ATM Modernization, Business & GA, Commercial, Military

Avionics Aftermarket Services: A Buyer’s Market

By Charlotte Adams | April 1, 2002

New airplane sales are down and opera-tors are focusing laser-like on the bottom line. Bent on reducing costs, airlines want to shift inventory expense and risk to suppliers on the best possible terms. At the same time, avionics original equipment manufacturers (OEMs), facing a weaker market for new systems, are trying to protect and expand their avionics maintenance, repair and overhaul (MRO) business. Competition for customers is tougher than ever. The result, users say, is a buyers’ market.

OEMs are focusing more on the aftermarket, in large part because of cutbacks in new production, says Brett Pogany, an associate with First Equity, an aerospace investment bank in Westport, Conn. OEMs are trying to increase their presence, trying to control the aftermarket of their products, he contends. (The majority of aftermarket profit is in sales of spares, rather than in maintenance because of increasing avionics reliability.) "We’re also seeing more pro-active, ‘total service’ [packages] for customers," Pogany says. This approach has been attractive to regional airlines, longtime aftermarket service outsourcers, but observers say it may be catching on among mainstream air transport carriers, as well.

Fastest-Growing Element

Spares management contracting may be the fastest-growing element of avionics aftermarket services. It preserves customer capital, improves dispatch, provides life-cycle savings and shifts the asset risk to the service provider, says Scott Gunnufson, vice president of business development for Rockwell Collins’ Aviation Services business. "It also provides a powerful incentive for the supplier to improve on-wing reliability."

Avionics OEMs, third-party avionics shops, airline shops and airframers are competing for customers. "It’s definitely a buyers’ market," says Drew Skaff, director of material management with Frontier Airlines, a regional operator of 30 airplanes based in Denver. "The customer wins through cost savings, reliability improvements and other competitive forces that suppliers generate to differentiate their service from the competition." Frontier recently signed an Integrated Support Solution (ISS) contract with Honeywell to support certain Honeywell components on new Airbus A319s. Under ISS, the manufacturer owns or manages the spares and provides repair and overhaul services for a fixed rate per flight hour.

"OEMs are making [service arrangements] attractive so they can control the aftermarket," Pogany says. But Skaff sees a win/win situation. Strategic agreements with OEMs can immediately reduce an operator’s total cost of component ownership, he says. Operators want to reduce costs and OEMs want to preserve and grow avionics component repair and overhaul revenues.

The market is "not totally driven by OEMs’ wanting to capture the [spares] business," says Mike Anderson, director of avionics for Garrett Aviation, an across-the-board aircraft services supplier and subsidiary of General Electric. The driver "probably really is the sophistication and integration of digital avionics equipment." The OEMs "are banking that their revenue stream [from total avionics services packages] will pay for spares and the internal cost to repair systems" over the period of the contract, Skaff observes. Operators, on the other hand, "are banking on less investment in inventory and spares over the same period."

In earlier days, OEMs offered spare parts and a maintenance solution in the aftermarket. The risk was primarily on the front-end, developing new products and solutions, says Tony Perillo, Honeywell’s manager of global services marketing. But with the increasing focus on the aftermarket, some of the risk may be shifting there. OEMs are mitigating risks through alliances and through tools such as "predictive reliability" analysis. For example, Collins can "take care of most customer needs even before they know they have a need," Gunnufson claims. "We’re there, troubleshooting it ahead of time."

Total Service

Honeywell, Collins, Thales and other OEMs offer various aftermarket services. Under "total service" programs, the OEM owns or manages a defined set of line-replaceable units (LRUs) across multiple aircraft, assumes the asset risk, and manages spares and component repair and overhaul. The OEM and its customer then negotiate a highly customized, long-term service contract involving a fixed per-flight-hour rate. (Honeywell can tailor its ISS program to include not only avionics boxes, but also parts such as auxiliary power units, engine accessory products and environmental control systems.) "Our portfolio is so broad, customers can cherry pick from it," claims Adrian Paull, vice president of customer services for Honeywell Aerospace Electronic Systems.

Express Airlines I, a wholly owned subsidiary of Northwest Airlines and a user of Collins’ Dispatch 100 "total service" package, cites the following factors as key to deciding whether to go with a spares management, life-cycle support approach:

  • Involvement of a large number of high-dollar value components,

  • Component reliability and spares acquisition costs that are not readily predictable and

  • High training costs.

"Anybody would prefer not to own spares because of the cash outlay," adds Doug Shockey, Express Airlines’ vice president of maintenance and engineering. In February 2000, Express signed a contract with Collins to support Collins avionics on the airline’s fleet of 35 CRJ 200s and legacy Saab 340s. The carrier’s experience with the prior Collins program was favorable enough for Express, under the Dispatch 100 program, to have "sold Collins the avionics inventory–mainly Collins products–for Express’s Saab 340 aircraft," Shockey says. Express shifted from a more traditional Collins support program, under which the carrier paid for its spares and managed its inventories.

"By having Collins control the inventory of Collins products, we eliminate excess shelf and pipeline quantities," Shockey says. "And we’re protected if there should be a hiccup with a component." Under the traditional maintenance model, if there’s a "high failure rate" item, the carrier is forced to go out to the market. Items can be difficult to find and it may take six to 12 months to get them fixed, Shockey says.

