Europe’s Challenges In a Dynamic MRO Market

Dramatic growth and change are forecasted for the worldwide aircraft maintenance market. Are Europe’s established repair centers positioned to maintain their share?

The maintenance, repair and overhaul (MRO) market looks strong and is expected to grow during the next 10 years by 51 percent, generating $62 billion in annual revenue by 2018. Supporting that upbeat prediction is the fact that the commercial aviation market has witnessed 10.6 percent growth in new aircraft deliveries and 5.1 percent growth in aircraft utilization. That trend is expected to continue.

That’s all good news. However, in Europe there remains the question: Will the European MRO community maintain its share of this bigger pie? Europe currently holds 26 percent of the worldwide MRO market, behind first-place North America, with 39 percent share. But to maintain its share, it must vault several high hurdles:

• Stiff competition from the Middle East;

• Greater competition from the original equipment manufacturers (OEMs);

• The weak U.S. dollar;

• A continuing pressure from the airlines to cut costs;

• Growing pressure to be more environmentally friendly;

• A possible shortage of skilled technicians as retirements ensue; and

• An inequity in the parts manufacturer approval (PMA) policies between the United States and Europe.

Mideast Competition

It was revealing that the keynote speaker for last year’s MRO Europe conference and exhibition in Milan was not from a European company or agency, but rather was Robert Mionis, CEO, manufacturing and engineering, for Dubai Aerospace Enterprise (DAE). He described a region poised to capture a big share of the MRO market and made clear DAE’s intent "to become the undisputed world leader in MRO." It’s a goal difficult to dispute, given the company’s acquisition of SR Technics, Landmark Aviation and Standard Aero — buyouts that place DAE squarely in all major aircraft-repair markets: commercial, military and bizjet. Mionis said DAE intends to establish worldwide credibility through mergers, build business organically and expand the company’s MRO network, which means buying more companies, or as he put it, "acquiring competencies."

Mionis also announced DAE’s program, started in 2006, to make SR Technics a "leaner" MRO and its effort to brand its new acquisitions, the result of which will be announced this year. Interestingly, unrest in the Middle East appears to circumvent the region’s aviation business and not deter DAE’s plans. Asked about Dubai’s close proximity to Iran, a country that some believe could disrupt the Mideast region, Mionis replied, "We are trading partners and have a close relationship with Iran."

DAE is not alone in the Mideast MRO market. Though it now has only four percent of the aircraft maintenance market, the region clearly is poised to become the European MROs’s strongest competitor, a fact concurred by David Stewart, principal of the industry forecast and analysis group, AeroStrategy Ltd. Stewart predicts nearly nine percent growth in MRO activity in the Mideast during the next 10 years, compared to just 2.8 percent in Europe. (AeroStrategy also sees strong growth in the Latin American and Asian markets, up to 6.4 percent and 5 percent, respectively.)

It should be noted that European firms such as Lufthansa Technik and HEICO Aerospace have been able to penetrate the growing Mideast market. However, David Macontell, senior vice president with the consulting firm, TeamSAI, sees European MROs enjoying limited benefit in the region. "The local governments in the Mideast are building their own infrastructures," he said. Dubai alone is investing some $82 billion. "So I don’t see long-term opportunities for European independents," Macontell concluded.

The Mideast MROs may also benefit from their location. TeamSAI foresees Asia’s MRO demand to increase by 21 to 26 percent. Many European MROs will have to find ways of extending their network of services to compete.

As for its competition to gain North American customers, the European MROs must contend with a strong euro — or weak dollar depending on your perspective — an obstacle when competing for maintenance work and one not likely to go away soon. In addition, according to Vincent De Vroey, general manager-technical operations, Association of European Airlines, the European market doesn’t have Chapter 11 protection from bankruptcy. Such laws, which have kept struggling, U.S. MROs afloat, represent a disadvantage to European MROs. "We need a level playing field," De Vroey added.

Need to Be Lean

The good news for MROs is that after six years in the red and losing some $40 billion, the worldwide airline market is finally in the black, though modestly so. Further good news for third-party MROs is the fact that 65 percent of airline market’s overhaul and maintenance is outsourced. Seventy-five percent of the engine work and 65 percent of the heavy maintenance are outsourced, according to Stewart. This trend likely will continue, but to take advantage, European MROs must establish or enhance their global networks. They also must establish integrated services that allow customers the options to pick and choose maintenance services or adopt a comprehensive support package. Such offerings would take advantage of the rise in outsourced line maintenance and give independent MROs the muscle to compete head-to-head with the OEMs, Boeing and Airbus, which are offering their own comprehensive support.

Obviously aware of this challenge, Lufthansa Technik (LHT) has established an integrated service offering and worldwide network. The network was developed, in part, by establishing strategic partnerships with 27 companies. The company serves about 540 customers, operating some 1,400 commercial aircraft.

But the not-so-good news for LHT and other European MROs is the continuing pressure to reduce operating costs — of which maintenance represents 10 percent. And sky-high oil prices, which loom over the aviation industry like an ominous cloud, won’t allow relief from the pressure. Fuel was expected to cost the airlines $132 billion in 2007, according to a TeamSAI study.

Airlines have shaved 20 percent of their maintenance costs through outsourcing and various efficiencies. Sixty-five percent of the commercial aviation maintenance is now outsourced and Macontell believes that figure will grow. He anticipates the following breakdown through this coming decade:

• 70 percent of the engine work;

• 63 percent of the component overhaul;

• 53 percent of the heavy maintenance and modification work; and

• 17 percent of the line maintenance.

Macontell cites as examples of positive lean maintenance and modification programs a 60-percent improvement in winglet modification downtime for the Boeing 757, 40-percent improvement in the cycle time of a CF34 overhaul and 30- to 40-percent improvement in C-check turnarounds. But with greater customer clout, airlines will demand more in terms of efficiencies and faster turnaround times from independent MROs.

