Sunday, August 1, 2004
Four Major OEMs Move into Airbus MRO by Forming OEMServices
In a bid to capture worldwide A380 MRO business, four European Airbus OEMs have signed a memorandum of understanding to form a joint venture called OEMServices. The partners are Diehl Avionik Systeme (avionics and cockpit displays), Liebherr-Aerospace (flight actuation, air systems, and landing gear), Thales (avionics and inflight entertainment systems), and Zodiac (fuel-circulation systems, oxygen and life support, system management computers, flight deck controls and displays, and hydraulics and controls, among others).
If all goes to plan OEMServices will be launched in mid-2004. Mindful that the A380 isn't in service yet, OEMServices also plans to offer "component management and maintenance services to airlines operating Airbus single-aisle or long-range aircraft," said the jointly-issued news release that announced the memorandum in April. It added that the current four-company arrangement does not prevent "future partnership with other OEMs who have expressed an interest to become members of OEMServices."
Mark Barclay, managing director of Thales Avionics Division's new Avionics Services Worldwide product line, described OEMServices as a logical response to customer demands: "There's a clear desire on the part of the airlines to focus on their core business, which is the provision of services to passengers, and subcontract the rest out to companies such as ourselves. Some airlines are looking for spares, some are looking for end-to-end service, and some are looking for avionics by the hour. OEMServices is being formed in response to all of these demands."
With the wide range of products offered by OEMServices's current partners, this new company is targeting the opportunity to provide complete Airbus servicing. According to Mark Barclay, this is the point of the whole exercise. "All four partners are pooling their resources, their capabilities, and their marketing into OEMServices," he said. "Between us, we have enough capabilities to provide complete global service. Thales certainly has facilities worldwide, while Diehl, Liebherr, and Zodiac are strong within their respective regions.
"Joining OEMServices reflects Thales's willingness to change its structure and approach to meet the market's evolving needs," Barclay added. "Everyone knows that the aviation services market is undergoing significant changes and that a `business as usual' approach is just not good enough."
For third-party repair shops, the notion of a mega-MRO targeting the Airbus market is somewhat unsettling. Adding to their unease is the fact that "The European MRO model emphasizes nose-to-tail servicing and power-by-the-hour parts replacements," said Dale McGlothin, senior vice president of operations at Genesis Aviation in Greensboro, North Carolina. "Even with Airbus supposedly opening up aftersales service to include third-party MROs, the fact is that this model favors much larger MROs like OEMServices."
However, the specter of OEMServices haunting the Airbus market doesn't disturb Randy Elvrom, vice president of Evans Composites in Mansfield, Texas. The company specializes in advanced composite and metal repair work for aircraft. "It's ludicrous to think that OEMServices could get a lock on the world A380 market," said Elvrom. "Federal Express [which has contracted to buy 10 A380-800Fs and taken options on 10 more] isn't going to tie themselves to a sole-source supplier for A380 servicing. In fact, no airline is going to put all their MRO eggs in one basket."
Time will tell if OEMServices becomes an Airbus MRO powerhouse or just another player in an already crowded MRO market. At the end of the day, what will likely matter most is cost: will OEMServices be able to leverage the size and strength of its four partners to undercut the competition? Or will the sheer size of this new company, and the differing corporate cultures of its four OEM partners, make it difficult for OEMServices to be sufficiently nimble to compete? Whatever happens, OEMServices will serve as a case study to other OEMs hoping to boost revenues by diversifying into the MRO sector. It will also alert existing MROs to the dangers posed to their bottom lines by OEMs that hope to secure large shares of the aftermarket. — By James Careless
INTERFILL Saves Costly Parts
The Interturbine/Lufthansa Technik joint venture Intercoat has developed an epoxy-based repair process that extends the life of fuel and hydraulic system components. For parts that are worn, corroded, and pitted, the Intercoat (www.lht-intercoat.de) INTERFILL process helps component service companies re-use parts that used to have to be scrapped.
The process is simple. After the part is cleaned and inspected, the INTERFILL epoxy material is baked on in layers, then machined and final inspected. Compared to typical repair techniques, INTERFILL is less expensive and easier to perform, according to Intercoat. Welding or plasma spray can cause heat distortion to the part; plating with nickel or chromium is more expensive; and compared to bushing or sleeve inserts, INTERFILL requires removal of less parent material.
