aw05052014mro1501l.jpg HAECO

New Volume Rules Change MRO Capability Investments

Defining how and when to invest in new aftermarket capabilities

A version of this article appears in the May 5 edition of Aviation Week & Space Technology.

When ordering new aircraft, airlines have big stakes in the availability of competitive MRO choices down the road. But shops have plenty of skin in this game too. If they invest too early or in wrong models, expensive hangars or test benches will be underused. If they move late or too cautiously, future business will be captured by more aggressive rivals.

MROs choose to support new models with financial rules. Estimates of the market, the portions they can capture and pricing generate revenue. Matching that against investment determines the return on investment. If it makes the hurdle rate, start spending.

That is easy in principle, but tricky in practice. None of the variables are certain. Different MROs have different strengths, regionally, by customers and support type. Plus, the OEMs’ push for the aftermarket increases support costs and changes the competitive landscape. This means that choosing smart is getting tougher. 

Lufthansa Technik (LHT) is not interested in niche markets, explains Walter Heerdt, senior vice president of marketing and sales. “We are very much volume driven. We do not want to see an aircraft or engine once a year. We would never get out of the learning curve, and we need a scale effect.”

LHT will thus support widely operated models that its parent airline does not fly, such as Boeing 787s and 737NGs.

To be competitive, LHT usually needs more than one continuous line of airframe checks. But less than a full line is sometimes sufficient. A line for heavychecks on widebodies might work on different models.

Timing is as important as scale. Support usually starts with training, line maintenance and engineering and materials—including home base kits and stocks of components. Then LHT gradually builds capabilities such as component repair. “We may not do all components at once,” Heerdt notes. “We plan capabilities according to expected needs.”

Timing also applies to engines, which are under warranties. Support starts with spares and minor shop visits; regular shop visits commence five years after service begins. Heavy airframe checks and landing-gear overhauls come last on the list.

LHT has applied this approach to the Boeing 747-800, 777 cargo aircraft, Airbus A380 and many previous models. The logic is now addressing new models like the 777X, A350, Bombardier CSeries, A320neo and 737MAX. “We do not get into a new model just for prestige or because we like leading-edge technology,” Heerdt emphasizes. “It has to fit a business plan.”

Another consideration, especially in engines and increasingly in components, is access to intellectual property (IP). LHT can do some work without access to OEM data. “But if IP is totally closed, it would be difficult to overcome that,” Heerdt acknowledges.

Fortunately, Lufthansa is a major buyer of OEM equipment. Heerdt says it offers “negotiating possibilities,” in obtaining IP access. “We’ve always been able to find a solution in the past and I am confident we can in the future.”

Summit Chan, Hong Kong Aircraft & Engineering Co.’s (Haeco) commercial director, divides support decisions into four parts: line, airframes, engines and components.

Line maintenance depends on Haeco locations and customer fleets. The MRO has a major presence in Beijing, Hong Kong, Shanghai and other airports; its recently acquired Timco Aviation Services has 15 line stations in the U.S.

If a current customer wants line support for a new model at any of those sites, the MRO will generally oblige. “It is a function of customer requirements and economics,” Chan says. “We will do major types at major stations.”

Haeco provides line support for A380s and expects to offer the same for 787s and A350s.

Airframe checks require new tooling. Haeco will conduct a complete check on A350s, of which Cathay Pacific Airways has ordered 48. It does not perform checks on A380s in Hong Kong, but may do them in Xiamen, China. There are not many A380s flying and they mostly fly for operators with in-house capabilities.

Haeco will probably offer major checks of 787s in the future. “It’s a big population, and we are a major MRO,” Chan says. “If demand is there, we will be there to serve it.”

With Timco’s four sites, Haeco has ample check capacity. The company avoids one-off checks if possible, but does not expect nose-to-tail lines early in a program. “New aircraft are supposed to have longer intervals and fewer man-hours per check than legacy aircraft,” Chan notes. 

Haeco partners with Rolls-Royce to overhaul Trent and RB211 engines in Hong Kong and with General Electric on GE90s in Xiamen. Support for new engines depends on OEM relationships, Chan says. “We are still in discussion on the XWB, but we will probably support it in Hong Kong.”

Haeco is active on components, with a repair shop in Hong Kong and one under construction in Xiamen. Joint ventures with OEMs support work on nacelles, thrust reversers, landing gear, wheels, brakes and other components. Component support also depends on OEM relationships. Haeco manages a pool of components for Cathay Pacific and other airlines and expects to continue this approach for new models.

Air France Industries-KLM Engineering & Maintenance (AFI KLM E&M) is concentrating on component and engine support, explains Marc Roubaud, senior vice president of business development.

The group will operate 787s and A350s, and the MRO will support those models. LOT Polish Airports, Royal Brunei, Kenya Airways and at least one other airline have signed up for 787 component support. Roubaud emphasizes his is the only MRO whose parent airline operates the 787, which provides first-hand experience.

AFI KLM E&M also supports Embraer E-Jets, as group subsidiaries fly these aircraft. The Spairliners joint venture with LHT for A380s was extended to cover these models.

The MRO supports ATRs and Bombardier CRJs, also flown by group airlines. But no AFI KLM carrier has ordered the CSeries yet, and the maintenance unit has not decided if it will be covered.

