Airlines seeking to outsource aircraft maintenance are increasingly being courted by the original manufacturers, but will the new generation of all-inclusive service packages bring them cost pleasure or cost pain?
Boeing has grabbed plenty of headlines this year with the creation of GoldCare, a broad package of life-cycle management service for the new 787 twinjet. The regional aircraft manufacturers have also rolled out all-inclusive packages of aftermarket services and Airbus, although reluctant to sell maintenance services, has established a network of preferred maintenance providers.
For years, the manufacturers have been working on strategies to capture more lucrative aftermarket business. It is a move, they say, partly driven by customer demands for the original equipment manufacturer (OEM) to be more active in supporting their products. Low-cost and start-up carriers are leading the charge, eager to create new efficiencies and improve cost predictability. "We're seeing quite a shift in our customer base," says Airbus senior director for maintenance, repair and overhaul (MRO) support management Wolfgang Kortas. "As we penetrate the low-cost carrier market we're confronting a clientele that is outsourcing everything it can, first of all maintenance."
In response, Airbus last year established a network of maintenance providers. Airbus refers its customers to the 15 members in the network, in particular new operators interested in acquiring maintenance-related services or packages before their new aircraft enter service. Kortas says Airbus is willing to manage the maintenance providers for customers if they insist, but strongly prefers its customers enter into contracts directly with its network members.
Boeing, in contrast, is aggressively pursuing contracts directly with airlines that have ordered the 787. If it succeeds in securing a launch customer for its new GoldCare product, Boeing will happily manage an array of maintenance services on behalf of its customer. "Before we were just selling parts now we're selling airlines a power-by-the-hour service and we're guaranteeing availability," says vice-president and general manager of Boeing Commercial Aviation Services Lou Mancini. "It's a nice change in our business. It's a nice change in our culture."
Offering a comprehensive maintenance package may be new to Boeing, but not to regional aircraft and engine manufacturers. ATR claims it became the first commercial aircraft manufacturer to offer such packages when it launched global maintenance agreements (GMA) in 1995. ATR vice-president of commercial customer services Luigi Mollo says there are currently 180 ATR 42/72s operating under GMA, which represents about 20% of the world's fleet. He says at least 230 aircraft will be in the programme in 2008. The spike is driven by India's Kingfisher Airlines, which signed up for GMA for all 35 of its ATR 72s.
"We're not promoting GMA. Airlines are coming to us. It promotes by itself," says Mollo. "It's good for airlines because airlines don't want to invest in infrastructure," says ATR chief executive Filippo Bagnato.
Lufthansa Technik has been selected by Bombardier to offer CRJ operators a total support package
GMA is a customer-tailored package that can include airframe, engine, propeller, landing gear and components maintenance, as well as spares. In 2003 Embraer launched a similar package of services as part of its total support programme (TSP). Bombardier followed by launching its own TSP earlier this year, offering heavy, line and components maintenance as well as spares - services it previously offered on an ad hoc basis through its service network. "We work it as a menu so it's a customised service," says Bombardier regional aircraft vice-president for customer support David Schenck. "We try to put customers in charge of the menu."
Embraer vice-president of customer support airline markets, Edson Mallaco, says that most of its TSP customers are start-up carriers in growth markets, such as Hong Kong Express and India's Paramount Airways, who sign up for the programme when or slightly after they order aircraft. Both carriers launched last year with Embraer 170s. Paramount is now even using Embraer to provide line maintenance services until it can build up its own capabilities.
"In general we see small ones [airlines]," Mallaco says. "The airlines are focusing on their core business on flying passengers, not doing maintenance." Bombardier's Schenck agrees: "It has become a standard requirement for start-ups. Gone are the days when people will spend countless money for ground infrastructure and spares. This is clearly the way of the future. It's not just a sale anymore, it's a total package. We're evolving with the market."
Turkey's AtlasJet, Macedonian Airlines and Nigeria's Arik Air have so far signed up for Bombardier's TSP. AtlasJet became a new CRJ operator last year while Macedonian took its first CRJ earlier this year and Erik is a start-up planning to launch later this year. All three are small carriers in growth markets, which is an encouraging sign for Bombardier's attempt to sell more aircraft outside Europe and North America. "It helps stimulate the market," says Schenck. "It's a trend especially in growing markets like China and India."
The gold standard
Boeing also expects small carriers in Asian growth markets will be among its first customers for GoldCare, but is confident it will also receive commitments from large legacy carriers. It is now in advanced negotiations with three carriers from three different countries and aims to have at least one secured as launch customer by year-end.
"A low-cost or start-up carrier would be very attractive to GoldCare, but we've also received strong interest from legacy carriers, which is great," says Boeing vice-president 787 services and support Bob Avery. "We hadn't planned on interest from legacy carriers."
He points out 787 launch customer All Nippon Airways is already a customer of Boeing's integrated materials management (IMM) programme and is a candidate for GoldCare, which includes an IMM service. Unanticipated interest from large operators such as ANA, which has ordered 50 787s, has led Boeing to project a 50% take-up rate for GoldCare.
