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Executive Interview
Supply chain fragility threatens MRO recovery
Lufthansa Technik has successfully navigated the pandemic and is preparing to expand in Asia when normality returns to aviation, the company’s chairman, Dr. Johannes Bussmann, tells associate editor and chief correspondent, Tom Ballantye.
If there is a major issue that will continue to cause problems for the world’s aviation MROs and OEMs as they recover from the pandemic, it is the fragility of the global supply chain, believes the chairman of the Executive Board of global MRO, Lufthansa Technik (LT). Read More » “We will see a lot of supply chain issues. The more I talk to our vendors and the OEMs, I hear everybody has, somewhere in his portfolio, companies that can’t deliver. Either its raw material or it’s a labor shortage,” Dr. Johannes Bussmann told Orient Aviation earlier this month.
The fact many companies have only one supplier of a specific part means if that supplier can’t provide the part, there is disruption, he said. “If the part is not there you cannot do a repair. It’s that simple. It’s not hi tech or rocket science. You need the part and it has to be qualified and in aviation that’s always a big burden. And this applies to whoever you talk. Boeing, Airbus and everybody else. You cannot just go next door and buy the part at the supermarket. This is something that will definitely show up [as an issue],” Bussmann said.
"Decisions are made much quicker now. Normally, we would tell the customer you can come on this or that day when we are ready but that can take time. Now, we can do it tomorrow. People will still travel, but doing inspections on a visual basis with cameras, this will be here for good" |
Dr. Johannes Bussmann Lufthansa Technik chairman of the executive board |
The problem is it is very hard to anticipate, he explained. “We are looking at all the vendors and suppliers, but we don’t know which part will be missing. And from my perspective, it will be the biggest threat [to the sector] that will come up and it will be the hardest to deal with because we don’t know where to look,” he said.
The 53-year-old engineer, who has been with LT for 23 years, including the last seven as chairman, holds a doctorate in engineering and has implemented the company’s growth and investment strategy. He also decisively drove the digitalization of the company and the development of digital products, most notably the AVIATAR digital platform for optimizing flight operations.
After deciding to devote his energies to activities outside aviation, in February he announced he would step down mid-year and that his successor will be the MRO’s COO, Soeren Stark.
In the meantime, Bussmann and his leadership team are well prepared for recovery from the pandemic and are looking at resuming expansion plans in the Asia-Pacific, a region where the MRO has several major joint ventures including Ameco with Air China in Beijing, a facility in Shenzhen in southern China, Lufthansa Technik Philippines (LFT) in Manila and offices and warehouses in Hong Kong and Singapore. It had broken ground on a hangar to service more aircraft, including A380s, in Manila but paused the project at the height of the pandemic. It is underway again.
The new hangar, dubbed Hangar 1A, will be a replica of the Manila facility’s existing Hangar 1, where aircraft from several airlines including Philippine Airlines, British Airways, Korean Air, Asiana Airlines and Saudi Arabian Airlines, are serviced. At 9,000 sq. metres, Hangar 1A is intended to increase LT’s airline customer base in the region.
LT is looking very precisely at its options for expansion in Asia, but growth will be guided by the evolution of Asia’s airlines, Bussmann said.
“This is something we are observing very closely. It makes a big difference if only new aircraft types are delivered in the region. Then we would build up different technical capabilities than if we have a mixture of aircraft or if older technologies are still dominant for the next 10 or 15 years.
In the next six to 12 months, it will be clear, he said. By then he predicts “the pandemic will be over and Asian countries will somehow change their politics about how to open borders and all that stuff”.
Recovery, when it starts, will be speedy, he told Orient Aviation. “For me, it was really eye opening to see how quickly a recovery could be when we dealt with the U.S. Within five or six weeks we knew the direction it would go. You need a starting point. I believe it predominantly depends on China when they [Asia-Pacific countries] open up, due to the size of the market, Then we can make decisions. With the learning curve we have from North and South America I am pretty optimistic it will be a quick thing.”
As for China opening up, Bussmann said there are few indications of when it might be. “Some say after elections and some say after the [Winter] Olympics. What I am hearing more from other industry people is quarter three or four this year,” he said.
LT is concerned about the zero-COVID policies many Asian countries have in place. “Either there are political reasons to achieve the one or the other thing. From a health care perspective it not required,” he said.
