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Ensuring Competition In Aftermarket Essential For Airlines

Airlines in Asia are concerned that OEMs will monopolize engine aftermarket services, limiting their MRO choices and driving up costs.

Some MRO providers and airlines are increasingly concerned about original equipment makers (OEM) becoming involved in the aftermarket, fearing that it will lead to less choice and higher costs.

“There is a real battle going on behind the scenes that is redefining the aftermarket as we speak,” says Ian Wolfe, Cebu Pacific Air’s senior advisor, engineering and fleet management.

Wolfe warns that OEMs becoming involved in MRO may lead to fewer, rather than more, choices and that this may in turn affect the residual value of assets. “As the engine MRO network [for example] becomes more concentrated, the issue arises as to what is the residual value?” he says. Wolfe warns if the market becomes too tight, and the cost of engine MRO becomes too high, market demand for an engine type may evaporate.   

Wolfe says research shows that the cost of engine MRO is already increasing. “Are we spending more because engine MRO is becoming more expensive, or is it because the OEMs are getting involved?” he asks rhetorically.

Maintenance costs—airframe, engines and components—account for about 15% of an airline’s total costs, says Wolfe, although the percentage varies based on age and type of fleet.

MRO is big business. Team SAI estimates that airlines will spend $67.1 billion this year to maintain their narrowbody, widebody, regional jet and turboprop fleets. And it seems the engine-makers are leading the push into this market.

Ameco Beijing’s executive director- operations division, Hans-Juergen Loss, says the reason engine OEMs are seeking to derive more of their revenue from the aftermarket is because the aircraft makers and the airlines have pressured them to reduce the initial price of their engines. So the engine makers are trying to make up for that by selling engine spare parts and services, says Loss. “That’s part of the game.”

Powerplant OEMs can muscle in on the aftermarket because they own the intellectual property and have access to technical data. And since engines stay in operation for 20 years or more, manufacturers can derive huge amounts of revenue over an engine’s life.

The situation has reached the point that MRO companies find it almost impossible to do engine maintenance unless they first reach an agreement with the engine OEM.

Loss says the way MRO companies can ensure that engine OEMs cooperate is to work hand-in-hand with a large airline customer and use the airline’s business—and its promise of ongoing needs for MRO—as leverage. Negotiating aircraft or engine deals goes hand-in-hand with negotiations on maintenance and materials supplies, he says. “There’s very good cooperation and exchange between Lufthansa and Lufthansa Technik on that,” says Loss, adding that Lufthansa Technik relies on Lufthansa German Airlines to use its weight to drive negotiations with the OEMs.

Ameco Beijing also combines operational knowledge with engineering expertise to create more repairs for customers. “We have quite a few deep repairs where we repair parts, even though the standard line from the OEM may be that they suggest replacing the parts.” Loss says designated engineering representative (DER) repairs are a valid alternative, and that such repairs can be cost-effective solutions that improve turnaround times for airlines.

Gameco General Manager Norbert Marx recognizes OEMs have a role to play in supporting the product and helping ensure the product is reliable, “but if the trend is that they take over the MRO market, then it will [result in]expensive replacement solutions.”

Some senior airline maintenance personnel worry that if OEMs profit so much from the aftermarket, they may no longer have a financial incentive to make their product reliable.

Rolls-Royce has said publicly that it now generates more revenue from the sale of engine spare parts and maintenance support services, such as its power-by-the-hour programs, than it makes from the sale of the engines.

Industry executives say the way engine makers sell to the airlines is to refuse to offer hefty discounts unless the airline agrees to a power-by-the-hour maintenance program as well.

Ameco Beijing’s Loss stresses the need for competition in the market. He points to CFM, which has competed effectively against International Aero Engines (IAE) because it convinced many in the industry that the CFM56 has a lower life-cycle cost. 

The aftermarket for the CFM56 is handled by GE and Snecma, the two partners in the CFM consortium. CFM and Snecma have engine MRO joint ventures, but each still allows airlines such as Lufthansa and Lion Air to establish their own engine MRO facilities.

Tohru Saito, general manager of the engine maintenance center for Japan Airlines Engineering says, “More than 92% of A350 customers have signed up for Rolls-Royce’s Total Care package for the Rolls-Royce XWB.”

Some of Rolls-Royce’s competitors argue Rolls-Royce has the aftermarket for its engines sewn up and is reluctant to allow engine MRO shops to work on its engines unless they are in a joint-venture with the engine maker.

But a senior Rolls-Royce executive responsible for customer support tells Aviation Week that this is untrue. He concedes that most Rolls-Royce commercial engine overhauls are handled by Rolls-Royce joint ventures, but adds that they do allow some independent operators to exist. For example, he says, All Nippon Airways, EgyptAir and Iberia overhaul Rolls-Royce engines, and the engine maker has no equity in any of these engine MRO facilities.

“We listen and allow people to put forward a business case, but you need to have sufficient volume to make it commercially viable,” says the Rolls-Royce executive.

Pratt & Whitney, which patented the term “the OEM MRO,” owns engine MRO companies around the globe, but still allows some independent engine MRO companies to handle its engines.

William Kircher, P&W vice president-Singapore overhaul and repair, says P&W engines are increasingly coming under the OEM’s service programs. The percentage is 40% for P&W’s legacy engines—such as the PW2000 and PW4000—says Kircher, adding that this has increased to 60% for the International Aero Engines IAE V2500 in which Pratt is the main partner. And for P&W’s newest engine, the PW1000G GTF, it is 80%, says Kircher

He says P&W has deliberately left 20% of the GTF aftermarket to other engine MRO providers because P&W wants to protect the GTF’s residual value and create competition in the aftermarket. It is competition that drives innovation and cost-effective solutions for airlines, he says, adding that “it pushes us to be the best choice in the industry.”

But many airlines and MRO providers are still skeptical. Another bone of contention is access to technical data.

Marx at Gameco says: “The new health monitoring systems are a great opportunity for airline and MRO companies, but it is coming [from the OEMs] with a price tag and that makes it difficult for the MRO companies to make a margin.”

Raymond Tan, head of maintenance for Singapore low-cost carrier Tigerair says, “The OEMs can be very selfish. They keep technical information to themselves. If the third-party MRO companies can’t get access to the technical information, then they can’t support the airlines.”

However, Boeing China’s president, Ian Thomas, does make the point— echoed by many OEMs—that they are fully aware that some of their airline customers are also involved in MRO. “So we know not to compete against our customers and instead collaborate.” But he makes no apologies for the trend to move into the aftermarket. “The OEMs have a strong knowledge of the product and this is something that only the OEM can bring to the table,” he argues.

TAGS: Asia Pacific
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