Industry Insight Special Report
Independent MROs underdogs in after market price war
Original equipment manufacturers (OEMs) continue to build their businesses in the maintenance, repair and overhaul (MRO) aftermarket with the sector worth a forecast $3 trillion in the next two decades. But airlines are unhappy and assert they are being overcharged and restricted by the scope of MRO contracts.
September 1st 2016
Airline MRO aftermarket services is lucrative business for major aircraft and engine manufacturers and equipment suppliers. It also is becoming a major arena of conflict between OEMs and their customers. Read More »
Tony Tyler, until recently a distinguished director general and CEO of the International Air Transport Association (IATA), said earlier this year that when it comes to aftermarket services airlines have “little alternative but to sign on to long-term maintenance and parts agreements containing pricing escalations that are often above the inflation rate”.
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| Rolls-Royce aircraft engines earned 51% of total revenue from aftermarket contracts in 2014 |
Privately, airlines are increasingly uneasy about the power wielded by equipment suppliers, who are controlling a market formerly serviced –largely – by third party MRO companies. Some carriers have said equipment suppliers of are withholding crucial information on products, such as manuals and technical drawings, to ensure that only they or their partners can provide spare parts or carry out high-quality maintenance.
Late last year, the chief executive of European airline group IAG, Willie Walsh, threatened legal action over the increasing cost of repairing his aircraft and accused manufacturers of “restrictive practices”.
Walsh’s allegations led to intervention by the European Commission’s competition authorities, which sent out dozens of questionnaires to airlines, engine makers and component suppliers about the issue. So far, no official inquiry has been launched but Brussels is sufficiently concerned by the complaints to explore whether the growing hold of OEMs on airline MRO could be anti-competitive.
Not surprisingly the OEMs who have commented on the claims strongly deny the allegations. Philippe Petitcolin, chief executive of GE’s engine partner, Safran, said Walsh’s complaints were unjustified and his customers were not forced into buying his engines or sign up for service contracts.
If the matter does progress at the EC, Airbus, Boeing, Rolls-Royce, General Electric, Honeywell, United Technologies and Pratt & Whitney are expected to defend their sales strategy with the full force available to them under EU law.
At Britain’s Farnborough Air Show in July, Airbus published its first Global Services Forecast (GSF). It predicted that in the next two decades the industry aftermarket services sector would be reach US$3 trillion.
Airbus said MRO spend would grow from $53 billion this year, at an average annual growth rate of 4.6%. MRO specialist consultancy, ICF International, has estimated MRO income would reach $96 billion by 2025, underpinned by rising demand for engine and component services in the Asia-Pacific and other emerging markets.
Despite the verbal skirmishing between airlines and manufacturers about MRO costs, OEMs are intensifying efforts to expand their MRO aftermarket businesses. With the accelerating demand for new routes and the region’s expanding fleets, the Asia-Pacific is the largest market for MRO business and the training of pilots and technicians.
Europe and North America combined will account for approximately one third of the total MRO market spend, said Airbus. “Moreover, with the ever increasing growth of the commercial aircraft industry, with Airbus’ OEM expertise, Services By Airbus will deliver value-adding and quality services for its customers worldwide – on a par with the quality of the aircraft which we deliver,” says Laurent Martinez, senior vice president of Airbus’ Services business unit.
Services By Airbus is the unit responsible for providing Maintenance, Upgrades, Training and Flight Operations for Airbus customers.
Another company with a strong dependency on the Asia-Pacific market, is Britain’s Rolls-Royce. Last year, the manufacturer restructured its engine MRO network and established a global customer service center (CSC) chain to improve responsiveness to airline clients.
It should have happened years ago, as Rolls-Royce’s TotalCare power-by-the-hour customer-support program serves 85 airlines that fly 14 million hours a year.
The manufacturer’s installed engine base has grown from 2,160 units to more than 4,500. Rolls-Royce, the world’s second-biggest largest maker of aero engines, generates 52% of its civil aircraft revenue from after-sales services. It is understood the service business is so lucrative that Rolls-Royce will sell its engines at a loss in return for a long-term service contract.
At Farnborough this year, Rolls-Royce announced an extension of its Trent Services Network to Abu Dhabi, where it will operate an approved maintenance centre (AMC) network. It will provide maintenance for the Trent XWB engine that powers A350 aircraft, a practical decision when the orders of A350s in the Middle East are tallied up. Other engine makers also had a successful show, with GE Aviation signing up a number of airlines for its TrueChoice aftermarket package. GE’s joint venture CFM International engines amassed more than $8 billion in engine orders and service contracts at the show.