“It (Asia) will be the last part of the world to open up. It does not change our perspective. The aircraft orders and also the exchange of old towards new aircraft will come. It’s just delayed a couple of years to return to the pre-COVID plan.
“We still see [Asia] as the biggest growth region for the next decade and that is what we are putting in our strategy and our plan for it.”
If there is a large-scale movement from older aircraft to newer aircraft in Asia’s airline fleets Bussmann conceded, in principle, there is a three to five year period that is less maintenance intensive for airlines and this cycle will have an impact on MRO revenue.
“We don’t see it to be honest. Everybody was expecting it a year ago. A year ago, we would have been talking about surplus and that there was a huge wave of surplus (aircraft and engines) coming. There is nothing. We don’t see anything so far. I’m pretty sure there will be an increase, but this wave that everybody was talking about, like a tsunami, I don’t think that will happen in the meantime.”
Instead, Bussmann said there will be a more gradual move by carriers to new technology aircraft. He also pointed to the massive debt airlines have amassed during the crisis. They do not have a huge amount of cash to splash out on fleet modernization.
“There will be a balance. How much can you afford to do? Even though many airlines in Asia are government-backed or government-owned, I don’t think they will go bankrupt, but they also need to look at the numbers,” he said.
As for the pandemic, Bussmann said LT actually has been quite lucky. “We had a growth strategy we started in 2014 beginning of 2015 with an intention specifically to have a bigger footprint in all the new aircraft technologies – B787, A350 etc. Broaden our portfolio there and that went very successfully,” he said.
“We also started our digitalization strategy. In hindsight, it was even more valuable than we thought when the pandemic kicked in. We had a very broad customer base. It’s around 85% narrow-bodies, a couple of cargo aircraft of course and the rest is long-haul. This is something that helped us because through the entire pandemic we have had countries where the operation of narrow-body aircraft was in place, at least to some extent. So, the U.S. started a year or so ago. We had China and we had a couple of other countries that were fairly big.”
An example? Speaking to the chief executive of a Mexican airline, Bussmann asked how it could be operating more than it had been pre-pandemic. “The answer was very simple. ‘Before, people travelled 12 hours on a bus to go from A to B. Now they travel two hours in my aeroplane because they think is safer’.”
None of this means LT escaped the carnage of the pandemic. Like other aviation firms it has had to cut costs and reduce staff. In 2020 it was hit hard with revenue tumbling by 43% year-on-year, to $4.3 billion. Its pre-tax profit was $529 million in 2019 but collapsed into a loss of $433 million in 2020.
Announcing that result, LT said the extensive downtime and decommissioning of commercial aircraft resulted in the postponements of maintenance events and a steep slump in demand for MRO services. By the third quarter of last year, however, the situation was clearly on the improve, with the MRO reporting a pre-tax profit of $177 million as it began to benefit from an industry-wide increase in demand for maintenance services as the global airline market began to recover.
During the crisis LT has had to establish agreements with its airline customers about dealing with extremely low numbers of flight hours. “All the flight matrixes we normally use were not covered and they [airlines] were not able to pay for the minimum flight hours normally agreed. We showed a lot of flexibility there and at the same time we found good levels of cooperation with airlines about dealing with the situation. It was a mutual process. We found really good ways to cope with that,” Bussmann said.
“We talked to airlines about making services affordable. But we cannot donate money to them. I need to pay my people and for the materials we are consuming. But there are ways. If you decide to retire an aircraft in three years then you can have a very detailed program of what work is required.
“How much money do I put into this engine so that it lasts for three years? How can we have a positive impact on the cash flow of the airline? There are a couple of factors you can’t avoid. If the engine is due, the engine is due. It’s not a question of do I do it or not. It’s a question of how much do I spend? That’s what we try to figure out with our customers. From my perspective, that works very nicely.”
One trend “tremendously” speeded up by the pandemic is MRO digitalization, said Bussmann.
Engineering departments have been able to look at completing work in a different way, starting from a clean sheet of paper. One example is an engine inspection during and after repair, which would normally involve someone from the airline coming to the LT facility. “That was not possible but still the engine needed to be overhauled and a table inspection conducted. We had to install a camera system. The quality of the pictures was so that if you see this part [an image] it is no different from standing next to it.
“The customer can see what the analytics are, or how big is the scratch or crack. You can have the visual and the data on one screen at the same time and can talk. This is a process that has helped us to speed up internally.
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