But several major maintenance companies do not think major airlines will be willing to outsource all their maintenance to Boeing because they fear original equipment manufacturers (OEMs) add a layer of cost. "At the end of the day the outcome will suffer," predicts Gulf Aircraft Maintenance general manger Saif Al Mughairy. "[OEMs] will drive up the cost of maintenance and the airlines will start to lose cost control."
Lufthansa Technik (LHT) chairman August Henningsen says manufacturers are not needed to offer maintenance packages because the large servicing firms are now adequately meeting the demand, even as airlines increase the amount of maintenance work they outsource. "The question is do we need the airframe OEMs to support this?," asks Henningsen. "I don't think so."
"As an MRO company we don't see any great advantage of GoldCare," says Monarch Aircraft Engineering commercial director Derek Gibson. "With my airline hat on we understand the logic of manufacturers wanting to sell an aftermarket product and service, but history shows if there is not a lot of competition the price goes up."
Monarch Airlines, a UK-based leisure carrier, ordered six 787s in August and its engineering company has begun approaching other 787 customers to offer them maintenance packages to compete with GoldCare.
Singapore Technologies Aerospace (ST Aero) chief executive Tay Kok Khiang also says airlines are "sceptical" about GoldCare. "The customer doesn't want to feel they are taken advantage of. They want control," he says, adding that airlines have historically managed the maintenance work they outsource or, in the case of some low-cost carriers and start-ups, have hired consultants to provide a management service. He expects "only a very small number of airlines" now want the OEM to take over maintenance management.
Airbus agrees and says it has only been approached by a few customers requesting maintenance management. Kortas acknowledges Airbus is close to signing a service contract directly with an undisclosed start-up, but says it does not expect to forge many of these of agreements and is not promoting them. "We believe the aircraft OEM adds little value to the equation," Kortas says.
"Boeing and Airbus don't have the operating experience we have," says SR Technics chairman Frank Turner. Mancini acknowledges Boeing has faced some resistance from airlines but says it has lowered its cost by working with its subsidiaries and partners. "In about 1990 I would have said the same thing about engine companies being in the maintenance business: OEM equals high cost. But look at what they have done," Mancini says.
The major engine manufacturers now dominate the after-market business and rely on maintenance services to provide an increasingly large portion of their revenue (see p52). "We looked a lot at the engine companies as we put GoldCare together," says Avery. "They overcame the fears of cost and came to market with total care programmes. Now almost every engine enters service with life-cycle programmes. Engine companies were smart enough to go with power-by-hour to streamline the supply chain for airlines. Now we're taking this to the airframe."
The services bundle
But others are quick to point out how different engines and airframes are. Kevin Michaels of maintenance consultancy AeroStrategy explains engine maintenance is more capital and less labour intensive than airframe maintenance. "It has worked for engines but it doesn't mean it will just flow to the airframe," he says. Henningsen points out that most airlines which have so far signed up for maintenance packages - including all three launch customers for Bombardier's TSP - elect not to include airframe maintenance.
Kingfisher also has excluded airframe maintenance from its GMA deal with ATR. "I think the airframe is a different case but sometimes packages at the OEM has its advantages," says Kingfisher executive vice-president Hitesh Patel. "I'm curious who takes [GoldCare] and what kind of price they offer."
Michaels does not expect many legacy carriers to sign up for the complete GoldCare package and suggests it "may be better suited for narrowbody operators" particularly those from the low-cost and start-up sectors. But Avery says: "Everyone we've talked to is interested in this product [GoldCare]. The scepticism is low."
GoldCare brings together several services previously offered individually, including health monitoring, maintenance toolbox, as-flying configuration management and electronic flight bags. But for the first time Boeing with GoldCare is also offering operators a full gamut of airframe maintenance services, from line maintenance to heavy checks. "An operator can change their business model if they wish to one that is much more simple and efficient," says Avery.
Boeing plans to outsource the airframe maintenance work to between three and five maintenance partners spread across all the major regions. In July SR Technics became the first supplier to join the GoldCare programme and Avery expects to have two more on board by year-end.
Hamilton Sundstrand and Smiths Aerospace have also signed on as GoldCare partners. They will help Boeing guarantee spare part availability and repair costs for all the major components and systems. "That is the low-hanging fruit, the part that is giving airlines a lot of headaches because they are dealing with hundreds of suppliers," says Michaels. Boeing is now talking to all the major system suppliers on the 787 and expects 20 to 25 to ultimately join GoldCare. "It gives us an opportunity to approach the market the way the market wants," says Smiths Aerospace president of customer services Catherine Gridley. "This allows us to interface with the customer, hopefully with a smaller infrastructure."
Custom packages in vogue
Several of the large maintenance providers have been offering packaged solutions for years and have rolled out new more comprehensive products as interest from carriers soars.