AFI-KLM E&M supports some types not flown by affiliate airlines, for example the A340-600, because it is important to Virgin Atlantic and South Africa Airways. But volume is crucial. “In the past, it was enough that we could capture 100 aircraft,” Roubaud says. “Now we may need . . . nearly 200 aircraft.”

Outlays required for equipment, technical data and license fees have increased significantly.

And the MRO needs to work with OEMs to support new models. “We always try,” Roubaud says. “We do not give up easily and usually get results.”

For engines, the MRO is well positioned on the GE90, with Air Canada and Aeroflot signed up and others expected, and on the GEnx. The XWB is “more difficult,” Roubaud acknowledges. “It is under discussion, and we want to do it, at least for our own fleet.”

AFI KLM E&M has not formally decided to support the A320neo or 737 MAX, but these would be easy extensions of current programs—such as the 777 component service support venture with Boeing, which the companies just renewed for 10 years. “We are sure to go ahead,” Roubaud predicts.

SR Technics already is investing in support of Embraer E-Jets, 787s, A350s, A320neos and the 737Max. These investments are all based on a strong financial case, says Oliver Grassman, head of corporate development. OEM fees and IP policies are becoming more important in calculating returns. And SRT recognizes other factors, such as local regulations or subsidies.

The analysis starts early. SRT began researching 787 support 5-6 years before entry into service. Investment is substantial because new models often mean new technologies. The 787 and A350 will require new test benches, hydraulic pressures, information technology infrastructure and other systems and tools.

SRT already has upgraded its hydraulic test benches to accommodate 5,000-psi tests. But Grassmann says the most important new interfaces for the 787 and A350 involve e-enabling technology and automating data access to airplane systems.

Young MROs in young markets can have slightly different perspectives. Generally, introducing heavy maintenance for a new aircraft is only profitable when at least 50 of the type, older than five years, are operated in a region, observes Zilvinas Lapinskas, CEO of FL Technics. Smaller volumes do not cover investment. But Lapinskas says the decision to support new-generation aircraft also is strategic, based on long-term goals and an MRO’s vision of where it wants to be in 5-10 years.

The FL Technics chief says OEM efforts to increase aftermarket involvement present an opportunity for MROs. Aircraft will need support, and support in each region influences airline purchasing decisions. “OEMs cannot ensure prompt and localized MRO support in every location where new aircraft will be operated.” Independent MROs like FL Technics can help.

Moreover, a one-stop shop for airframe, engine, components and training can be crucial for new aircraft. Relying on multiple providers risks increased aircraft downtime, especially in early years of operation. So FL Technics is supporting the Sukhoi Superjet 100 in Europe and Asia. Several dozen technical specialists are ready to provide continued airworthiness, line, base and other support and are helping Sukhoi with component assistance in Asia-Pacific. The MRO is also a Boeing partner under Edge, allowing it to support the 787.

For some MROs, the major choice is whether to extend support to existing models. AAR has done airframe checks primarily on narrowbodies and mid-sized widebodies like the 757 and 767. “We are looking forward to starting on larger widebodies,” says Dany Kleiman, group vice president.

The opportunity is the result of the diminishing gap between Far East and U.S. labor rates, which Kleiman says are “almost equal now.” AAR’s airframe facility in Lake Charles, La., will accommodate aircraft up to an A380, 747-800 or any new-generation widebody.

Kleiman says the A330 is an obvious target, as is the 747. The MRO has already overhauled a couple of A330s and one 747 at Lake Charles. AAR will probably seek 777 work, but will put off 787 checks for a while as these require heavy investment.

For checks on 787s and A350s, AAR would have to set up more equipment to do repairs. It has worked with composites on older aircraft, does autoclave repairs and has its own manufacturing division. Even so, the company would need to invest substantially.

Of course, the 787 already is one of the biggest new opportunities out there. But Kleiman notes that Boeing was very selective. It chose suppliers for the 787 who are expected to cover the aftermarket as well. 

For AAR, the decision to enter a new market turns on two major questions. “Can we come up with a competitive offer?” Kleiman asks. “And do we have the right infrastructure?”

The company plans for the long run. “We are not owned by a hedge fund that wants to turn us in five years—we will invest in our business,” Kleiman says. Investment includes tackling the learning curve for new models, but that does not mean AAR accepts losses in early years.

For components, criteria are different. “We would like to choose airframe components that make sense in volumes,” Kleiman says. “You cannot be good at everything.” Components also require IP and other forms of cooperation from OEMs, so AAR must choose its role wisely. For example, it may distribute components, rather than repair them. The MRO both competes and partners with OEMs.

This type of competition/partnering combo is becoming more common in the aftermarket. But each partner must have a specialty. 

Global airline-based MROs usually lead the way on new models in order to support their own fleets. This internal work helps build necessary scale, and parent airline orders help obtain technical data. Major independent MROs are still essential in accessing young markets and in ensuring competitive pricing over the long haul.

Scale remains the major requirement for a commitment to building airframe capacity.

OEM policies and charges complicate the investment decision on engines and components. There is no doubt the capacity will come when needed. But OEMs will heavily influence terms and pricing. 

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