Printed headline: Baltic Worldview
Ambitious businesses from small countries face a similar challenge: Their domestic markets are too small to sustain growth beyond a certain point. For aviation MRO companies, that problem is mitigated by the mobility of aircraft, which makes it easier to attract foreign customers, but other limitations are less easily addressed.
The Baltic countries of Estonia, Latvia and Lithuania have a combined population of just over six million, and this creates a dilemma for local MRO providers. “One of the main challenges we face here in the region is certainly the lack of skilled staff,” says Jan Kotka, chief operating officer of Tallinn, Estonia-based Magnetic MRO.
“We do our best to hire skilled professionals from the local market, but the talent pool here has limitations,” he admits.
Zilvinas Lapinskas, chief executive of Vilnius, Lithuania-based FL Technics, echoes those thoughts and outlines various strategies the company is pursuing in response. These include collaboration with local schools and universities and the implementation of lean production. “This method has proven itself throughout the world, so we expect to shorten the training time of our new employees in order to establish and maintain standardized work and required quality,” he says.
Magnetic is also cooperating with local education authorities. “We have a customized study program to boost the number of specialists in cooperation with the Estonian ministry of education,” says Kotka. “Magnetic MRO also holds EASA [European Aviation Safety Agency] Part 147 training approval and runs a specially designed training center, which we use to serve our own needs as well as third-party customers,” he says.
Then there is the problem of scaling. Local airlines can provide only limited maintenance work, and bigger carriers in the wider region tend to have their own technical departments. This applies even to some low-cost carriers, which might be expected to outsource. Ryanair, for example, has its own maintenance base in Kaunas, Lithuania—Kaunas Aircraft Maintenance Services (KAMS). Its chief executive, Karolis Cepukas, says it has completed 700 checks for the airline’s Boeing 737 aircraft since 2013. “Most of the work is done in-house,” he says. KAMS will add 737 MAX capabilities in the first quarter of 2021 at the earliest, he notes.
The biggest local carrier—Riga, Latvia-based AirBaltic—also has its own MRO capabilities, although until recently these focused on line maintenance and A checks, with heavier work (plus engine, wheels and brakes maintenance) outsourced. However, for the airline’s newest aircraft, the Airbus A220-300, AirBaltic is planning to do C checks itself, with the first scheduled for the fourth quarter of 2019. It also plans to add wheel maintenance for the type by expanding its workshop capabilities. These developments mark a significant shift away from outsourcing, since AirBaltic is migrating to a single fleet type of A220 aircraft.
One comfort for third-party providers is that AirBaltic’s technical department does not compete with them for other customers, although that may change.
“Currently, AirBaltic does not perform any maintenance work for third parties,” says Andris Vaivads, AirBaltic’s senior vice president for technical operations. “With expansion of the company’s maintenance capabilities, AirBaltic may evaluate the opportunity in the future.”
Six years ago, more than 75% of FL Technics’ customers were from Russia and Commonwealth of Independent States countries, but that has dropped to one-third, while European customers now constitute half the company’s work. “The current diversification is a healthy one, and I plan to keep it that way,” says Lapinskas.
Perhaps the most eye-catching win was a five-year deal signed in 2018 to provide base maintenance for 28 Lufthansa Group A320s, a contract that Lapinskas says would have been “impossible” to win several years ago. He credits new production methods, new wheel and brakes services and the modernization of FL Technics’ avionics, interior, battery, emergency equipment and non-destructive testing capabilities for the transformation.
Another interesting development for the company was a deal to maintain aircraft for South African carrier Comair over the summer months, a traditionally slow period for Northern Hemisphere MRO providers.
Diversification is also being sought through international expansion, which seems vital given that the Baltic MRO market will be worth just $126 million in 2019, according Aviation Week’s Fleet & MRO Forecast. That compares with $3.8 billion for the Eastern European MRO market and $17.3 billion for Western Europe.
