Boeing and Airbus have given much more responsibility to their Tier 1 suppliers for design and manufacture of the new 787s and A350s. Will this consolidation of new aircraft production be mirrored in the aftermarket? Independent shops and engineering firms are sure to feel the ripples.
So far, new-make consolidation is simply nudging the aftermarket in directions it was going anyway. Airlines want more comprehensive support, at least as an option, and OEMs are eager to capture aftermarket revenue and margins.
But all face big challenges on the road to consolidation. It is much tougher than it looks for giant corporations to coordinate just their own internal activities. And airlines want to enjoy the benefits of broad offers while preserving competition in each component market.
Jim Patrick, UTC Aerospace Systems (UTAS) vice president of commercial aftermarket and customer services, says his company has lots of experience at integration. “We try to get our supply chain more integrated and reduce our tail. We look for aggregators for a simple interface and less administration.”
Patrick believes UTAS customer airlines want the same thing: simpler supply chains. Of the three levels of aftermarket support—nose-to-tail, system, and component—more transactions are now being done at higher levels.
UTAS provides comprehensive accessory repair and exchange and on-site support. These programs are offered by several business units: Electric, Sensors, Aerostructures, Landing, Interiors, Engine and Environmental, ISR and Space, and Actuation and Propeller. But integrating units takes a lot of processes, tasks and tools. UTAS wants consistent performance across 60 shops across units and the world.
UTAS has a single sales and service force for all the units. The same services—health monitoring, diagnostics and predictive maintenance—support all products. The OEM inherited long-term contracts from units and is evolving these toward integrated UTAS arrangements. It offers the same kind of contract for every unit, and airlines include as many components as they choose.
Engine-maker Pratt & Whitney is still a “big brother” to UTAS in the United Technologies family. But there are synergies in the electric systems that feed or take power to or from engines and offer opportunities for these brothers to work together.
UTAS performs half its repairs under long-term contracts—flight-hour, fixed-price or otherwise; the other half is time plus materials. Increasing the long-term portion is key.
Interestingly, its Sensors and Integrated Systems unit is taking health and usage monitoring systems (HUMS) techniques developed for rotorcraft and applying them to fixed-wing aircraft. HUMS would cover engines, drive trains, APUs, gearboxes and fans of any manufacturer. Even structural health monitoring of airframe parts should be possible in 3-5 years, says Chris Carella, manager of HUMS strategic planning.
Patrick says the position of independent MROs has not changed much in his market in the last decade. UTAS partners with some major MROs chiefly to ensure its products are well-supported but also to tap surge capacity if needed. “The independent shops will always be there. I don’t see any change in competition. At the end of the day, customers will find what they want.”
He also predicts independent engineers will stay relevant. “As more materials change and innovate, there will be more opportunities for new repairs.”
Safran is another aerospace giant trying to maximize the advantages of integration. “We make everything on the airplane except the airplane. And we fix what we fly.”
Lengyel also emphasizes Safran’s market position: along with partner GE, first in propulsions systems for 100-plus-seat aircraft, Messier-Bugatti-Dowty’s leading position in landing gear, first in wiring systems and first in avionics for commercial and military rotorcraft.
Safran units fix the majority of their content on aircraft, and the majority of these repair relationships are long term, formed either at purchase or afterward.
Lengyel believes long-term relationships benefit airlines in cost and quality. Relationships can be between airlines and one, several or all Safran units. Comprehensiveness of the relationship depends more on how much content Safran has on given aircraft than on whether airframe OEMs consolidated suppliers for original production.
The Safran executive says it has been challenging to harness capabilities of his formerly independent companies, but believes there are benefits. Especially as aircraft require integrated systems and Big Data analytics, Lengyel sees virtues in integration of aftermarkets.
Unit leaders concur. Safran’s Messier-Bugatti-Dowty has lots of equipment, landing gear and Chapter 32 components on the 787 and A350, says Alan Doherty, senior vice president of sales and business development. “We support these as a company, but try to harmonize with Safran’s other units.”
Landing gear is overhauled at 10-12-year intervals and requires expensive equipment and access to rotable gears. These barriers mean gear overhauls will continue to be handled by major airlines or OEMs, as in the past.
For other components, Messier-Bugatti-Dowty offers dispatch-guarantee programs for flight-hour charges. The OEM can also tailor dispatch support to minimize initial provisions, then let the airline gradually build its own spare stocks. Doherty expects flight-hour programs to grow via either Messier-Bugatti-Dowty-only or Safran-wide agreements.
Safran’s Aircelle supports nacelles from a shop near Le Havre, a joint venture in Dubai, two long-term agreements with shops in Asia and now with Aircelle Services America, after acquisition of Applied Composites Engineering’s (ACE) in Indianapolis. Aircelle long cooperated with ACE. Richard Nevill, vice president of customer support, says Aircelle will purchase, joint-venture with or establish its own Asian shop within 12 months.
The company wants long-term relationships where possible. It dominates A380s and shares A330s with global MROs, but A320 classics are an open market. The firm will aggressively pursue A320neos and A330neos.
Aircelle ownership of its U.S. facility will enable investment and growth, for example by better supporting nacelles on A318s from Latin America and those on Interjet Superjets in Mexico. ASA will also help Aircelle do on-wing troubleshooting in the Americas.