Adrian Jones, operations director for the U.K.-based consultancy firm, KM&T (Knowledge Management & Transfer), said successful MROs must go beyond point-of-use kitting, self-directed work cells and manufacturing-like moving lines. Leanness requires a top-to-bottom commitment within a company. All employees must be committed to customer satisfaction, he said, and the company must secure a competitive cost structure, zero quality defects, best-in-class turnaround times and product and process safety. He added that the commitment to be lean must start from the top management who, in turn, must set organizational targets and ensure the work force fully understands those targets.

However, Europe’s changing MRO work force could complicate efforts to be lean, at least in western Europe. Many technicians in western Europe’s more developed market are reaching retirement age. Meanwhile the eastern European market is expanding dramatically — Macontell forecasts 11 percent growth in the region — and this can siphon off many younger technicians who seek the professional opportunities of a more exciting business environment.

Environmentally Speaking

While "lean and mean" may have been the aviation industry’s mantra in recent past, "lean and green" would be appropriate today. Global warming and CO ² emissions have been the focus of much public and political attention, and the aviation industry, feeling it is a target for criticism, fears the attention could turn to mandates. This despite the fact that aviation contributes only about two percent of the CO ² emissions. And it is despite the fact that in 2006 the airline industry saved about a billion gallons of fuel — using, for example, just one engine during taxiing — yet carried 12 percent more passengers than in 2000.

The green movement most impacts Europe, where the Advisory Council for Aeronautical Research in Europe (ACARE) has committed the industry to cut CO ² emissions by 50 percent by 2020, compared to emissions in 2000. The council is reacting to public pressure in Europe, which has called for a cutback in domestic air travel, increased taxes on tickets and reduced airport expansion, among other measures. The European Parliament and European Commission also have taken tough stances against carbon emissions, advancing regulatory proposals that would impact airlines operating within and into the 25 European Union (EU) countries.

Few individuals trumpet the need to make aircraft operations and maintenance environmentally friendly more vociferously than Pierre Girault, vice president, QSE and sustainable development for Air France. "An environmental strategy is part of the KLM/Air France strategy," he claimed. Girault brushes aside fears that environmental issues may constrain the aviation industry, stating, "If industry views the environment only as a constraint, it will be a problem. Long term, I see greater efficiency and an improved environment as a benefit."

The MRO industry, of course, can only help resolve part of the environmental issue. "You have to look at the aircraft’s entire life cycle," said Jean Baptiste Gambini, Airbus’s head of material processes. Nevertheless, MROs can establish the greener use of paints, primers and solvents, and come up with fuel-efficient means to transport of parts. Again, European companies face stiffer regulation than the rest of the world; two years ago the European Parliament voted in the controversial REACH (registration, evaluation and authorization of chemicals) policy, which requires that all chemicals used in the EU must be registered and tested. Many European businesses believe the policy, enacted in June 2007, will place them in a competitive disadvantage.

Girault believes the aviation industry can become greener and that the key is to pursue new technologies and "share experiences." He said communications is essential and mentions his own company as an example. "We have a suggestion program and have received 6,000 suggestions," he claimed. "Fifteen percent of those involve ways to improve environmental quality. People are interested in the environment."

PMA Differences

Originated as an alternative material source in the United States, PMA parts have made inroads in Europe. About 6,000 different types of PMA parts are used there. Once a skeptic of using other than OEM parts, British Airways, for example, established a partnership with HEICO in May 2007 and now claims savings of 30 to 40 percent when purchasing the Florida-based company’s PMA parts for overhauls. (The carrier also claims it enjoys 20- to 30-percent savings by bringing component repair and overhaul in house.)

The PMA parts market originated in the 1950s. It has been growing steadily since the early 1990s and got a big boost in Europe in 1997 when Lufthansa Technik invested $50 million in HEICO Aerospace, thus showing its confidence in PMA parts. Now arrangements like the BA-HEICO deal are becoming commonplace; a recent example is Delta TechOps’s $1-billion contract with Chromalloy Gas Turbine Corp. to develop and supply repairables and life-limited parts (blades, vanes, etc.) for the CFM56-5 and -7 engines during a 10-year period.

Increased PMA parts use in Europe likely will continue, as leasing companies, the primary hold-outs in using other than OEM parts, recognize that the PMA process is robust and accepted by a growing number of the commercial carriers. Kate Schaefer, vice president-sales and marketing for HEICO Parts Group, predicts world airlines will drive development of new PMA parts during the next 10 years, and as a result, leasing requirements will soften. In the near future, she said, installing PMA parts will "become a commonplace, mainstream activity and no longer a subject meriting discussion" — which it often has been.

For years individual European countries have had bilateral agreements with the FAA covering PMA parts, some worded vaguely and some quite specific. The European Aviation Safety Agency (EASA) has taken the best, most specific wording from these agreements to draw up a EU-wide bilateral deal. It automatically allows the use of non-critical parts; life-critical parts — generally identified by the design approval holder or exporting authority as parts with a specific life limit — must still receive EASA’s EPA or European part approval.

So far, EPA approval represents no real obstacle, as virtually all PMA parts used are non-critical. But European parts producers want EASA to have an approval process comparable to FAA’s. That will require much greater staffing and test capability, and until that happens, frustration among European manufacturing firms likely will mount.

As for critical PMA parts, FAA and EASA continue to discuss ways of strengthening the U.S. agency’s ability to test and approve such components. EASA then would be able to accept critical PMA parts.

As of this writing, European MROs are anxiously awaiting implementation of the EASA-FAA bilateral agreement. Officials with the agencies say finalization is imminent.