Mixed aftermarket business results plaguing some major players continue to steer clear of Air France-KLM Group (AFI KLM), which padded its MRO backlog to nearly five years of work and is on track to boost year-over-year operating profit of its AFI KLM E&M engineering unit for the fifth consecutive year.
“In terms of turnover—external turnover and profitability . . . we are targeting in 2015 something which is significantly higher than in 2014 with a strong profitability,” Air France KLM CEO Alexandre de Juniac said on a recent earnings call.
The MRO unit boosted first-half third-party revenues by 35% to €776 million ($861 million). Factoring out non-organic growth, notably the acquisition of U.S.-based engine component supplier Barfield, and third-party revenues increased a still-healthy 13%. The unit’s operating profit was €86 million—a 34% increase, or 15% when factoring out non-organic contributions. The MRO unit’s order book stood at $8.5 billion on June 30—enough to keep AFI KLM E&M shops occupied until mid-2020, the company says.
The MRO unit’s consistent growth puts it among the exceptions within the Franco-Dutch conglomerate. The group, in the midst of a multi-year cost-trimming initiative, posted a €638 million first-half loss and is scaling back planned overall airline growth outside of its low-cost Transavia unit (Aviation Daily, July 27).
AFI KLM E&M, which accounted for about 6% of group revenues in the second quarter, is one of the businesses that the group is investing in as part of its Perform 2020 plan, which eyes major cost cuts by 2018. The MRO unit is focusing on the aftermarket’s most promising growth areas: engines and components (Aviation Daily, June 18).
So far, the strategy seems to be paying dividends. Last month, it announced its 10th 787 component support contract, which combined put about 160 aircraft under the MRO provider’s care—more than any other MRO provider, the company says. Last year’s deal to acquire Barfield combined with several major wins to fill its GE90 capacity are evidence that its power plant focus is in full swing as well.
While AFI KLM’s big-dollar wins have mostly come in its two focus areas, it continues to nab traditional MRO deals as well. Recent wins include an extension of an Air Madagascar total support contract on the carrier’s two A340-300s, and a multi-year heavy maintenance deal for two CityJet Avro RJ85s. Such deals may pale in comparison to multi-year wins on platforms like the 787 or GE90, but they underscore AFI KLM’s continued strength in a surprisingly uncertain market.
Last year’s drop in fuel prices had many aftermarket players anticipating jumps in sales as airlines altered their cash-conserving strategies of deferring unnecessary maintenance. But halfway through 2015, the results have been mixed at best. Several high-profile companies, including United Technologies Corp. (UTC) and Rockwell Collins, posted soft aftermarket sales in the second quarter. The reasons cited for the dips included lower-than-expected 787 initial spares provisioning, more reliable parts leading to fewer needed repairs, excess shop capacity, and continued MRO-cost scrutiny by operators.
An early June survey of more than 50 commercial aftermarket players by Canaccord Geunity found that half were running behind their 2015 business plans, compared to 34% in the first quarter.
“It is almost seems like old news at this point, but the commercial aerospace aftermarket performance so far in 2015 has been below expectations,” Canaccord noted. “While expectations may have been overly heightened coming out of 2014 with lower fuel prices, better airline profits, strong traffic, and an expectation that airlines would increase the use of older aircraft. . . we believe the year-to-date commercial aftermarket numbers are running below levels even normal traffic would justify.”
The solid fundamentals and added boosts of older aircraft flying more means a turnaround is inevitable.
“We believe we will see improvement” in the second half of the year, “but according to this survey, a stronger rebound is not expected until early 2016.”