Air France-KLM Group will leverage its growing third-party maintenance, repair, and overhaul (MRO) operations—particularly engine and component work—with an eye on adding up to €80 million ($104 million) in pre-tax earnings to the group’s bottom line by 2018 through a mix of organic growth and strategic acquisitions.
The target underscores MRO’s expanding role in the group’s long-term business plan, which is being established as a five-year effort dubbed “Perform 2020” (Aviation DAILY, Sept. 16). Unveiled Sept. 4, Perform 2020 is a follow-on to a three-year plan that is wrapping up by yearend. The current plan focuses on cost containment and debt reduction, while Perform 2020 will leverage the group’s strongest attributes—such as long-haul flying—and mitigate risk posed by weaker ones.
MRO makes up a fraction of the group’s revenues, but it is profitable. Third-party sales totaled €576 million in the first half of the year, just less than 5% of the group’s €12 billion total revenues. But its €50 million net income not only led the group’s four segments, it was the only one that ended in the black. As the group moves toward firm financial footing—the group turned a profit in the second quarter—MRO will play an expanding role, even as other key operations, including cargo and short-haul capacity, are held in check or cut back.
“We are very well-placed in this market, and we have ambitions,” group Executive Vice President, Engineering & Maintenance Franck Terner said.
The group’s third-party MRO revenue made up 35% of total maintenance revenue in the first half of the year, and that figure is climbing. Its order book was up to €5.1 billion at June 30, a 55% bump from where it was at the end of 2011.
The group is concentrating on two high-growth, high-margin areas in MRO: engines and components. Nearly half of the group’s external revenue comes from engine work, and 36% from components. Airframe work is about 15%, a low figure reflective of its internal operation as well. Air France-KLM no longer does its own Boeing 747 or Airbus A330 heavy maintenance, reasoning that the high number of man-hours required make it more sensible to outsource. Its Boeing 777s are still done in-house because the most intensive check requires few enough man hours—about 7,000—to render outsourcing uneconomical.
Terner said that emerging technology could help tilt the balance back toward keeping work closer to home. He notes that a Boeing 787’s amount of hands-on labor for maintenance checks is projected to be just 10% of a 747-400. Factor in high fuel costs and rising labor rates in developing regions like the Far East, and it’s not a stretch to see a more globally balanced heavy maintenance industry that favors convince as much as low labor costs.
Meanwhile, the group’s MRO focus will remain on engines and components. Terner said the group’s position as “the only credible alternate solution” to manufacturers GE and MTU gives it a strong position on the GE90. Competition for its other core engine product, the CFM56, is more challenging because of a capacity glut, Terner acknowledges. But, he adds, the group’s experience should help it add volume and gain share in a still-expanding market.
On the component side, Air France-KLM’s expansion strategy includes both internal growth and targeted acquisitions, similar to this year’s Barfield acquisition (Aviation DAILY, March 20).