Printed headline: Set in Stone
If CFM International and GE Aviation abide by new standards developed in response to airline complaints of anti-competitive practices, operators and independent aftermarket providers should benefit as a result. But anyone looking for market-altering changes in the agreement will likely be disappointed.
CFM and the International Air Transport Association (IATA) hammered out guidance—officially dubbed Conduct Policies (CP) and associated Implementing Measures--in two years of talks that began with the association’s March 2016 formal complaint to the European Commission (EC) Competition Directorate. IATA used the complaint to back an informal EC inquiry into aftermarket competitiveness.
While neither the EC nor IATA provided many public details on what led to the probe, the reported list of grievances is familiar to operators and MRO providers. Among them: Manufacturers and suppliers withhold or charge exorbitant fees for maintenance manuals and other key information needed to perform repairs, seeking instead to steer work to their own shops or so-called “authorized service centers.” Engine OEMs balk at parts manufacturer approval (PMA) parts on their engines, and upon discovering them either void warranties, refuse to work on engines with PMA installed or both.
The list goes on—at least in customers’ minds. Absent a clear set of policies, however, the so-called list was more notional than ironclad. Airlines that wanted to use PMA parts had to rely on often-opaque fine print in support agreements, or input from an OEM sales rep. Any seeds of doubt were often enough to dissuade operators from seeking savings by putting future technical support at risk.
“I still run into air carrier representatives that believe they cannot buy PMA because it is illegal or automatically voids warranties,” says Jason Dickstein, Modification and Replacement Parts Association president.
In its talks with CFM, IATA pushed for a detailed set of publicly available policies. The result: more than 40 pages of detailed practices and what-ifs, as well as a dispute-resolution process that, if necessary, can be extended to independent arbitrators.
“We are happy with the agreement,” says Jeff Shane, IATA’s general counsel and one of the association’s negotiators. IATA signified its satisfaction by dropping its formal complaint.
CFM says the CP’s contents “reaffirm its commitment” to ensuring competition in the MRO market and “help to confirm, clarify and complement” its aftermarket practices. GE Aviation says it will adopt the policies as well. The CP goes into effect in February 2019.
Among the few changes the policy establishes is an agreement to waive fees for using CFM engine service manuals. This extends to shops that use PMA parts or alternative repairs. Also clarified: Use of PMA parts and Designated Engineering Representative (DER) repairs will not void warranties. “CFM will include a statement in all future contracts to make clear that the mere use or presence of non-OEM parts and repairs does not render void CFM warranties,” the CP says. “CFM will also amend language in future contracts as needed to eliminate potential ambiguity.”
The manufacturer plans to keep its staff educated as well.
“CFM will issue and maintain internal guidance and regularly train CFM employees and staff to operate in compliance with this principle when negotiating or implementing CFM agreements,” the CP says.
Big-picture, the policies are more about transparency and clarification and less about CFM making significant changes. Some elements of the CP—such as the free use of engine manuals—are new, but the rest appear to reaffirm that CFM’s practices do not target its competition unfairly and are not illegal.
“It appears that what CFM and IATA agreed to is consistent with federal competition laws in the United States and the European Union, but nobody was enforcing those laws against CFM,” Dickstein says. “To the extent that CFM actually adheres to its agreement, it is a win for the entire industry.”
The agreement includes another important element that offers hope for those frustrated with perceived inaction by regulators against OEMs. Companies that believe CFM or GE is violating its policies can raise the matter with a designated liaison. If that fails to resolve the issue, the next step is either trustee oversight or arbitration under generally accepted international business rules.
Dispute-resolution that does not rely on regulators is one of the deal’s most important elements, Dickstein says. Not to be overlooked, he adds, is that the process does not require legal counsel, which lowers the financial burden for smaller businesses that otherwise would shy away from challenging a CFM-sized entity.
Ultimately, the agreement’s success will be judged on whether airlines believe they have more freedom to choose between OEM offerings and alternatives. PMA specialist Heico Corp. is cautiously optimistic that the settlement will open up competition. “I do think that one of our largest unrecognized opportunities would be . . . the engine PMA business,” says Eric Mendelson, president of Heico’s parts-making Flight Support Group division. “The airlines want a choice. So if the manufacturers heed this warning and basically cut out these anti-competitive . . . practices, then I think that is probably [our] greatest opportunity.”
Uncertainty around engine PMA policy is one reason sales have not been higher. The PMA market is projected at about $600 million annually, but some 95% of the FAA-approved PMAs are for Airbus, Boeing and Bombardier airframe and component replacement parts, an ICF International analysis shows.
“The engine space, over the last 10 years, has become very difficult,” Mendelson says. “And from our perspective and from what the airlines have taught us, some manufacturers have been extremely anticompetitive and have basically threatened their customers and told them that if they used alternative parts, they’re not going to support it. That’s been a real headwind for our business.”
While the CP’s language should help change this, it does not necessarily mean PMA suppliers will see demand increase. PMA makers rarely develop parts on spec but rather wait until they have customers before investing in product development and certification. PMA-shy airlines may continue to steer clear of using alternative parts until the CFM agreement has been put to the test.
“I think it is a good opportunity, but I just caution you not to get overly excited about it until we see some of the results,” Mendelson says.
IATA hopes the CFM deal is just the start. The association also filed a formal EC complaint against Honeywell over auxiliary power unit maintenance, but IATA says there has been little movement, while Honeywell stands by its practices
“Honeywell believes that our practices are fair and in compliance with all relevant laws,” the company says. "We have and will continue to cooperate with the European Commission’s preliminary inquiry.”
The EC also targeted Rolls-Royce in its informal inquiries that led to IATA’s formal complaints against CFM and Honeywell. “We will look carefully to assess what implications there are, if any, for us,” the UK-based engine-maker says of the CFM/IATA deal. “We have taken significant steps over the last few years to foster competition in services as a result of our increasing installed base.” Examples include more flexible TotalCare options and changes to its support network that give operators more options on where to send engines.