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EC: Is Europe’s MRO Market Anti-Competitive?

The European Commission scrutinizes the competitive landscape of commercial maintenance in Europe.

At industry trade shows, airlines perennially gripe about original equipment manufacturers (OEM) holding too much sway over the commercial aftermarket—and pricing their products accordingly. But as more than 7,000 attendees gathered in London in October for Aviation Week’s annual MRO Europe show, some potentially seismic reverberations were coming from across the English Channel.

The European Commission (EC) in Brussels confirms that it is taking a close look at the competitive landscape for MRO services in the European Union. In a statement, the regulator says it “is closely monitoring competitive conditions as regards maintenance of engines and components of large commercial aircraft.”

The EC’s scrutiny was first reported by the Financial Times.

As part of the process, the EC is sending questionnaires to relevant companies to learn more about how they develop maintenance contracts. Documents observed by Aviation Week say the commission is investigating “alleged anti-competitive behavior” related to MRO services on large commercial aircraft. The documents also reveal that there are at least two versions of the questionnaire, one focusing on engines and the other on components.

Among the topics the questionnaires touch on:

•Specific provisions to which companies agree in purchase contracts.

•Reasons why operators would sign maintenance contracts when purchasing aircraft.

•Perceptions about the safety of parts manufacturer approval (PMA) parts and designated engineering representative (DER) repairs, and whether manufacturers have failed to honor use-warranties.

•The percentage of airlines’ MRO costs for certain equipment taken up by spare parts.

Those questionnaires specifically mention two platforms: The CFM International CFM56 engine and Honeywell auxiliary power units (APU) and APU starters. Both Honeywell and General Electric—which manufacturers the CFM engines under a joint venture with the Snecma division of France’s Safran—confirm they have received questionnaires and are cooperating. Figures presented by Safran in 2013 projected that about 65% of CFM56 overhauls would be performed at an OEM shop or under a service agreement.

Rolls-Royce, which bundles long-term maintenance agreements with nearly 90% of the Trent engines it sells, confirms it has also received a questionnaire. Germany’s MTU Aero Engines, which offers MRO services for the CFM56 as an independent provider, says it has not received one. Pratt & Whitney declined to comment.

The International Air Transport Association (IATA) and other trade groups have also received questionnaires. IATA says aircraft MRO represents 10-13% of airline costs, and those costs are rising beyond inflation despite efforts to rein them in. The trade group estimates that a 1% reduction in maintenance costs could mean $800 million in savings for the industry.

“There has been limited entry in the market for MRO services,” says IATA spokesman Perry Flint in a statement. “We are encouraged that the European Commission will give some attention to driving competition and efficiency in this area.”

The ramifications of the EC’s scrutiny—if any—remain unclear. The questionnaires are apparently voluntary, and the EC is gathering facts to determine whether to launch a formal investigation. One source estimates questionnaires have been received by 100 companies, but this number has not been confirmed.

Several airlines have been vocal about keeping maintenance costs down. At the World Financial Symposium in Barcelona in September, IATA Director General and CEO Tony Tyler said 20-25% of airline expenses are related to aircraft ownership costs. He even mentioned that IATA was examining options—including legal steps—to help airlines manage aftermarket costs.

“Unfortunately, certain OEM business practices drive up costs by blocking new entry into the market for maintenance, repair and overhaul services,” Tyler said. “As a result, airlines often have little alternative but to sign onto long-term OEM maintenance and parts agreements containing pricing escalations that are often above the inflation rate. IATA is examining commercial, legal and economic options where we may be able to contribute to efforts to rein in runaway aftermarket-related costs.”

At IATA’s annual general meeting in June, International Airlines Group CEO Willie Walsh said airlines need to start pushing back on costs in areas where their choices are restricted by a limited number of suppliers controlling the market.

“I think as an industry, we need to start taking action, or our maintenance costs will definitely rise,” he said. “If we don’t challenge the restrictive practices that exist, we will be held captive, and costs, as we have seen before, will rise, and will rise well in excess of anything that is justified.”

In some cases, airlines have opted for alternatives to using repairs or material from the major OEMs, including DER repairs at independent MRO facilities and PMA parts from other suppliers. But even then, some have said that OEMs limit the information included in maintenance manuals—using remove-and-replace instructions instead of providing repair details, for instance—to retain a proprietary edge.

TAGS: Europe
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