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Latin American Airline Growth Strong, MRO Support Fragmented

Diverse customs and regulatory procedures, small fleet sizes create challenges for Latin American MRO providers, despite steady growth of local carriers.

Latin American airline fleets have grown substantially and are due to become much bigger. But the political fragmentation of Latin America has led to regulatory fragmentation, many small fleets and thus special challenges for airline maintenance, repair and overhaul (MRO) providers .

TeamSAI estimates Latin America has nearly 1,600 commercial aircraft, a number headed for 2,600 by 2024. Executive Vice President Tom Cooper says there are still almost 100 operators with 10 or fewer aircraft. That makes things tougher for both airlines and MRO companies.

Very small airlines cannot afford to build hangars or other infrastructure for in-house maintenance. Neither can they invest in information technology or technical staff to manage outsourced maintenance well. Moreover, small carriers do not have much buying power when shopping for aftermarket services.

Sparse in-house maintenance capabilities at airlinescreate opportunties for  MRO providers. Innovative shops or parts traders can offer menus of services, such as power-by-hour components and exchanges, Cooper believes. “You also see some MROs offer integrated technical support. That is getting limited penetration.”

But providing heavy checks for small airlines poses its own difficulties. MRO providers must respond to requests for proposals, negotiate contracts, agree on hangar slots, train technicians in airline procedures, learn formats of carrier paperwork, resolve material and logistics issues, perform checks and then create invoices, all for one or two checks.

MRO shops need volume and predictability to spread their fixed costs. Nose-to-tail lines for one customer bring up to 20% gains in efficiency, while one-off checks pay the equivalent penalty.

Cooper says pooling has been limited in Latin America because supply lines from OEMs are long and customs are a huge challenge. So Latin carriers buffer delays with expensive, large inventories, which are on-site and airline-owned.

Cooper predicts this will change over time as integrators like AJW offer inventory and exchange programs. “They will learn how to stage stocks in the right locations and how to work with customs processes.” General Electric has figured out how to deal efficiently with Brazilian customs, “but it took years of investment and work.”

Another challenge is that a region as large as South America lacks a uniform regulatory authority like the FAA or European Aviation Safety Agency (EASA). Cooper says Latin carriers are thus reluctant to depart from OEM maintenance recommendations, and this reluctance inhibits efficiency.

Regulatory fragmentation can also frustrate pooling. Pools require inspection tags on each component acceptable in many countries. To provide these, carriers and regulators in Latin America might have to agree on using FAA or EASA tags. 

With more than 300 aircraft, the Latam group is big enough to secure competitive maintenance outsourcing. Senior Maintenance Director Luiz Gustavo da Silva says Latam makes MRO even more efficient by concentrating on efficiency, minimizing turnaround times and standardizing fleets. Latam’s narrowbody fleet is comprised of the Airbus A320 family, and the carrier plans to replace its A330s and Boeing 767s and 777s with 787s and A350s.

Da Silva says pooling in the region is hindered by two problems. Governments in Latin America see pools as entailing purchases and sales, both of which are taxed, makina And customs procedures are inefficient, sometimes requiring almost a week to clear a part.

So Latin airlines build internal repair capacity if they have sufficient scale. Latam has installed capacity at São Carlos, Brazil, for 70% of A320  line replaceable units. Da Silva says this option costs 30% less than pooling would.

El Salvador-based Aeroman has 12 lines for Boeing and Airbus narrowbodies and plans to add capabilities for Embraer E-170s and -190s early in 2016, says CEO Ernesto Ruiz. It focuses strongly on airframe checks, while also doing light component work.

The Salvadoran MRO uses quality, turnaround-time and its cost advantage to work for several North American airlines and also supports several larger Latin American airlines. Unfortunately, there are only a few airlines in the region with more than 30 or 40 aircraft, Ruiz observes. Aeroman customers include Volaris, Avianca and Latam, but the larger Brazilian airlines tend not to venture so far north.

If Aeroman has a slot available and a smaller operator can forecast when it needs the slot, the MRO is willing to do the check. But Ruiz does not rely on these one-off checks, which represent only 10% of his work. “It’s best for an MRO to fill a line year-round, and these are the type of customers we have been dealing with for 10 years. But we always have a line or two dedicated to additional work or a single check. If we can get advance notice, we will see if we can accommodate it, but we do not plan the schedule around small airlines.”

