Air France Industries and KLM Engineering & Maintenance merged eight years ago to create what is now a global MRO powerhouse. Today, AFI-KLM E&M is mainly focused on expanding its engine and component business, which accounts for 10% of its growth. The company’s president, Franck Terner, discussed strategies with Aviation Week.
How will the AFI and KLM E&M MRO dual-profile continue to evolve?
Terner: We are already an integrated company. It’s not Air France Industries on one side and KLM Engineering & Maintenance on the other. It has been more than seven years since we merged, and we are one, single integrated company. Business at AFI-KLM E&M will continue to go on as it has for almost eight years.
From Day 1, the main topic of discussion was: “What can we get out of this merger?” It is difficult to say how long it took to get to this stage, probably years. The synergies between Air France and KLM are very aligned; there is no crossover in the products we share within our network.
Can you describe your “contract management flexibility” strategy?
It’s a simple strategy: organize ourselves to say ‘yes’ to the customer. Our main goal is to never say ‘no’ to a customer. Our first question to a customer is, ‘What do you need?’ Do you need components powered by the hour? Yes, we can. Do you need flexibility to just have us do the repair and you take care of your own asset? We can do that. Do you need engine spares? We can do that. The contract has to be adaptive to what the customer wants.
What are your performance goals for the aftermarket business?
We have a history of pretty nice growth, which is mainly focused on engines and components. Overall our business has grown 3%, but when it comes specifically to engines and components, it’s more like 10%. Our goal is to carry on that growth and we think the market is there, as long as we continue to deliver a high-quality service.
How will you achieve that?
The first thing is to implement the Air France-KLM Group’s Transform 2015 plan. We can also rely on some existing strengths. We have invested significantly in our Paris and Amsterdam facilities, including the new test cell for very big engines. We’ll continue to focus on listening to the request of the customers and not impose a solution on them. By continuing to ensure we keep up with new technologies, we can guarantee our growth in the long term. We also want to have a presence in areas such as China, Asia and South America.
Where do you see the biggest opportunities for growth?
If you look at demand in our industry, you can see steady growth of roughly 3% globally. If you focus a little more on what kind of product is growing, new-generation aircraft are growing fastest, I would say 8-10%—this is a balance between aircraft retiring and new aircraft entering into service. Looking more closely again at the areas in which this growth is particularly high—Asia, China, India (even if India is still a small market, it is growing fast), South America, Eastern Europe and Russia—today we are present in all these areas, whether we have contracts, or whether we are implementing some facilities to be closer to our customers.
Is there an increased emphasis on growing partnerships in China?
We cannot say we invest more in China than in Europe. We will continue to invest in our facilities in Europe, but of course we have to be present in this growing market [China], so we will also invest in the region. We have to be very open to partnerships of any kind. We are working with many partners around the world and I think there is a real opportunity to catch some growth from these emerging markets.
What new services are you introducing to the market?
Our large-engine test cell at Charles de Gaulle in Paris is now running. It is a big move for us as it makes us a full alternative to GE. We are fighting a friendly fight every day with the OEM; there is still big competition in this arena. The fact that we are now 100% capable for the GE90 is very important. The test cell will also be capable of handling all the new big-engine technology.
What about future developments?
We are working hard on new products like asset management. We are growing that activity and we think there is a real opportunity to leverage our big assets. In 2014, we will invest significant sums of money into setting up a new facility here in Paris for aerostructure activity. Our customers are very keen to be helped with day-to-day on-wing services, so we will also enhance our engine capability for on-wing services.
How is the business preparing for the Boeing 787 and Airbus A350?
We have been present on the 787 from the beginning, when we signed a contract with LOT Polish Airlines. It was our first contract and won’t be the last.
Handling components on A350 engines is our goal. It is a bit too far away to say what the aircraft is looking like as far as the airframe is concerned, but we are working hard to offer our customers that capability.
We see a trend that new-technology airframes require less and less maintenance. Some years ago, and it’s still the case for 747s, for example, when you have facilities in Western Europe, or sometimes in the U.S., it is a good thing to fly the aircraft over to a lower-cost region for maintenance. But when the aircraft is less demanding in man-hours, you have to consider the tradeoff between fuel cost and man-hour rates. In the longer term, it may happen that the maintenance of the 787 and A380 will be regionalized. We’re thinking about that and we will see if there is interest from our customers for us to be present in the areas where they fly the aircraft.
The new aircraft capabilities come on top of already existing products that we have developed. We are a big provider on the A380 with our partner, Lufthansa Technik. We are becoming a big player on Embraer’s E-Jet family and ATRs, too. Our big seller is still the Boeing 777, while we are probably the leader in Airbus A330 component support. We will continue to develop capabilities on the GE90 and component repairs on the engine.
Are customers starting to bundle services more with new aircraft such as the A380 or 787?
We are very keen to have a global offer for airframes, components and engines, but we do not see customers bundling those services because the facilities and the know-how for each product are very different.
What is the bulk of your external business?
The main products we serve our customers are engine and component services. We are still strong on line maintenance and cabin modifications. There are regions of the world where our customers can achieve D checks far more cheaply, but they are still in high demand, particularly for our parent company.
What trends are you seeing in component and engine MRO?
It is quite obvious that customers are growing in size as they consolidate. These bigger customers have more power to negotiate. And with newer technologies bringing better value to airlines, there is a clear size effect on the business of components. As a trend, component MROs have to be more and more competitive as time goes by.
With these bigger customers investing in new long-range fleets, which have newer technology and larger engines, it is more difficult to access these new technologies. There are high barriers to getting into the big-engine business, so the number of players is quite low, perhaps only five. As a result, I think in the future we will see only big MROs handling engines. I’m not saying it will lead to a consolidation, but perhaps there will be bigger partnerships in order to cope with the customer’s demands for lower cost and to deal with the size effect of larger airlines.
Will there be room for the smaller aftermarket players?
With bigger customers putting more pressure on price and impacting margins, there is less ability to invest in growth, and at the end of the day, you can imagine how that will affect smaller MROs.
It’s also impossible to predict what will happen as OEMs put more pressure on the market. It’s a question of leveraging discussions with OEMs, and I can imagine that small independents will have some trouble doing that. The trend is going toward partnerships and/or consolidations. When? I don’t know.