The Safran Group would like to bundle solutions from its different units, Nevill notes. So far, different units have disparate sales teams and contracts with airlines. But contract terms for one unit can be applied to another unit and extend the range of group services
Component repairs increasingly flow through integrators including MROs and OEMs, notes Joel Berkoukchi, executive vice president of avionics at Safran’s Sagem unit. Airframe OEMs offer packages, technical expertise, bargaining power with Tier 1 suppliers and capital. But airlines seek used parts and new repair processes. Berkoukchi says a breakthrough in coming years might come from PMAs (parts manufacturer approvals) facilitated by 3-D printing and more delegation of authority.
Berkoukchi believes component OEMs can still provide very competitive pricing, fast turn times and management through service bulletins and reliability monitoring, either directly to airlines or through nose-to-tail providers. He says independent MROs will have to specialize in market segments or have the scale to support technology and rotables.
Nordam CEO Meredith Siegfried expects aftermarkets to consolidate as parts become more reliable and require less repair, materials become more exotic and requirements to substantiate repairs become more stringent. “It is critical for independent MROs to have a significant staff of engineers to support repairs if the customer wants anything beyond a basic component-manual repair. MROs need a global presence to fund the heavy R&D effort required.”
She says airframe OEMs’ consolidation of suppliers of major assemblies may benefit airlines [depending on] “what obligations OEMs impose on Tier 1s to manage aftermarket part pricing and provide access to repair data and engineering.”
Siegfried predicts efficient independent MROs will survive, some working with OEMs and Tier 1s. Nordam works with both Airbus and GE. She predicts independent engineers will prosper if intellectual property (IP) belongs to airframe OEMs and they share IP to keep life-cycle cost down. If IP belongs to Tier 1 or component suppliers who do not share, independent engineering will become more difficult.
Cannacord Analyst Ken Herbert argues consolidation may help Tier 1s. He says Tier 1 suppliers have taken more risk on production, which might prompt them to seek more profit from aftermarkets to fund future programs.
John Schmidt, managing director of Accenture’s North American A&D business, sees the industry moving to Service 3.0 with the 787 and 350. Selling in this new aftermarket requires much more data and analytics to price parts based on customer value, not just cost-plus. Data and analysis are also necessary for multi-echelon spare planning and to remedy warranty problems. Small shops lack these tool; OEMs lack IP, unless they are behind the “walled garden” of OEM MRO networks, he says.
But other factors work against consolidation. Fast-growing markets like Asia and the Middle East want their own MRO facilities. And in mature markets, “people are certified, not companies,” Schmidt observes. Valuable certified people can leave and start a new shop if so inclined. “Consolidation never happens as fast as you think.”
Christopher Kubasik, president of the Seabury Advisory Group, sees an overall trend toward consolidation, with its pace depending on the type of maintenance and location.
Repair of major components and line replaceable units (LRU) is becoming more concentrated, with partnerships between major MROs and OEMs and a drive toward pooling, especially in Europe and parts of Asia. OEMs want more control of aftermarkets and are likely to get it for next-gen components. But it is hard for OEMs to do this across platforms without part buying, repair and logistics. Airframe manufacturers will play an increasing role here.
Geography and union rules inhibit consolidation of airframe MRO, Kubasik says. Low-cost regions have been losing their advantage, but the Middle East is attracting skilled labor from low-labor-cost countries.
Engine MRO is already very concentrated, with OEMs and a few large MROs dominating. OEMs will also maintain control of gas-path material repair technology. Peripheral engine work is very fragmented, but main players are likely to continue to gain.
Kubasik says drivers of consolidation include airlines’ increasing reliance on outsource repairs. Carriers want one-stop shops near main hubs for sensitive items or major and highly efficient repair factories. OEM business goals also matter, and scale efficiencies favor consolidation.
The latest technologies require more investment in R&D, training and licensing, which smaller players cannot afford. And next-gen fleets are more reliable, so now larger fleets are needed to ensure efficient in-house MRO. Standardization of maintenance programs across fleets means outsourcing can be more efficient. Finally, OEMs are simply capturing more of aftermarkets at initial sale.
But Kubasik says MRO consolidation is still inhibited by several factors. Airlines resist outsourcing critical capabilities. And they want to preserve choice and are concerned about possible OEM monopolies. Still, OEMs may be preferred over independent MROs if they offer complete, risk-free coverage.
Kubasik says information technology systems required to manage outsourcing may not exist or require expensive upgrades. And the repair expertise of niche providers is difficult to replicate in large corporations.
For airlines, Kubasik says increased consolidation will mean much heavier reliance on single suppliers, less competition and more standardized solutions. Carriers will also need new business processes as well as more sophisticated procurement, contracting, monitoring and management.
But airlines may gain from reduced complexity, scale efficiency, more predictable costs and possibly higher reliability and part availability.
Independent MROs may gain by consolidating LRU repairs across multiple OEMs, but OEMs will be exerting more control of aftermarket. Independent MROs will need to manage their own IP, such as operational know-how and insights, to be better able to compete. They need to complement OEM offers with unique insights and business focus. Independent engineering and professional firms need to do the same.