The head of Air France-KLM’s engineering and maintenance division Franck Terner talks to James Pozzi about its new engine blade repair joint venture, maintaining its competitive edge in the face of growing OEM aftermarket presence and where it is looking to cement its MRO activities.
Aviation Week: AFI-KLM E&M has created a new joint venture with Safran focused on engine-compressor blade repair. How significant is its formation, and what are its long-term aims?
Terner: We’re in the business of maintaining engines, and the compressor blades are the most expensive parts of those engines. For compressor blade repair, we subcontract nearly 100% of the workflow on three engine types—the CFM56 powering the Boeing 737 and Airbus A320, the GE90 for the Boeing 777 and the GP7000 used on the Airbus A380. This project is about insourcing this repair into a brand new shop in the north of France, which will operate as a subsidiary with Safran holding a 51% share and AFI-KLM E&M holding the other 49%. It’ll be a big flow of parts benefitting the engines repaired in our existing shop. When the joint venture becomes steady around 2019-20, we will have 200-250 employees ranging from mechanics to engineers. The plan is to invest more than €20 million ($21.9 million) with a return on that investment expected to be in less than three years. On the whole, it’s a very solid investment for us. The main customers for the time being will be Air France-KLM and Safran. There’s a big flow of engines coming into both companies’ shops, so focusing on re-insourcing the flow of parts being outsourced is key.
What was the geographical strategy behind the location of the compressor blade repair shop?
Other locations were considered during the initial process, but after analyzing the offers and assessing the support structures available to us in areas such as technical training, we opted for France. There’s a big Safran shop in the southern region of Paris, and of course, AFI-KLM E&M has other facilities at Paris Orly, Charles de Gaulle and Amsterdam Schiphol. Location-wise, La Porte du Hainaut works as a location because it’s more or less in the middle of the other facilities.
Looking at the business side of Air France-KLM, company revenues for engineering and maintenance were up alongside Ebitda. How do you see the previous year and AFI-KLM E&M’s prospects?
The aftermarket services industry is growing at 4-5% annually due to demand—especially from the East [Asia and the Middle East]. The [strong] dollar was a big factor in this growth, but regardless, it was a good year. Air France-KLM’s engineering and maintenance division is growing slightly above the market, and this year we expect to grow either level or slightly above the market. But is the MRO market good? That’s a question dependent on where a company is operating—competition is very tough. There’s also a lot of pressure on parts prices for many reasons, one being tough competition and the other being that component OEMs are really active in the market. I sometimes read about how the OEMs are coming into the aftermarket, but that’s not the case—they’ve been there for a long time. However, they are certainly more aggressive now. But through initiatives like our Transform 2015 and Perform 2020 plans, we’ve managed to stay competitive and improve our competitiveness against other MRO suppliers.
You mention OEMs are increasingly active in the aftermarket. Does that concern you?
It’s more a matter of attention rather than a cause for concern. But their greater activity has certainly changed the industry. One only has to compare old-generation aircraft to new ones, which have ensured the protection of the OEM’s intellectual property (IP) has become more significant for them. For new entrants, it used to be easier to establish a new company off the ground, but now greater authorization, IP and licenses are required, and if they have no leverage on [OEMs], then this can be troublesome. But the true extent of growing OEM activity is something that will be determined in the long term, and it will be interesting to see where these companies are 10 years from now.
How has AFI-KLM E&M remained competitive in the face of competition?
Above all else, we see ourselves as a customer, because essentially we are an airline group that knows how to fly aircraft and use our airline perspective. But as an airline group, we are different from OEMs, as we know what other carriers need in terms of MRO: They want value-creation and something for their maintenance costs. When looking at the different players and rivals, the question needs to be asked how you are differentiating yourself from them. AFI-KLM E&M is different from the OEMs, being a nose-to-tail integrator covering engines, components, aircraft, line maintenance, training—so a very wide offering. When an airline is looking to have any kind of service in the field of MRO, we can say “yes.” The real value-creation is being able to offer the full package and then sell what you need; the second is being able to think from the perspective of airline customers and knowing exactly what they want. So far, this formula has worked well for us.
AFI-KLM E&M’s presence in global regions is well-balanced across North America, Europe and the Asia-Pacific. Will you look for further business in these areas, or will there be a focus on growing in other regions?
The balance is good, with our customer share in North America, Europe and Asia-Pacific amounting to around 30% in each region. Growth in the Asia-Pacific and specific countries like China is no surprise, so we’ve been very attentive toward what’s going on there. In the past two years, we’ve signed some large MRO contracts, such as our $1.5 billion deal with Air China and its cargo arm to service the GE90 engines on their Boeing 777s for 10 years and more recently, a GEnx maintenance contract with Xiamen Airlines. We have a small facility in China but are expecting the flow of work to increase, so we are becoming much more active. Looking outside of our main regions and to places like Africa, again, that’s a fast-growing region but perhaps starting from a lower base than the other territories. It’s a mixed continent; some airlines are struggling there while others are in better shape. No part of the world will be neglected, so we will continue to look for the right opportunities wherever they may be.
Could this growth manifest itself in the form of joint ventures?
Of course, but there is no set time frame for any joint ventures. Deals in the market are seemingly getting bigger and more complex by the day—10 years ago we were repairing the parts; now we are talking about financing part of the inventory, exchanging know-how and implementing shops locally. When you look at our track record, there is no reason to think that we won’t carry on to implement joint ventures and partnerships with customers and even competitors, as demonstrated with our Spairliners joint venture formed with Lufthansa Technik. This is clearly a part of our strategy.
On that topic, how closely do you follow developments at some of your competitors?
Business intelligence is key. If you don’t know what’s going on around you, then there is a danger of missing out on something, so being aware is important. Any movement, press release or joint venture from our competitors is noted. There’s a lot of impressive companies out there, and I have a lot of respect for our competitors and what they do. But for our own strategies, we’ve never aimed to follow our competitors and have tried to position ourselves as a market front- runner—being proactive rather than reactive but never overconfident. Hopefully, our competitors are the ones tracking us.