IATA boss objects to “runaway aftermarket agreements”

In a blunt reference to the aviation OEMs of the world, the director general of the International Air Transport Association said his airline membership was concerned OEMs’ aftermarket agreements limited MRO competition.

by ORIENT AVIATION 

October 1st 2015

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It was a good week for the world’s airline MROs in mid-September, when they acquired a powerful new ally in their battle to defeat OEM dominance of their industry - the International Air Transport Association and its director general and CEO, Tony Tyler. Read More »

HAECO Hong Kong complex: Fighting to contain the success of OEMs in winning MRO contracts

Delivering the opening address at the association’s second World Finance Symposium, held this year in Barcelona, Tyler said: “IATA is examining commercial, legal and economic options where we may be able to contribute to efforts to rein in runaway aftermarket-related costs.

“Unfortunately, certain OEM business practices drive up costs by blocking new entry into the market for maintenance repair and overhaul services. As a result, airlines often have little alternative but to sign onto long-term OEM maintenance and parts agreements containing pricing escalations that are often above the inflation rate.”

Tyler’s sentiments might be music to the ears of MROs, but it will be a battle to contain the assault on aftermarket services by OEMs when many of them are restricting availability of the parts and technology necessary to maintain the new generation fleets of airlines today.

At the Airline E&M China and East Asia conference in Hong Kong in September, speakers generally agreed that airlines are still outsourcing their MRO and component business to third party providers, but that more and more of their business is being won by OEMs, especially in the engine sector.

At the conference, pessimism prevailed among several airline and third party MRO providers as they outlined the challenges MROs face in spite of the fast paced growth of aviation in the region.

“The engine MRO market is largely lost to non-OEMs. Unless an MRO has a partnership with GE, Rolls-Royce and Pratt & Whitney. You have no chance,” said AAR’s senior vice president and managing director Asia-Pacific, Middle East and Africa, Rahul Shah.

He identified the main issues as higher costs for airlines for inventory for new aircraft and the costs this imposes if an airline does not have a power by the hour agreement, OEMS becoming more active in the aftermarket sector, which is increasing costs for airlines and the cost of maintaining new generation engines.

Additionally, well capitalized OEMs are going after the components sector, which is one of the sectors that is profitable. Some MROs see the day when the only business left for them will be base maintenance because OEMs do not to maintain the large labour forces required to service this sector of the industry . But even this sector has issues, with the market generally in surplus in airline parts.

Shah said: “Fifty per cent of engine maker’s profits are in the aftermarket and 80% of orders have an aftermarket contract on the purchase order. The engine market is clearly going towards consolidation. How do you combat the threat the OEMs present to MROs?”

Seabury Group executive director and head of the group’s maintenance advisory practice, Frank Martin, said the shifting dynamics of the MRO industry in the Asia-Pacific meant a large portion of future MRO contracts will be for narrow body aircraft, which will represent up 71% of the region’s fleet by 2020. Airline and third party MROs must adjust to this trend if they are to make money, he said.

He forecast healthy growth of four per cent for MRO in the Asia-Pacific to 2020, because of the forecast fleet expansion. The forecast was in line with the global industry trend, but he cautioned there are several factors at play that are re-shaping the industry when economic instability is emerging in the region.

MROs will have to adapt to expanding OEM involvement in the airframe after market, adjust their product offerings to an increasing application of composite materials in new generation aircraft, revise their business plans to increased intervals between checks for new platforms and train and retain a skilled labour force, he said.

Airline MROs and third party MROs will have to build closer partnerships with engine and component OEMs and demonstrate they have the financial and technical capabilities to compete in the new market environment.

Martin said that independent engine MROs are the most disadvantaged in the sector because OEMs have tight control over repair data, which limits the scope of work the shops of independent MROs can perform and labour costs in the Asia-Pacific continue to rise.

The trend of Independent MRO and airline MROs also losing business to the OEMs is continuing. They are finding it necessary to co-operate and/or form partnerships with OEMs because new aircraft types require new product agreements, investment in workshops and equipment and new time frames for checks on the latest airliners being put into service.

Lufthansa Technik’s corporate product manager, Carsten Wortmann, said successful integration of next generation fleets into an independent MRO’s structure required understanding new technologies surrounding electrical structure networks, software management, hydraulic power, prognostics and composite materials.

Lufthansa said that by participating in the A350 Customer Focus Group, the MRO gained experience in planning maintenance for the new aircraft type even altho the plane had not yet been flown by an airline and had almost no commonalities with other Airbus aircraft.

This collaboration with Airbus allowed Lufthansa Technik to learn the behaviour of the airframe carbon fiber/composite technology, the XWB engine and the strengths and weaknesses of the unique systems of the A350.

To win business from airlines for the new generation aircraft, third party MROs must have six major packages to offer customers: materials, engines/APUs, engineering, logistics, cabin and maintenance, Carsten said, and have the in-house ability to respond rapidly to MRO and to component requests.

He said Lufthansa Technik has 116,500 components available in its pool, an investment not every independent MRO can afford.

Aftermarket strategies of engine OEMs   * Allows airlines and third party MROs to compete for maintenance of new-gen LEAP and GENx engines * Airlines can choose to sign maintenance agreements with OEMs or licensed third party MROs * Has committed to keep the maintenance cost of LEAP engines at a level similar to the CFMN56 * Geared Turbo Fan (GTF) engines to be maintained at selected engines centres including MTU’s mx centre and Japanese Aero Engine Corporation’s (JAEC)s overhaul centre. MTU and JAEC were partners in the engine program. * Percentage of GTF engines under the company’s Fleet Management Program (FMP)is expected to be higher than PW4000 * Captures most of the aftermarket share of its own engines, as demonstrated by its huge aftermarket services revenue * Controlling the engine aftermarket by offering its comprehensive TotalCare and TotalCare Flex services Presentedy by Seabury executive director and head of Maintenance Advisory Practice, Frank Martin at AirlineE&M: China and East Asia Hong Kong 2015