The INTERFILL process is JAA-approved (No. LBA 0360) and FAA-approved under the DER repair system. Hawker Pacific Aerospace, which is owned by Lufthansa Technik, performs INTERFILL repairs in Sun Valley, California, each time obtaining DER approval of the data for the repair and issuing an FAA Form 8110. Hawker Pacific has been doing INTERFILL repairs since the beginning of the year.
Components Shops Jockey for Position in Buyers' Market
These are tough times for MRO component suppliers large and small. The reason? "There's a huge overcapacity in the market when it comes to MROs," said Nicolai Hertz, director of sales and marketing for SAS Component in Copenhagen, Denmark.
Under the law of supply and demand, this puts the customer—the airlines—in the captain's chair when it comes to demanding service, selection, and price.
Even in the best of times, a "buyer's market" wouldn't be good news for component shops. However, it is occurring at a time when financially-strapped airlines are pinching every possible penny wherever they can.
"`Cut costs!' is the airlines' mantra these days," said Dale McGlothin, senior vice president of operations at Genesis Aviation in Greensboro, North Carolina. "When it comes to getting new business, we compete every single day on price," McGlothlin said.
To add fuel to the competitive fires, many airlines are expecting third-party MROs to share in the risk of doing business, by carrying inventory that airline shops used to buy themselves. "Through our Free2Fly program," said Hertz, "we take responsibility for sourcing and supplying our airline customers with whatever parts they may need. We bear the expense of buying them, storing them, and managing them."
One thing is certain, to compete in this buyer's market components shops must cut their own costs. Since most trimmed any extra fat years ago, the only way to accomplish this is to grow the business: bring in more money while hopefully getting a price break from suppliers for buying in volume.
In the past, 1,000-person companies such as SAS Component would have spent their own money to grow either by building new facilities or buying competitors. But these days few can afford to take such risks, which is why SAS Component has focused on developing partnerships instead. The concept here is that by combining forces, an individual MRO can realize savings from parts manufacturers and attract new clients (through its partners and vice versa) without spending millions of dollars to expand. Certainly this is the goal of SAS Component, which has established partnerships with a variety of companies. The most far-reaching cooperation thus far is that between SAS Component and EADS Sogerma Services, which offers the full range of the Free2Fly product to the world's Airbus operators.
Other strategic partnerships are with Lufthansa Technik, SAAB Aviocomp, Honeywell Aircraft Landing Systems, and Wilson Logistics, which covers logistic solutions for SAS Component customers. With these partnerships in place, this Scandinavian company is now able to supply aircraft components worldwide.
Avborne Accessory Group of Miami, Florida is expanding its revenues through "organic" growth, said Sean Beaubien, Avborne's vice president of sales. Operating out of a 156,000 square foot facility beside Miami International Airport, Avborne has organized its facilities into "a series of unique shops under one roof," Beaubien said. "[Our] company's goal is to be able to offer airlines the ability to send large volumes of work to one shop or to be a niche player to an airline on a particular part. We believe our system of having smaller business units under one roof allows us to have the product offering and the cost basis to compete in both categories."
Avborne's strategy is to offer such a broad range of components and services to its clients that airlines will be able "to reduce their vendor base by half or more," he added. "We plan to be able to offer components to them at the best price, because of our purchasing power and our unique business system."
As for competition, Beaubien's main concern is the OEMs, which he sees reaching into the component sales market for much-needed new revenues. "It's very difficult to compete against someone like a Honeywell on their own products," he noted. "An OEM such as this is just so big that it can undercut us, albeit only in some very specific categories."
At the small end of the scale, 50-person Genesis Aviation is counting on excellent customer service and competitive pricing to keep it in the game. "We're not big enough to do head-to-tail inspections or power by the hour equipment leasing, so we focus instead on meeting our customers' needs and then some," McGlothin said. "For instance, we focus on hydraulic and electromechanical components and getting them to our customers when we say we will. We'll even pick up the part at the customer's loading dock, bring it back for servicing, and then return it to their dock within the contracted time."
For small shops like Genesis Aviation, niche marketing appears to be the key to survival. "We don't try to be everything to everyone," McGlothin said. "We emphasize what we do best."
This approach wins kudos from Avborne's Beaubien. "If you're a true niche player, not only will you survive but you'll even get business from larger MROs," he said. "Niche players are often able to compete on price because they focus on a limited range of services, which keeps their own per-job costs down."
Taken as a whole, the aviation components market has become a tough slog for all players. Large shops worry about losing sales to OEMs: smaller operators fear for their own survival and seek niches that will protect them against the heavyweights. — By James Careless