It is clear the aggression of the OEMs’ efforts to secure airline aftermarket business is changing the MRO landscape. Wolfgang Weyness, senior vice president at Lufthansa Technik, one of the world’s top 10 MROs, said recently; “We are seeing a new level of competition. Manufacturers are intensifying their efforts to increase their part in the entire supply chain. These are big challenges. They will have consequences for margins.” Chris Doan, of Oliver Wyman, estimated that 15% to 20% of MRO spending could be redistributed as a result of the changes to the traditional practice of airlines when buying MRO services.
In a report earlier this year, Frost & Sullivan analysts said the MRO landscape was “disrupted” by the emergence of new technologies and the growing presence of OEMs in the aftermarket. The aftermarket provides a variety of critical services, including engine, components, base and line maintenance, with engine maintenance accounting for around 40% of total maintenance cost, they said.
“These services have largely been provided by in-house (‘captive’), airline third party and independent MRO service providers, with OEMs playing a more limited role. However, aggressive forays by engine and airframe OEMs into the aftermarket were re-shaping the sector, forcing traditional aftermarket service providers to re-evaluate their value propositions,” said the Frost & Sullivan report.
MRO service demand also is being reduced or displaced because new aircraft need less frequent maintenance, overall maintenance needs, airlines are buying greener fleets that require fewer shop visits and the Middle East is displacing demand at traditional maintenance hubs.
Technology factors also are having an impact on airline MRO practice. A modern fleet promises improved reliability, but also increased maintenance complexity, which requires skills from technicians that not all MROs provide.
The shift to advanced materials such as composites mean new strategies, techniques and schedules are needed compared to the more mature metallic processes of MRO shops. Similarly, advances in data analytics and the shift to predictive maintenance are introducing requirements that not all third party MRO providers would be able to accommodate.
Airlines that typically spend between 10% to 15% of annual revenues on direct maintenance costs, are facing significant unit maintenance pricing. IATA said the average maintenance cost in 2013 was $1,167 per flight hour, $3,021 per flight cycle and $3.1 million per aircraft per year.
Today, for a wide-body aircraft, the MRO cost could reach $5 million annually. As fleets age and carriers start to incur the costs of major maintenance milestones, such as C and D checks, airlines are exposed to a growing maintenance burden. As a result, airlines are focused on reducing MRO expenditure.
Historically, engine OEMs have been relatively successful in cultivating strong aftermarket relationships with airline customers. By leveraging the technical complexity and material-intensity of engine maintenance activities, significant barriers to entry have been established in both the wide-body and rapidly growing narrow-body markets.
In the wide-body aftermarket, Rolls-Royce is an acknowledged aftermarket leader. In 2014, it held held 24% of the wide-body aftermarket by engine volumes an 83% of its commercial transport engine fleet was covered by its TotalCare service. Fifty two percent of civil aerospace revenues were earned from aftermarket services.
GE-Snecma engine joint venture, CFM, accounted for 51% of total deliveries in 2014 and controls around a third of the aftermarket services business for its products. Significantly, 80% of CFM’s next generation LEAP engines are to be bundled with long-term service agreements.
In the past, airframe manufacturers traditionally have held a lower proportion of aftermarket MRO business. Boeing’s GoldCare offering covers around 1,600 aircraft, the equivalent of 15% of its active fleet. “However, motivated by the need to recover heavy development costs and capitalize on the projected growth in MRO revenues, the airframe OEMs have redoubled their efforts to secure Long Term Service Agreements (LTSAs) at the point of aircraft sale,” said Frost and Sullivan.
“Combined with the technological complexity of the latest airframe designs, restrictive licensing agreements and strategic intellectual property advantages, these offerings make it more difficult for non-affiliated MROs to compete,” said the report.
As the airframe, engine and component OEMs cement their presence in the aftermarket, the development of collaborative OEM-MRO partnerships will be essential for MRO survival.
Most analysts agreed that as more new generation reliable aircraft come on stream, that will have longer gaps between maintenance checks, third party MRO demand will plateau.
Another aviation consultancy, The Cavok consultancy, believed the presence of more planes with advanced technology in airline fleets will result in decreased MRO demand. It advised to develop “aggressive and innovative plans for growth” if they want to remain competitive in the market.
The industry should anticipate more such improvements as airlines use broadband connectivity to bolster maintenance proficiencies, it forecast.
