Printed headline: A Strategic Approach
The strong run of traffic demand and airline profitability in recent years is affecting the aftermarket in obvious and subtle ways, with operators and service providers each benefiting.
Demand for lift as measured in revenue passenger-kilometers is pushing 7% year-over-year (YOY) growth for the fourth straight year and has not been below 6% annually since 2013, International Air Transport Association (IATA) data show. Airline profits are similarly stable. Global carriers are on pace to top $30 billion in aggregate net profits for the fourth straight year, and the industry has not reported a collective net loss since 2009, IATA says.
The most obvious ramification for MRO providers: Busy aircraft need regular maintenance, and in the case of older airframes may be worth more in service than on the part-out market. That means more spending on parts and services to keep them airworthy. Figures compiled by Canaccord Genuity analyst Ken Herbert suggest that aftermarket spending, including both modifications and line maintenance, could increase 8% YOY this year. Next year’s growth rate may edge into double digits, especially if fuel prices, which were trending downward in October and November, do not spike.
Solid airline profitability is helping drive MRO growth beyond the expected increase in the number of shop visits and overhauls. When forced to pull equipment from service, carriers are often taking the opportunity—and their extra cash—to maximize workscopes, especially on engines. Safran executives cited both more shop visits than expected and higher material consumption per overhaul for a 19% jump in civil engine MRO revenue last quarter—a trend that should help full-year growth hit 12%.
Stronger balance sheets provide another benefit when planning maintenance strategies: breathing room. In lean times, executives often must prioritize decisions based on near-term factors, usually led by keeping costs down. This influences everything from how much will be spent on an overhaul to how many people the airline will employ to perform noncore work, including maintenance.
“In the times of financial distress—basically the previous entire [2000-09] decade—it was all about taking fixed costs and making them variable,” says Jonathan Berger, managing director of Alton Aviation Consultancy. This included opting to outsource maintenance instead of staffing up to do it in-house.
Today, things are different. “Airlines have the bandwidth to make more robust business decisions around in-sourcing and outsourcing,” Berger says. “We’re seeing some work come in and some work go out. But today the decision is much more based on these business cases.”
American Airlines used such a case to determine that its CFM International CFM56-5B work would be best done in-house. GE Aviation Services had the contract, but American has a huge engine shop at its Tulsa, Oklahoma, technical operations base that handles the carrier’s CFM56-7B. American bid out the -5B contract and included its own shop, and the in-house option won.
“Whenever there is steady, long-term consistent work that our skilled technicians can perform in-house and it makes competitive sense to do so, we will in-source that work,” David Seymour, American senior vice president for integrated operations told Inside MRO soon after the decision was made last fall.
Bringing the -5B work in accomplishes several goals for American. It provides the Tulsa shop with steady work even while two other engines it maintains—the Pratt & Whitney JT8D-219 and the GE CF6-80C2—are being phased out as American retires its respective platforms, the MD-83 and 767, in the next three years.
More important, it gives the airline more control of its narrowbody engine work at a time when demand is beginning to put strain on the supply chain. American operates 151 CFM56-5B-powered Airbus A320s and expects that number to be about 154 by year-end. (Its fleet also includes International Aero Engines V2500-powered Airbus narrowbodies.) The carrier’s turnaround-time target for a -5B overhaul is 53 days, matching its -7B rate. That is as much as 50% faster than some shops are turning them out—a result of high demand and, in some cases, parts backlogs.
“It’s very difficult to get a slot in the engine market,” says Berger. “We’re seeing at many MROs, engines lining up waiting to be inducted, because they can’t get parts. We’re seeing significant [turnaround-time ] increases. That’s just the state of the industry right now.”
American’s long-term benefits will come at a short-term cost. The airline spent about $7 million for tooling, shop reconfiguration and training to prepare for the first -5B induction, which took place in November. American is also moving 80 people from Tulsa TechOps to the engine shop, including 20 needed to help handle a projected jump in -7B work.
But American was in position to make the investments, thanks to consistently strong financial returns. The carrier generated $19.4 billion in pre-tax, before-special-items earnings in 2014-17—its first four full calendar years following its merger with US Airways. Each annual result has fallen within a notional $3-7 billion annual-profit range set by the the airline’s top executives.
“If airlines are making money, then they can decide how to invest this cash,” says aviation consultant Richard Brown. “Having no money also makes airlines take tough decisions.”
Among the advantages that financial strength affords is the ability to tailor maintenance programs. Berger points to carriers such as Ryanair and Southwest Airlines that have both significant in-house and outsourced airframe-overhaul programs. Beyond the obvious flexibility this creates, performing work in-house provides reliable benchmarks for bidding some of the same work out.
“You not only have balance and control, you understand the costs involved,” Berger says. “If I do work in-house, I know the man-hours. I have the information. I can keep my suppliers honest and have more control of my slots.”
For many airlines with extensive in-house MRO operations, in-sourcing opportunities are examined for benefits that extend beyond their fleets. For Delta Air Lines, last December’s confirmation that it landed a spot on Pratt & Whitney’s list of approved PW1000-series geared turbofan (GTF) overhaul shops as part of its A321neo order means it can both control more of its own MRO costs and generate millions of dollars in third-party revenue by in-sourcing work.
