Airlines have welcomed the tentative inquiry by the European Commission into potentially anti-competitive terms in maintenance contracts for certain engines and components.
European regulators have sent questionnaires to airlines and manufacturers to assess conditions in the equipment's service agreements as part of a preliminary investigation.
While the EU's executive body has not officially announced the launch of a specific investigation or what specifically would be focused on, a competition spokesman for the Commission says it is "closely monitoring competitive conditions as regards maintenance of engines and components for large commercial aircraft".
German engine manufacturer and maintenance specialist MTU says the inquiry is aimed at determining "whether airlines are forced into anti-competitive contracts" and especially concentrates on support of CFM International CFM56 and Rolls-Royce Trent XWB engines. The powerplants are the sole engines available for the Boeing 737 and Airbus A350 respectively, though the CFM56 is additionally employed on the A320 narrowbody family in competition with the International Aero Engines V2500.
Munich-based MTU has not received a questionnaire because, it says, it is not participating in the Trent XWB programme and its CFM56 aftermarket service is conducted as an independent third-party MRO provider without involvement of CFM parents General Electric and Snecma.
Europe's largest 737 operator Ryanair supports the Commission inquiry and is among the airlines that have received a questionnaire. The budget carrier acknowledges that there is sufficient level of competition for CFM56 maintenance in terms of the number of repair specialists, with the engine supported by a range of manufacturer-associated and independent third-party overhaul shops: "We don't see a restriction in the number of MRO providers for the services we require." Ryanair has a contract with GE for the maintenance of its engines.
However, the airline indicates that manufacturers' restrictions on the provision of repair information to other aftermarket players – such as third-party MRO providers or alternative spare-part suppliers – is limiting competition. Ryanair argues that "there is a need for freer access to manufacturers' data and the introduction of limitations on what may be classified [by manufacturers] as intellectual property". If such information were more widely accessible, maintenance costs would be lower, Ryanair suggests.
This view is also held by Icelandair vice-president of technical operations Jens Thordarson. Speaking at the MRO Europe conference in London in mid-October, he said manufacturers' increasingly "dominant" aftermarket role risked "stifling innovation" in aircraft maintenance because they were "not always the best" party to provide such services.
Air France-KLM, British Airways parent IAG and Lufthansa Group have received questionnaires too. All of these airlines support the investigation, though none of them wanted to comment on specific issues. However, Air France-KLM says "the questions asked by the Commission are the result of the growing concern" among airlines, while Lufthansa declares that it "welcomes all efforts to ensure an open, competition-based market".
Earlier this year, IAG chief executive Willie Walsh voiced concerns about rising maintenance costs during a panel debate at IATA's annual general meeting in Miami. "We have to start redressing this situation. The IATA board of governors was unanimous on the issue, and they are going to engage external legal counsel to start looking into this issue," said Walsh. "We need to start pushing back on our costs where they are driven by a limited number of suppliers."
Despite the airlines' complaints about rising maintenance costs, Richard Brown – principal at consultancy ICF International – tells Flightglobal the investigation caught many industry participants by surprise. As operators and lessors typically negotiate large discounts for aircraft and engines during their initial purchase, manufacturers retrieve their outlay for the equipment's development through the sale of long-term aftermarket service contracts.
That model has been established for some time, and were it challenged, the granting of discounts by the manufacturers would be unsustainable, suggests Brown: "Somebody has to pay for the technology." He says airlines would face a dilemma as to how the technological advances and improved aircraft economics they demand would be funded.
GE Aviation's financial results reflect the significance of aftermarket profits in its business model. Although GE does not disclose aftermarket results for the aviation business, a former head of that division boasts on his LinkedIn profile that he led that business to post $7 billion in revenues and $3 billion in operating profit in 2011. That implies an astounding 43% operating margin for GE's aircraft engine aftermarket business that year.
But the aviation division overall, which includes the aircraft electronics business formerly known as Smiths, reported only $3.5 billion in profit in 2011, on $18.9 billion in revenues – a 19% margin. The aftermarket business alone accounted for 86% of GE Aviation's annual operating profit in 2011. The rest of the business combined to generate an operating margin of nearly 4%.
Rolls-Royce and GE separately confirm that they received questionnaires and support the investigation. The UK engine maker says around 40 airlines and manufacturers have been contacted by the Commission, but adds that the investigation is still in the early stages.
GE, meanwhile, says it will co-operate in "helping the EC [European Commission] understand the dynamics of the aviation industry".
Source: Cirium Dashboard
