it became independent in 1995, says Karl-Rudolf Rupprecht, vice-president, marketing and sales. By 2001, LHT will turn over almost DM1.6 billion ($1 billion) a year, he says, adding that last year alone it signed 90 new contracts, worth DM1 billion.
When Lufthansa Technik was spun off into a separate profit centre, as part of the Lufthansa group's major overhaul five years ago, the unit was turning over only DM850 million. It is now a major standalone business in its own right. LHT quickly took over maintenance at Lufthanasa's charter carrier Condor, buying out the 30%share that Cargo had held in the busines and instead merged it into a joint venture with the cargo unit.
Although maintaining the Lufthansa fleet still provides the bulk of LHT's revenues, the company's reliance on in-house work has declined. "External" contracts accounted for one-third of Lufthansa Technik's total sales in 1995, compared to 44% in 1997, and the company plans to make third party maintenance an increasingly large part of its business.
LHT claims to have a 10% global market share of the third party maintenance, repair and overall (MRO)market. Rupprecht says the company must continue its overseas expansion to keep growing, taking advantage of lower costs, mainly labour, and locations close to new and fast growing markets. Although it is still investing heavily in Frankfurt, Hamburg, Berlin, Munich and Alzey, LHT's joint ventures in Ireland, the USA and Asia symbolise the company's growing focus outside Germany. Between 1995 and 1997 foreign sales almost doubled, to DM1.2 billion, with particularly strong growth in Europe.
Shannon Aerospace, a 50:50 joint venture with competitor SR Technics employs 850 workers and contributed DM4 million to the company's bottom line in 1997. Lower-cost Shannon is a significant asset in the company's portfolio given its capability to maintain short-haul aircraft that were previously serviced in Germany. Shannon maintains Boeing 737s, 757s and 767s, Airbus A320s and Boeing MD-80s for Lufthansa and others. LHT also owns two engine shops in Ireland - Lufthansa Shannon Turbine Technologies and Dublin-based Lufthansa Airmotive Ireland, which works closely with LHT's Hamburg engine maintenance facility.
Last year the company consolidated its hold in the US components market when it increased its stake in Florida-based Heico Aerospace Holdings. In Chicago it shares the ownership of a spares operation, AirLiance Materials, which consolidates its partners' surplus spares inventories, with Star Alliance partners United Airlines and Air Canada.
LHT also has a major service contract with Ameco Beijing, a 10-year old joint venture between Air China and Lufthansa. This venture employs 4,000 people and boasts Asia's largest hangar. Originally set up to service the owners' fleets and other Chinese carriers, its customers include Air New Zealand, Atlas Air and Saudi Arabian Airlines.
Rupprecht aims to focus on Asia and the USA. "The biggest market for sure is the USA, but there is growth potential in Asia," he says, conceding that the region's economic problems mean that it is currently "not so stimulating".
Alliances
Although LHT is becoming more economically independent of Lufthansa, sales and industrial co-operation are growing with Lufthansa's Star Alliance partners. Lufthansa Technik's joint venture with its Scandinavian partner, SAS Components, received a major contract last year to maintain and overhaul 100 CFM56-7 powerplants for more than 40 new 737s ordered by SAS. It is also co-operating with United Airlines on Boeing 777 maintenance and is involved in Bombardier's CRJmaintenance joint venture with Air Canada.
"We are open to making a combination of services within the Star Alliance," says Rupprecht. "Of course, there are links in technical areas and we are using these links to increase business and reduce costs - in purchasing we are working closely together [with partnerairlines]."
Rupprecht says the link with Lufthansa must stay, for it has been the key to its success. Lufthansa's reputation for high quality and reliability rubs off on LHT, he says. Lufthansa Technik wins business because of its long experience in maintaining the Lufthansa fleet, one of the largest and most diverse in the world, Rupprecht adds. The German national carrier's fleet consists of Airbus, Boeing, McDonnell Douglas, Fokker and Bombardier aircraft, giving LHT an almost unrivalled breadth of expertise. "The number of competitors that can offer that range [of services] globally is very limited," he says.
LHT's track record with its sister airline - which includes giving Lufthansa average aircraft utilisation of 15h a day and a 98% on-time performance record, as well as a saving of "several million marks" on its Airbus A340 fleet, has allowed it to capitalise on the growing trend in the industry to outsource long-term turnkey maintenance contracts.
"When we started in 1995, shopping was the philosophy of many customers. Now they are not only shopping, but looking for [long term] partners," says Rupprecht. If they sign up with Lufthansa Technik, "-customers can concentrate on their core businesses".
Materials pool
He says that carriers can save large sums by going to just one supplier and claims, for example, that an airline can cut spares costs by up to 50% by joining LHT's "materials" pool.
LHT has more than 30 airlines and 110 aircraft signed for its Total Technical Support service. Some of the latest turnkey deals include a 15-year engine overhaul contract for 80 of KLM's Boeing 747s, 767s and MD-11s, won in October, and a 10-year deal for Atlas Air's new 10-strong 747-400F fleet.
It has a long-term deal with Hapag Lloyd to maintain its 16 737-800s, with Uzbekistan Airways for work on its Boeing and Airbus aircraft and turnkey contracts with Austrian Airlines and Lauda Air.
SR Technics, while considerably smaller than Lufthansa and Air France Industries, is no less ambitious and, as a separate legal entity within SAir Group's SAirServices division, is seen by LHT as its main competitor. SR Technic's third party business has grown by 20-30% since 1994, when it began life as a separate profit centre. It separated legally from the airline in 1997 and, at the end of that financial year, turned over almost $900 million.