Lufthansa Technik (LHT) for several years has offered three package products - total component support (TCS), total engine support (TES) and total technical support (TTS) - and in April launched total material operations (TMO). It says there are now more than 1,200 aircraft under TCS, almost 50 customers in TCS and over 35 airlines participating in TTS, which is the only package offering airframe maintenance.
Mainly small and low-cost carriers, which are keen to enjoy the economies of scales traditionally achieved by larger carriers, have signed up for LHT's packages. "I see them going to a one-stop shopper who is able to support them over all fields of services," says LHT chairman August Henningsen (pictured).
He says LHT has been developing packaged solutions for 20 years and is responding to increasing interest from carriers by offering more customer-tailored packages. With TMO, LHT for the first time is offering consumable and expendable parts plus an integration service which involves LHT sitting at an airline operation centres and delivering parts to line maintenance bases.
Singapore Technologies (ST Aero) also says interest in its customised total aviation support (TAS) package, which was launched two years ago and now has three customers, is coming mainly from low-cost carriers.
"For all low-cost carriers, the model is to outsource all their maintenance services as single packages or individual packages," says ST Aero chief executive Tay Kok Khiang. "We can actually serve the customer in every dimension they wantThe point is to have the range of capabilities. We try not to force a model on a customer. The customer doesn't want to be forced."
SR Technics, which last month was acquired by a consortium of Middle Eastern investors, launched its integrated airline solutions (IAS) programme in 2005. It now has three customers and 270 aircraft under IAS, which includes the entire range of services including line and heavy maintenance, and about another 600 aircraft in other less comprehensive package products.
"The total solution may not be every-thing," says SR Technics executive vice- president sales and marketing Declan O'Shea. "It's everything the airline wants to put into it. Really it's tailor-made."
Some of the work done under GoldCare may also potentially be carried out at service shops Boeing is committed to opening in Shanghai, China and Nagpur, India. But Mancini insists Boeing is not interested in becoming a large MRO player and points out that maintenance only accounts for 1-2% of the revenue of Commercial Aviation Services.
On the other hand, Embraer has aggressively expanded its in-house service capabilities over the past few years and as a result it now maintains 28% of the world's ERJ fleet. It acquired Tennessee-based Celsius Aerotech in 2002 and last year acquired a majority stake in Portugal's OGMA. Embraer wants to expand its Brazilian operations and is exploring opening or acquiring a facility in Asia, where a shortage of Embraer-qualified repair stations is hindering sales efforts. "We feel it's strategic to have our own facilities," Ranreri says.
Bombardier also has its own maintenance operations in North America, but has decided to partner LHT and ST Aero subsidiary SAS Components in offering its TSP service package to CRJ and Dash 8 operators, respectively. Schenk says Bombardier co-markets TSP with its two maintenance partners but, like Airbus, refuses to manage maintenance done at third-party facilities because this is not an efficient exercise for an OEM. "We just add overhead," he says.
ATR has a completely opposite strategy - it is more than willing to manage maintenance work done by other companies, but is not interested in operating its own maintenance shop. ATR believes OEMs should be in the business of managing maintenance to control the quality of work done on its aircraft and the costs MRO shops charge its operators. But when asked why ATR does not take the strategy a step further and buy its own maintenance facility, Mollo says: "We don't think it is necessary." Kortas at Airbus has a similar response: "We asked customers if they want us to own the maintenance provider. The answer was a clear, loud no. The customer told us they want choice."
Kortas explains that through the Airbus MRO Network the manufacturer is giving its customers 15 options. He claims if Airbus followed Boeing's GoldCare and only lined up a few service partners, competition would be stifled and costs would escalate. "Our belief really is in flexibility and customisation. That's the real advantage in our network approach," Kortas says.
The concept also allows Airbus to avoid competing with its maintenance partners and its airlines customers, some of which have large MRO operations with significant third-party business. "We will not go into a market which is dominated by our customers like Lufthansa and Air France," says Kortas. "At the same time we need to answer to low-cost carriers like easyJet. Our approach is partnership. We partner with the best MROs in the business."
Boeing's Mancini and Embraer's Ranreri acknowledge that OEMs must tread carefully as they expand their after-market product line because they risk competing more against maintenance companies and some of their airline customers. But they think OEMs can successfully walk the tightrope as long as they work closely with both. "We need to manage it. That's the challenge we have now," Ranreri says. "As we grow it will be interesting."
The fact the major maintenance players, while somewhat sceptical, seem happy to work with the OEMs should give the effort credibility. Several sell their own service packages (see box p45) but at the same time are willing to join both GoldCare and the Airbus MRO network. As Turner from SR Technics says: "You've got to look at the value Boeing will provide. Boeing will tailor the offering for the customer. We expect to participate on a subcontract basis."
Henningsen says LHT is also open to joining GoldCare and says "in the end the customer makes the choice".
Tay from Airbus MRO partner and potential GoldCare partner ST Aero says: "Wait three years and see what results from the Boeing and Airbus angle. It's a new philosophy. Where it goes we'll have to see." ■
Source: Airline Business