FL Technics is venturing even farther afield as it seeks to capitalize on burgeoning demand in Asian markets. Its efforts in this regard have been buoyed by parent company Avia Solutions, whose sister company AviaAM Leasing, along with Henan Civil Aviation Development, set up a joint venture leasing business—AviaAm Leasing China—in Henan province in 2016. FL Technics has built on that relationship by establishing its own Chinese joint venture, FL ARI Aircraft Maintenance & Engineering, with local partners China Aircraft Leasing and ARI. The Harbin-based MRO aims to provide A320- and 737-family support. It has just received line maintenance approval from Chinese regulators and is progressing toward EASA certification.
Meanwhile, in August 2018, FL Technics Indonesia earned FAA Part 145 certification for its operation at Jakarta’s Soekarno-Hatta International Airport. It also holds local approvals from aviation authorities in Indonesia, Thailand, Vietnam and Cambodia.
Magnetic MRO also has been busy abroad with this year’s acquisition of Dutch line maintenance provider Direct Maintenance, which has a network of 11 line stations across Europe and Africa.
“Historically, our focus has been in Europe, and our main base and line maintenance customers have been from the area, [but] that trend has been changing within the past few years,” says Kotka. “Through the acquisition of Direct Maintenance, we will have a much stronger foothold in Africa.”
Also in 2019, the company opened EngineStands24 in Dubai, a new warehouse to store stands for narrowbody aircraft engines such as the CFM56 and V2500. Magnetic may open another engine-stands hub in Saudi Arabia following a memorandum of understanding with Saudi Arabian repair specialist First Premium for Support Services, which will initially see the parties jointly establish wheel and tire, brake, oxygen refill and battery shops in Jeddah.
While the Saudi and Dubai ventures represent organic growth for the company, Magnetic MRO is considering further bolt-on purchases, which will help mitigate “growing” competition from Eastern European MRO providers. “Luckily though, our portfolio is rather wide, and that has left us certain freedom to develop in the areas we have decided to focus on,” says Kotka.
“Direct Maintenance will definitely not be our last acquisition. Growing our global network is one of the biggest ongoing priorities we have, and we’ll keep working hard to strengthen our position in regions that are most important for us strategically,” he adds.
The Middle East and Asia offer the best opportunities to grow Magnetic’s business in the coming years, Kotka says.
For 2019, Aviation Week estimates that spending in the Baltic regional MRO market will be split as follows: 29% for line maintenance, 29% for engine maintenance, 26% for component maintenance; 9% for airframe heavy maintenance and 7% for modifications.
The leading share of line maintenance reflects significant investment by local MRO companies in the specialty. FL Technics, for example, will introduce mobile line stations this year to assist with AOG situations. It is also planning to open a new painting hangar in Lithuania and introduce line capabilities for PW1100G- and CFM Leap-powered A320neos as well as the Boeing 777 and 787.
Lapinskas says the company has identified a need for more flexible, short-term line solutions for charter and other seasonal operators. “We see a gap in the market where flexible solutions are required for the operators when they have a need for line maintenance services during a short period of time up to six months,” he says. “Most MRO providers tend to go for long-term contracts while charter operators are being left at the mercy of local providers and their availability.”
Line and base maintenance have been the “pillars” of Magnetic’s business until now, says Kotka, although he notes that new avenues are opening, with the MRO providers, fastest growth on the asset-management side as it trades aircraft and engines for leasing and part-outs.
“There’s great potential in everything that revolves around end-of-life assets, and we’re glad to fill that gap with our complex set of in-house capabilities and decades of experience working physically with the assets,” he says.
New technologies also have significant potential to improve Magnetic’s business. Kotka cites the company’s development of virtual reality solutions for interior inspections, 3D laser scanning for damage inspection and a digitization plan that includes 3D printing and fingerprint scanning.
“Of course, this is just the tip of the iceberg, as we have many more activities ongoing and ahead of us,” he says.
It appears Baltic MRO providers are well-positioned for further growth in their home market and beyond.