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Uncertainty About Brexit Troubling UK MRO Providers

The UK’s relationship with the European Union has effected small to mid-size businesses bearing the brunt of uncertainty.

For independent UK engine specialist Aero Engine Centre (AEC), the future is an exciting one. The business set up by CEO James Cook in early 2016 at a facility close to London Heathrow Airport has seen steady additions to its engine repair capabilities and approvals during its relatively young life. Next-generation engine upgrades have also been achieved: March 2018 saw the addition of Leap 1A engine capabilities, with more than 30 checks on the engine type taking place in the subsequent period. This year, approvals for the
Leap 1B and its first widebody engine in the form of the GEnx-1B have followed.

However, as for many companies big and small operating in the UK’s vibrant aftermarket, the specter of Brexit has brought lingering uncertainties for AEC since the June 2016 vote. The delay in the planned exit date of March 31 this year to the end of October, with the very real prospect of a no-deal exit from the European Union that would see the UK leave the single market and customs union with immediate effect, has merely compounded the uncertainties. The possibilities of coming to a revised agreement with the EU, or extending the process for another six months, also cannot be ruled out. While the prospect of Brexit taking place is still likely, exactly which form it takes remains a mystery, and the devil is in the details.

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MRO providers in the UK such as AerFin have adapted strategies and taken measures to mitigate the risk and effects of a no-deal Brexit.

For independents like Cook’s AEC, the Brexit scenario and the uncertainties it throws up are still being felt some 3.5 years after the vote. “The impact of the Brexit scenario has moved from uncertainty to paralysis,” he recently told Inside MRO. “It is affecting our ability to move forward with new customers, as they view the UK as a risk.” This has had a knock-on effect on the company’s UK expansion plans, he says. “We planned to extend our facility by another 6,000 ft.2 to take our overall footprint to 60,000 ft.2, but it’s all on hold until we have some clarity on the future.”

In the aftermarket, the belief is that larger companies are better equipped to deal with Brexit, whatever the outcome, than their smaller, independent counterparts. Nevertheless, Cook says AEC has made Brexit contingency plans for multiple scenarios post-Oct. 31. They include gaining Belgian Civil Aviation Authority approval in the third quarter of this year to set up a site in mainland Europe, possibly close to either Brussels or Liege. If established, this would replicate AEC’s activities in the UK: a fully bonded warehouse, storage capacity and a workshop certified for engine maintenance.

Cook says the move to apply for the Belgian approval was done out of necessity: “Our customers rely on transporting their assets at short notice to service their demands all over the EU. The risk of Brexit and a deal that saw the UK out of the customs union forced our hand. We couldn’t sit around and wait for an outcome, so we needed to be proactive.”

In leaving the EU, the UK will cease being one of the key stakeholders in the European Union Aviation Safety Agency (EASA). While some regulators have committed to a relative level of continuity should an agreement between the UK and the EU be struck—such as the UK Civil Aviation Authority (CAA) and the FAA negotiating separate agreements for deal and no-deal Brexit outcomes—questions remain over specific regulation, licensing and certification issues between the UK CAA and EASA.

This scenario was laid out in Aviation Week in August by consultants from Oliver Wyman. “The most immediate concern would be licensing that affects MRO companies, engineers and design organizations,” the consultants explain, as reciprocal license recognition for a designated time period after Brexit has yet to be agreed between the parties. “This means that UK-registered maintenance organizations would need to comply with EASA third-country operation rules—designed for non-EU nations—to be able to service EU-registered aircraft after Brexit, adding both cost and complexity to MRO operations,” the consultants conclude.

The UK’s larger players have also made moves to ready themselves for every Brexit eventuality. At the end of 2018, engine giant Rolls-Royce shifted its EASA design organization approval from Derby, England, to its Dahlewitz, Germany, site. This move didn’t involve the transfer of any staff or manufacturing production, and maintenance and production approvals remain in the UK with the CAA regulator. The engine manufacturer reaffirmed its readiness for every Brexit scenario during its half-year earnings call last July. CEO Warren East, who stated the company’s preference for a deal between London and Brussels over a no-deal scenario, won’t have to do much further work if Brexit happens. “We already hold inventory and may need to carry a little more as we transition out of the EU,” a Rolls-Royce representative says.

