Despite Fewer Aircraft, MRO Capabilities Expanding In Russia

Some experts see opportunity for MRO expansion in Russia despite political issues, while others are more cautious about growth prospects

It was never going to be easy for the Baltics, Eastern Europe and Russia (BEER) to rebuild after the fall of the USSR, but some MRO organizations started on the right foot.

“For many, the structural advantage was zero cost of assets,” says Ian Ferguson, senior manager at ICF International. “Typically, this was a great big Soviet hangar that might have needed the roof fixing, but was otherwise a huge facility for free. I also think it is reasonable to suggest that some companies had access to cheap finance.”

There were limitations, however. “In Russia, for example,” Ferguson notes, “a lot of airline MRO departments used to be run off Excel and the long-term arrangements in place weren’t terribly well considered. They were either very simple ad hoc, or best not thought about.

“Their knowledge assets were also a problem. They either relied on off-the-street technicians trained from zero, which wasn’t cheap, or they had guys who knew about Soviet airplanes, but needed retraining to handle Western aircraft.”

Since the economic crisis of 2009, the region’s MRO organizations have— despite challenging circumstances— started to reinvent themselves.

“An enormous amount has changed over the last five years,” Ferguson explains. “The general trend across the region, which is by no means homogenous, has been to professionalize, and so gain the credibility to win longer-term contracts.” They have taken a strategic approach to the infrastructure and capabilities.

“For example, Transaero bought into Ireland, S7 split off its engineering department into its own profit center, Aeroflot is making strategic partnerships, and UTAir is professionalizing itself. There also have been a couple of players who made a specific effort to become regional experts, mainly by hiring young people with the right local languages and with a very strong service ethic.”

But Russia’s new “strategic direction” and the related economic sanctions have had a great impact on this situation, Ferguson laments. “It has had a dreadful effect on passenger numbers and income and made it impossible for airlines to have any sensible planning horizon.”

While most ex-Soviet bloc countries have made business ties outside of the region, economic ties to Russia are still strong enough that sanctions against Russia have a knock-on effect to the rest of the region.

Graeme Butchart, director-international sales at Engineering Holding, agrees that times have been tough, but says there are still opportunities to be had.

“The Russian airline sector saw passenger growth after the economic crisis of 2009, up to 2013. From 2013, though, that growth rate started to decline. More recent circumstances have also led to further weakening in the sector,” which has affected airlines and MROs, he says.

“The 2014-15 winter season, in particular, was very difficult, with about 80-100 aircraft leaving the Russian fleet. Several airlines reached agreements with lessors on early terminations, and there were a small number of less-agreeable hostile repossessions. Other aircraft, owned by airlines or Russian financiers, are also now on the market for sale,” says Butchart.

At the same time, a few Russian airlines decided to bring their maintenance in-house. “For example, Ural Airlines has opened its new hangar and obtained all necessary approvals under EASA 145 and Bermudan OTAR39. Oren Air has also started to perform C checks on its fleet in-house. We believe both facilities will initially service their own base airline fleets, but over time, we expect them to seek third-party business,” says Butchart.

“So, there are fewer aircraft, and indeed fewer airlines, and there are more facilities opening up to service aircraft. The market has changed and certainly presents challenges, but recent events have also led to real opportunities. For example, due to changes in exchange rates, [the cost of labor] is significantly lower than a year ago, which of course is a very attractive option.” New labor rates explain in part why, under agreements already reached, Engineering Holding expects to perform 130 C checks in 2015, up from approximately 100 C checks in each of the last three years. At least one company appears to have gone some way to adjust to the new economic climate.  

China’s rising labor costs and the high price of fuel have caused multiple industries to consider re-shoring or seeking domestic or regional solutions. Over the past few years, more aircraft are staying within Europe, to the BEER region’s advantage.

“Yes, there’s been some mixed success at that,” says Ferguson, “but since most of the companies can’t compete on C checks, it becomes a matter of differentiation.”

Engineering Holding, Butchart says, is doing just that. The company has three Russian maintenance bases—Domodedovo, Novosibirsk and Mineralnye Vody—that are all EASA 145-approved for heavy maintenance on the A320 family, 737NGs and 737 Classics. Novosbirsk is also approved for heavy maintenance on CRJs, 757s and 767s. It recently won tenders to perform heavy maintenance checks on the Aeroflot Group fleet. So far, the first 10 C checks on A320, 737NG and 767 (Rossiya) aircraft have been completed.

“In terms of the next five to 10 years,” Butchart adds, “we of course hope that Russian airlines will return to growth, but our model also envisages us providing quality services to a variety of international airlines.”

In this day and age, global business is desirable for any aviation company, but for those in Russia, and therefore—by extension, the rest of the region—it is almost a necessity for survival.

“It would be lovely if Russia sorted itself out and came back [from the brink],” says Ferguson gloomily, “but I think its current geopolitical situation will remain quietly, disappointingly, stable. Whether the whole region will be pulled down with it, I just don’t know.”

Butchart strongly disagrees with Ferguson. “I think he is being very negative,” he says. “Despite challenges, we have quite a positive view of the future.” 

TAGS: Europe
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