Like the Lufthansa Group, SAir's task was to create a separate maintenance arm so that it could identify the costs and benefits of one of a variety of large globally active companies in its portfolio.
At the same time, "-because growth in the pure flying sector was limited, the Swissair Group needed to diversify", says Hans Ulrich Beyeler, SR Technics president and chief executive.
SR Technics' product focus "-is largely along the lines of the Swissair fleet", he says. This means narrowbody A320s, widebody A330/340s,MD-11s and MD-80s, the latter being serviced for Swissair subsidiary Crossair, as well as for other regional carriers.
A large part of SR Technics' growth is being driven by Swissair's alliance strategy and in particular the Qualiflyer Group, the fleet commonality of which offers obvious economies of scale. Swissair, Austrian and Sabena's joint decision in November 1997 to buy Airbuses led to SR Technics setting up a "technical support" organisation with the maintenance arms of the three airlines in the same month. "Where sensible, we are aligned along Swissair's airline alliances," says Beyeler.
However, SR Technics is also actively seeking separate business and strategic partnerships, particularly in Asia, where Thai Airways, Garuda Indonesia and China Eastern Airlines feature on its client list. SR Technics is well aware of the advantages of moving some of this work out of Zurich where the costs are high, the potential for expansion small, and the logistics of servicing the aircraft of airlines based on the other side of the world make little sense. "We are in negotiations with the technical arms of airlines in Asia," he says.
Air France
Although not on the same commercial footing as LHT and SR Technics, Air France Industries (AFI), is not far behind its German rival in terms of size and penetration of the third party market.
The company, part of the Air France group, operates out of Paris Orly, where it services engines, components and widebody aircraft; and Paris Charles de Gaulle, where engineering and light maintenance is carried out. AFI also overhauls narrowbody aircraft in Toulouse, and provides specialist services at Le Bourget, employing 9,000 staff, around 1,000 fewer than at LHT.
There are no plans to turn AFI into a separate profit-making unit, according to Bernard Delauney, vice-president of marketing. This lack of autonomy has prevented the company from forming any foreign ventures, he adds.
French regional carrier AOM, however, is by no means AFI's only major external customer. AFI has cemented overseas "partnerships", with carriers such as Air Canada, TAP Air Portugal and Royal Air Maroc, while it has major contracts with Virgin Atlantic and Airtours. With some of these airlines "-we find solutions by exchanging [maintenance] tasks", says Delauney. Like its competitors, AFI wants to concentrate on the more high-tech, automated and skilled maintenance tasks, while farming out the more labour intensive work.
"Air France is big in engines and components. Airlines are interested in contracting out maintenance of engines to Air France. In return, we are very interested in subcontracting out airframe overhaul." He says, for example, that Air France has shifted some of its labour-intensive airframe maintenance to Morocco, and in return Royal Air Maroc gets its engines maintained in France. Engine maintenance accounts for around one-third of revenue at AFI as well as at LHT and Swissair.
AFI claims to control 9% of the global components market and says it is a major player in CF650, CF680C2 and CFM56-5 engines, holding around one-fifth of the global market. As for airframes, Delauney says AFI has around one-quarter of the "free market" in the A320 and 737 families. The company aims to build on its global position and is targeting 9% growth a year in components, 5% annual growth in engines, and double digits in niche areas such as fan thrust reversers. Overall, AFI is aiming to grow revenue by 25% in the third party market over the next three years.
If the degree of optimism exhibited by these market leaders is anything to go by, third party airline maintenance has a bright future. They claim that airlines neither fear that they will get second-best treatment compared to the maintenance company's sister carrier, nor worry that they are contributing to a rival airline group's bottom line.
Major customer
SR Technics' Beyeler says Swissair is treated well simply because it is a major customer, and that this has nothing to do with an equity link. Swissair still has to book time, following exactly the same procedures as any other customer, he adds. LHT's Rupprecht concurs. "It's first come, first served," he says.
LHT maintains the fleets of some Lufthansa rivals, including Eurowings and BA's German subsidiary. "Deutsche BA has no difficulties. If we make them an excellent offer, it makes them more profitable. BA is focusing on the passenger side," he says. Still, the day may never come when LHT takes over the total fleet maintenance of say, BA or KLM. "The future will show if it can be done," Rupprecht says.
In the meantime, relentless cost pressure on airlines means that they will expect better value for money, forcing the industry to consolidate into 50 suppliers, with three MROs dominating globally, Rupprecht believes. This trend, he says, vindicates LHT's strategy of expanding market share and product diversity. "If you are not the market leader, you do not have the chance to stay in the market for a long time," he says.
But, according to Beyeler of SR Technics, "-the recipe for making a good use of size has not been found in the MRO industry". LHT is not as profitable as SR Technics - indeed, it is the poorest performing company in the LH Group. It has to serve a diverse market that does not lend itself easily to economies of scale, says Beyeler.
The competition
Airline maintenance shops are also under increasing competitive pressure from OEMs and, in the battle for market share, they predict that independent companies will get squeezed out.
SR Technics says that companies like FLS have to make "great efforts" to compensate for not having an organic link to an airline and lack the experience of handling the whole maintenance cycle of a large fleet. FLS' acquisition of TEAM was driven by the need to buy into a company with working experience and a strong business relationship with a major airline, says Beyeler.
As for the engine manufacturers, Beyeler warns that their aggressive entry into the maintenance market will dry up competition in spares. "Airlines will become very dependent on OEMs."
Fewer than five years since the disappearance of co-operative airline maintenance groupings like Atlas and the advent of a true third party sector, the competition is hotting up.
Source: Airline Business