Others have also made contingency plans by placing parts at other locations on the continent to deal with no-deal Brexit concerns related to possible customs delays, new taxes on goods and stocking necessary inventory in the event of border delays. Low-cost carrier EasyJet says it registered a European parts-stock holding for maintenance and materials support on the continent, “to ensure we continue to have the right stock in place across our network,” an airline representative tells Inside MRO.

AerFin, which specializes in aircraft and engines in the middle to end of their lives with services ranging from aircraft parts supply to engine leasing and teardowns, is one company that has made such moves. James Bennett, AerFin’s director of sales and marketing, says with 35% of the company’s revenue stream generated from Europe, business continuity post-Brexit is critical. “The Brexit outcome will clearly define the shape and magnitude of any export complications,” he says. “With an orderly Brexit, we would expect a continuation of existing regimes and export practices. However, with a no-deal Brexit, there is likely to be more friction at the borders.”

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Along with following government guidance, Bennett says the company has adjusted its own business strategy in order to mitigate any risks related to a no-deal Brexit. Central to this is moving inventory around to other locations outside of the UK, a strategy popular with industry component specialists. “We’ve strategically located inventory across our main product lines at select locations on the continent, including Tarmac in Tarbes [France], and our new E-Jet logistics facility in Atlanta, ensuring our customers can continually receive accustomed service levels throughout any periods of uncertainty,” he says. The company has also invested heavily in inventory stock ahead of Brexit—mirroring moves by other UK-based parts suppliers and airline maintenance divisions.

AerFin has also broadened its network of repair vendors and has several long-term airframe and engine component repair agreements in place with specialists including Honeywell, Barfield, StandardAero and BP Aero. “By doing so, we continue to streamline the repair and movement of goods,” Bennett says. EASA Part 145 maintenance organization approval certification for its engine MRO services covering CFM56-5B, -7B, -5C4, CF34 and Rolls-Royce RB211 engines was also added in June 2019.

However, while the uncertainty of Brexit has seemingly raised more questions than answers, not all MROs are seeing a reduced pipeline of work. Shops are still running close to capacity and independents like Caerdav, which formerly operated as Cardiff Aviation up to April 2019, are still seeing strong demand for maintenance work. “Our input pipeline is looking very robust, and we are confident about maintaining this level of business,” Joachim Jones, CEO at Caerdav, tells Inside MRO. Future plans have yet to be altered due to Brexit, he says, pointing to existing certification from both EASA and the UK’s CAA as being enough regardless of any deal outcome for the company. “We will continue to invest as planned over the next couple of years to become a center of excellence,” with a focus on Boeing 737 and Airbus A320 aircraft MRO services.

Despite Brexit uncertainties, along with other factors such as domestic airline consolidation, new entrants have not been deterred from venturing into the UK’s MRO segment.

Morson Aircraft Engineering, established in September 2018 as an MRO provider offshoot of technical recruiter Morson International, is one of these new entrants. The company specializes in line maintenance and to date has set up seven repair locations across the UK, with its latest established at Bristol Airport in the summer of 2019. Scott Wells, director of Morson Aircraft Engineering Services, says the MRO went into business with Brexit contingencies in mind. “Our foreign EASA approval has been applied for and will kick in automatically in the event of a no-deal Brexit,” he says.

And while the mystery over outcomes remains, with many potential disruptions looming, AerFin’s Bennett believes that any supply chain disruptions to the country’s MRO industry will likely be resolved over time. “Once the initial ‘settling down’ period has completed post-Brexit, aside from administrational changes, there is unlikely to be any material adverse effect on exporting parts,” he says. 

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