Delta, which opted for PW1100G-JM engines to power its 100 A321neos, will see its Delta Tech Ops MRO division become an aftermarket support partner for both the A321neo engines and the PW1500Gs powering the A220. Delta has 75 A220s on order, and the first aircraft will enter service in January. “We have a guaranteed number of over 5,000 engines that are going to be repaired here in Atlanta over the life of that engine,” Delta CEO Ed Bastian said at the airline’s 2017 Investor Day, which took place on the same day that its 100-aircraft A321neo order was announced.
Delta’s volume guarantee ensures that Pratt’s Columbus, Georgia, GTF shop 100 mi. down the road does not present too much competition to the airline’s Atlanta-based TechOps facility. Columbus, which has expanded its facilities in preparation for the eventual rise in GTF overhaul demand, also services several other engine types. Five other shops are or will be serving the GTF MRO market, including a joint venture between Lufthansa Technik—the Lufthansa Group’s partner MRO—and MTU Aero Engines.
In situations such as American’s and Delta’s, fleet scale helps justify investing in in-house capabilities. For others, greater scale can pave the way to more budget-friendly agreements on work that is sent out.
JetBlue’s 250-aircraft fleet is dominated by 190 International Aero Engines V2500-powered A320-family narrowbodies, and it has 85 PW1100G-JM-powered A320neos on order. A little more than a decade ago—at the end of 2007—its Airbus fleet was 104 aircraft. The growth means it can leverage the large, common fleet to land more bottom-line-friendly long-term maintenance agreements—and it is doing just that as part of a major cost-cutting initiative.
JetBlue spends about $800 million annually on technical operations—80% of which is external. Annual maintenance-unit-cost compound annual growth rates (CAGR) have been eye-opening: 16% for its 60-aircraft Embraer 190 fleet and 13% for its A320-family aircraft in 2010-16, the carrier says. Engine-maintenance CAGRs led the way, jumping 29% for the E190s and 24% for the A320s. JetBlue spends about $325 million per year on engine MRO.
One ramification of the carrier’s skyrocketing maintenance costs: a major increase in overall unit costs. JetBlue’s cost-per-available seat-mile excluding fuel costs (CASM-ex) rose 2.8% annually in 2010-16. Factoring out maintenance, JetBlue’s CASM-ex annual growth was 1.7%. U.S. legacy carriers, in contrast, saw maintenance costs fall slightly during that period, JetBlue calculates.
Part of the reason for the rapid maintenance-cost escalation in recent years: The growing carrier did not have the scale to secure more favorable long-term maintenance agreements. With 250 aircraft in service and commitments for 145 more—including 60 A220-300s that are slated to replace the carrier’s E190s—that is no longer the case.
JetBlue has long-term engine-service agreements in place for the Pratt & Whitney PW1000G variants that will power its A321neo and A220 fleets, the first of which arrive in 2019 and 2020, respectively. It is putting together deals for overhauling the V2500s that power its current A320 fleet as well as airframe heavy-maintenance agreements for its entire A320ceo and A320 neo-family fleet.
“The 85 [A321neos], they start arriving in March of next year, and you think about the A220s that start arriving in August 2020, the engine maintenance contracts we put in place are safeguarding JetBlue for the long term,” says Chief Financial Officer Steve Priest.
The carrier also is taking steps to reduce E190 costs, even as that fleet is slated to be phased out by 2025. Among the changes: a revamped engine-services agreement with GE that targets CF34 engine life-limited parts (LLP) costs, factoring in the fleet’s retirement.
JetBlue has targeted maintenance-related cost-savings initiatives of $100-125 million annually by 2020 as part of a broader structural cost-reduction program involving everything from catering contracts to the headquarters headcount. Deals completed to date, notably the CF34 agreement and renegotiation of several “key sourcing contracts” are expected to deliver about 70% of the projected annual technical operations-related savings.
Another fast-emerging development that airlines are taking advantage of is the broadening of parts-inventory management offerings. All airlines have the need, and for those that already outsource heavy maintenance, an MRO provider that offers bolt-on parts management can help streamline their vendor pool, which often means lower costs.
“Airlines are working with us in a consultative manner to tailor the support offerings that they desire, from inventory and rotable support and engineering all the way to fully outsourced MRO and inventory models,” says Carl Glover, AAR Corp.’s Americas vice president of sales and marketing. “Some airlines are asking us to plug the gaps in their operational support requirement, whether that be repair management, component repairs or inventory solutions to help them phase out and phase in fleet types but also to help them build out their capacity to manage their fleets.”
As airlines become more efficient, cost-cutting grows more challenging, presenting opportunities for highly targeted efforts. Alternative parts sourcing is a prime example. Delta, one of the industry’s parts manufacturing approval (PMA) pioneers, approved 307 PMA parts last year, says Donny Douglas, one of four engineers dedicated to the airline’s PMA program. Delta calculates it saved $10 million from those parts last year alone.
For a PMA to make sense in Delta’s world, it should save at least $5,000 per year compared to the OEM’s alternative. “But if we’re having issues with [OEM part] availability or reliability,” Douglas says, “that goes out the window.”