Ruiz dealt with pooling challenges in his former positions at TACA Airlines. Component providers tried to make big pools available, but to make economic sense these pools had to be put at major hubs. Ruiz thinks pools might thus be suitable at Miami, to which many Latin American airlines fly daily. “It’s a perfect location, several airlines might be interested if costs are reasonable.”

In Brazil, the MRO business looks slightly different. “We have many opportunities, but plenty of competition,” summarizes Anderson Fenocchio, business development director of TAP Maintenance & Engineering Brazil.

Fenocchio says smaller Latin American airlines are only interested in MRO costs, and there about five well-established MRO providers in the region that have a leaner cost structure than his own. Usually, this is because these shops have less infrastructure than TAP M&E Brazil. TAP’s advantages are that it can service many models for all fleets and that it can provide component repairs as well as airframe checks.

TAP M&E has two facilities. A very large hangar in Rio de Janeiro can handle widebodies. In Porto Alegre, TAP’s big hangar can serve a 747 with two 737s under wing, and there is additional room for three narrowbodies. The MRO can complete checks on almost all Boeing models, except the 787, and all but the A380 in the Airbus line. The company is also an authorized service center for Embraer.

TAP does well internationally, with a Canadian charter carrier sending widebodies for checks, and leasing companies like Gecas, AWAS and AerCap using its services. It also does checks on many cargo aircraft, including those of Lufthansa Cargo. And it also supports TAP Portugal’s widebodies.

But Latin American customers are scarcer. Boliviana uses TAP hangars, as does TAME of Ecuador. TAP once did checks for LAN, but the carrier now goes to Mexico.

Distance is obviously not a challenge, as the MRO draws work from across the seas. Costs have been the problem competing for business in Latin America, but not for European or North American customers. Of course, labor costs are higher in Europe and North America, and TAP is usually able to help out with ferry costs.

Part pooling is not common in Latin America, the TAP exec acknowledges. “Embraer runs pools for its Latin American customers, but airlines do not come together.” He says many carriers in the region obtain parts from AJW, AFI KLM E&M or Lufthansa Technik.

TAP does well on turn-times, even with the difficulties posed by Brazilian customs, Fenocchio emphasizes.

But another challenge for the company has been relatively few long-term customers. Azul has three complete lines, a large customer has a widebody line and TAP’s own checks go nose-to-tail. Apart from these, the MRO has no continuous airline lines.

Despite the dependence on more transactional work, Fenocchio says TAP has done a good job filling lines in the last two years. However, “it would be much easier with more long-term customers.”

Nevertheless, TAP has plans to grow, and is adding capabilities for ATR aircraft in its Brazilian shops. “We want to do ATR airframes and components so they do not have to send them to Europe,” Fenocchio says.

Pooling is not necessarily less popular in Latin America than in the U.S., argues Miguel Chiang, vice president-Sales for AFI KLM E&M. Chiang says pooling choices depend on the size of the fleet, how mature aircraft are, an airline’s MRO philosophy, willingness and ability to make long-term commitments and logistic constraints such as customs, taxes and distance.

Global MRO companies adapt to each situation in providing component support. AFI KLM E&M provides pools for Latin American airlines through its network of repair facilities and partners. It can offer repairs and inventory from either the Americas or Europe.

For example, AFI KLM E&M supports some 767s, 777s and 787s in Latin America from repair and inventory facilities in Miami, Amsterdam and Paris. Carriers that operate within Latin America are supported by pools in Miami. The MRO seeks to put shops as close as possible to customers to minimize time in transit  and inventory costs, one reason for its acquisitions of Barfield in Miami and AMG in the Southeastern U.S.

Jörg Femerling, sales vice president at Lufthansa Technik, notes that the abundance of small fleets in the region gives MROs like LHT the opportunity to accompany and support airlines as they develop over the long term. Femerling says carriers in Latin America use both pooling and home-base leases to support components, but less frequently repair the components in-house. Customs procedures tilt large Brazilian fleets toward owning stocks at their home bases rather than pooling. And many Latin American airlines seek to hold prices down by spreading their contracts over several smaller shops.

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