Big Business

Airline MRO outsourcing–avionics and other services–is worth about $2.5 billion and has been growing at about 10 percent a year, says Collins’ Gunnufson. Leading indicators like fleet expansion and flight hours for the business/regional market segment could continue to boost the growth rate, although Sept. 11 and its aftermath have for now applied a damper. Collins estimates that OEMs already own 50 percent of the avionics MRO market; airlines, 35 percent; and third parties, 15 percent.

Honeywell estimates the global value of component repair and overhaul outsourcing to be about $3.2 billion for all types of services. The company expects the component repair and overhaul market, including airline outsourced and inhouse work, to grow at 4 to 5 percent annually for the next five years, reaching $7.9 billion by 2005.

Honeywell sees air transport carriers moving toward outsourcing, as well. Regional airlines traditionally have had a lean-and-mean approach to maintenance, minimizing their infrastructure. But now "air transport operators are moving more toward regional operators’ buying behavior," observes Paull.

Hawaiian Airlines has entered into avionics arrangements with both Honeywell and Rockwell Collins. Hawaiian will use the Dispatch 100 package for Collins equipment on the carrier’s new B767s. Hawaiian uses Honeywell’s ISS program to support Honeywell equipment on B767s and B717s. Delta Air Lines and American Airlines, known for doing their own work, have over the years begun to use some Honeywell repair services, he adds. Honeywell also "has forged effective working arrangements with British Airways."

"There are airlines looking for ways to offload the cost of inventory and spares," says Hank Evers, vice president of marketing and strategic development for the Customer Support and Services Group at Thales Avionics. On the other hand, United Airlines has a "tremendous infrastructure" and Lufthansa has an MRO business of its own. "[Lufthansa] competes with us," he says.

Collins sees no dominant trend in this area. "Some airlines have shown signs of moving to the [outsourcing] model, while others have adopted a strategy to grow their MRO business," Gunnufson says. "Further, there are airlines which have adopted both approaches, depending upon the components."

Parts Reselling

Avionics OEMs also resell used airplane parts. Honeywell’s Aerospace Trading Operation (HAT), about two and a half years old, buys a wide range of used parts–Honeywell’s and other manufacturers’. "In the past Honeywell might sell a unit once" despite its large, upfront investment in R&D, says Dan Lopez, business operations manager for aerospace trading. "But two to three years ago, we came to the realization we were missing out on a huge revenue stream." The average LRU is sold four times during its lifetime, including at least one time by the original manufacturer.

HAT’s highest-margin resale business involves buying parts, arranging for their repair and test, and then selling them. HAT also brokers parts, locating used equipment for customers. Under a third service, parts exchange, Honeywell buys a carrier’s faulty component and, for a sizable fee, exchanges the component for an overhauled and tested box. Customers include air transport and regional operators.

Boeing Airplane Services offers a B737 NG spares exchange program, popular with European operators, such as KLM, Transavia and Braathens. Boeing's Component Repair and Exchange Services business unit has stocked large inventories of Boeing, Honeywell (Allied Signal) and Collins avionics components under the program. The airframer owns these spares and takes responsibility for repair, modification, testing and record keeping, while avionics OEMs perform repair and maintenance on their LRUs. Boeing offers fixed, per-flight-hour service rates, negotiated uniquely with each airline, simplifying customers' long-range budget forecasting.

Honeywell also offers Web-based repair management services, covering parts from multiple OEMs. Operators own their spare parts but outsource maintenance management. Intalogik–basically a few people and a Web site–simplifies operators’ repair process by offering a single point of contact. (Servicing is handled through agreements with other OEMs.) Intalogik is popular in Europe with small regionals and some majors, Paull says. "Smaller airlines want OEM oversight." Operators can obtain greater efficiencies and shorter turn times, perhaps reducing inventories.

Collins’ trading organization, Intertrade, delivers equipment to commercial, regional, corporate and military customers. Intertrade arranges for the resale or exchange of used equipment–which it manages or owns–from multiple OEMs. Components include avionics, engine accessories and airframe components.

Balancing OEMs, MROs

Frontier Airlines’ participation in Honeywell’s "full-service" Integrated Support Solution (ISS) program departs from the carrier’s traditional approach of owning its assets and using avionics original equipment manufacturers (OEMs) or third-party maintenance, repair and overhaul companies (MROs) to repair and overhaul components. The Honeywell program "precludes initial investment while maintaining high service and support levels," says Drew Skaff, Frontier’s director of material management. Frontier’s approach permits lower overall cash flows for the airline and a streamlined service process, he adds.

Frontier continues to use independent MRO suppliers for non-Honeywell and non-ISS avionics components through the request for quotes (RFQ) process, Skaff says. The operator has partnered with MRO suppliers under non-exclusive arrangements to minimize costs, resulting in significant reductions in component overhaul cost in the past fiscal year, he adds.

Traditional MROs have advantages over the OEMs in parts pricing and labor charges, Skaff says. But OEMs have some leverage with parts availability and quotations and "can make the case that they are the experts." MROs also may encounter warranty issues with OEMs, some of whom "may be apprehensive about honoring warranties with [MRO] competitors."

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