‘Consolidate or be consolidated’, says AFI KLM E&M chief

The flurry of mergers and acquisitions in the aerospace sector in recent years means that MROs are increasingly finding themselves squeezed between two sets of giants, Franck Terner, president of Air France Industries KLM Engineering & Maintenance (AFI KLM E&M), told me yesterday when I visited some of the MRO’s facilities in Paris.

“First thing there is a consolidation of airlines. In 2010 I was interacting with not small but reasonably-sized customers, now I am very often interacting with giants like LATAM,” he said.

“Second there is a consolidation of our suppliers.

UTC, for example, is huge; 50 to 60 per cent of the components installed on a 787 are made by UTC companies.

“[As an MRO] you have at the front and the back two giants…so you have to be big. The challenge is to be part of the consolidation and there are two ways to do that – consolidate or be consolidated.”

And AFI KLM E&M’s approach is to be one of the consolidators.

Terner confirmed that of the 10 per cent annual like-for-like growth the MRO aims to achieve in the coming years, half will be generated through acquisitions and partnerships with other companies.

Creating networks of MRO facilities with complementary capabilities – for next generation aircraft AFI KLM E&M is splitting out maintenance operations between its shops in Amsterdam and Paris, rather than having the shops compete – coupled with part sales companies, enables the firm to improve operating margins, according to Terner.

It’s an approach that seems to working thus far for AFI KLM E&M which yesterday (February 19) posted its annual results for 2014 along with the rest of the Air France KLM group.

While the group overall posted an operating loss of €259m ($293m) – as a result of costs associated with Air France pilot strikes in September – the maintenance division posted an operating result that was €15m ($17m) more than in 2013 and when adjusted to a like-for-like basis this figure increased to €42m ($47.5m) up on the previous year.

Total annual revenues were up 3.4 per cent, with revenue from third-party maintenance up 2.1 per cent year on year. Furthermore the MRO’s orderbook increased 28 per cent on 2013, up to €5.6bn.

Since 2011, AFI KLM E&M’s orderbook has increased 70 per cent, with revenues from third-party customers growing by six per cent a year and operating results increasing by a CAGR of 21 per cent.

And with plans to grow a further 10 per cent a year, a new composite repair facility set to go live this summer and with consolidation front and centre of its business development strategy, AFI KLM E&M certainly shows no sign of checking its ambitions.

When asked what the future MRO market will look in 10 or so years, Terner is confident that consolidation will have played a significant part in shaping the landscape.

“There will be big MRO networks. I will bet that we will be there, along with Lufthansa Technik and a few others, leading these networks and OEMs will have their MRO networks too," he says.

The paradox will be that these players will compete as they do today, but they will also be customers to each other and cooperate.”

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